Valuation Multiples 1 – Comparable Companies Analysis
Valuation Multiples 1 – Comparable Companies Analysis
In this blog (August 26th 2019) I will talk about “valuation with multiples” and then more specifically: Comparable Companies Analysis.
My last blogs on “Discounted Cash Flow Valuation” (DCF), “Leveraged Buyout Analysis” (LBOs) and “M&A Analysis” (M&A model) can be found under here in case you did not read them yet:
Discounted Cash Flow Valuation (July 24th 2019): https://www.linkedin.com/pulse/discounted-cash-flow-valuation-dcf-joris-kersten-msc-bsc-rab/
LBO Analysis (June 9th 2019): https://www.linkedin.com/pulse/leveraged-buyouts-lbos-joris-kersten-msc-bsc-rab/
M&A Analysis (June 20th 2019): https://www.linkedin.com/pulse/ma-model-accretion-dilution-joris-kersten-msc-bsc-rab/
Comparable Companies Analysis (CCA): An Introduction
CCA provides a benchmark against which a M&A consultant can determine a valuation for a private company, or analyse the value of a public moment at a given moment.
With CCA we basically assume that similar companies are a very good reference for valuing a certain target company.
And we use the information for a lot of different issues like M&As (mergers & acquisitions), IPOs (initial public offerings), restructurings, investment decisions etc.
Selection of the comparable companies
When we want to value a certain company; the target, we want to learn as much on this company as we can.
This is in general more easy for public companies since here we have access to the annual reports (10-Ks), consensus research estimates, equity and fixed income research reports, press releases, investor presentations etc.
For private targets this is in general more difficult. But a M&A consultant will often receive detailed business and financial information in an organised M&A sale process (in the form of a confidential information memorandum).
Once we understand the target company, we need to find good comparable companies. Good target companies share both a similar business profile and financial profile.
With a similar business profile we mean: Sector, products and services, customers and end markets, distribution channels, geography etc.
With a similar financial profile we mean: Size, profitability, growth profile, return on investment, credit profile etc.
Usually the best way to find good “comparables” (comps) is to start at the target’s public competitors. Because these companies share key business and financial characteristics, and are susceptible to similar opportunities and risks.
The following sources can be used to get information on the “comps”: 10-Ks, investor presentations, credit rating agencies reports (e.g. Moody’s, S&P, and Fitch), equity research reports, fairness opinions, Bloomberg sector classification etc.
Locate the financial information
Financial information on the “comparable companies” (comps) of the target can be found on: Bloomberg, Bureau van Dijk (Amadeus, Reach and Zephyr), company.info, Factiva, MD info, MergerMarket, OneSource, Thompson one banker etc.
It just depend what kind of database-tools your bank, corporate finance consulting firm, M&A boutique or accounting firm has.
We basically want to know the historical performance of the comps (e.g. LTM financial data) and the expected future performance (e.g. consensus estimates for future calendar years).
Historical information can be found in the annual reports like the 10-Ks. This information is used for balance sheet data, basic shares outstanding, stock options/ warrants, and information on non-recurring items.
And for future performance you can use for example equity research. Research reports provide the M&A consultant with estimates on future company performance like sales, EBITDA and/ or EBIT, and EPS for future quarters and future two or three year periods.
Within this respect, initiating coverage research reports are more comprehensive. And consensus estimates (Bloomberg) are used as basis for calculating forward-looking trading multiples in trading comps.
Key statistics
For all the comps you need key financial statistics and ratios. So you need info on: Size of the company, profitability, growth profile, return on investment and the credit profile.
Size
The size of the comps can be calculated with multiplying the share price of the target times the “fully diluted shares outstanding” (FDSO). FDSO is the basic shares outstanding including the in the money options and warrants and in the money convertible securities.
When we have calculated this, then we have calculated the market value of equity.
When we take the market value of equity and add the (market value) of debt, preferred stock and non-controlling interest (NCI), minus the (excess) cash and cash equivalents, then we have calculated the famous “enterprise value” (EV).
Profitability
For the profitability we want to know the comp’s sales and percentages of gross profit, EBTIDA, EBIT and net income in relation to sales.
Growth profile
Very important, we need to know how fast the comps has been growing in the past and what the expected growth rate is.
We do this by checking the “Compound Annual Growth Rates” (CAGRs). These CAGRs basically show the average growth per year over a certain amount of years.
Within this respect, it is very interesting to look bottom line at “diluted earning per share”. And here fore historical EPS need to be cleaned for non-recurring items.
An example of “historical and estimated diluted EPS growth rates” is given under here. The example comes from the book: Investment Banking: Valuation, leveraged buyouts and mergers & acquisitions of Joshua Rosenbaum & Joshua Pearl (chapter 1 (comparable companies analysis) in the book). This is the main book I use in my training “Business Valuation & Deal Structuring” and my participants receive a hard-copy of this book when they register.
Return of investment
We also want to know the returns, like return on equity, return on assets and return on invested capital (EBIT/ (average net debt + equity)).
Credit profile
And we want to know what the leverage level of the “comp” is, so we need to know “debt over EBITDA” and debt as part of “debt + preferred stock + non-controlling interests + equity” (capital structure).
And we also need to know the “debt coverage”, so for example the interest coverage ratio:
(EBITDA, (EBITDA – Capex), or EBIT)/ interest expense.
Supplemental financial concepts and calculations
For multiples we tend to look at LTM numbers in the income statement, so these are numbers from the last twelve months (LTM).
We also tend to “clean” these number for non-recurring items. These are items that most likely only took place once like for example: Inventory write downs and restructuring charges.
An example of cleaning the income statement for an “inventory write down” and “restructuring charge” to an adjusted income statement is given under here. The overview comes from the book: Investment Banking: Valuation, leveraged buyouts and mergers & acquisitions of Joshua Rosenbaum & Joshua Pearl (chapter 1 (Comparable Companies Analysis) in the book). This is the main book I use in my training “Business Valuation & Deal Structuring” and my participants receive a hard-copy of this book when they register.
Key trading multiples
When we eventually have calculated the clean LTM EBITDAs and EVs (enterprise values) of the “comps”, then we can calculate the EV/ EBITDA multiple of the comps.
Benchmark the comparable companies
When we have calculated all the financial statistics as mentioned above for all the comps, then we need to compare them with the target.
We now need to select the closest comparables in terms of business profile and financial profile. In the end, this is not a science but an art.
For the valuation of the target we in general focus on the two or three closes comparables to frame the ultimate valuation (for the comps).
An overview of a “selected multiple range” is given under here. The overview comes from the book: Investment Banking: Valuation, leveraged buyouts and mergers & acquisitions of Joshua Rosenbaum & Joshua Pearl (chapter 1 (Comparable Companies Analysis) in the book). This is the main book I use in my training “Business Valuation & Deal Structuring” and my participants receive a hard-copy of this book when they register.
When we have calculated the “comp-range” in EBITDA multiples this serves as an input for the “valuation football field”.
After this we need to add more input to the “valuation football field” like:
Valuation through precedent transactions, discounted cash flow valuation (DCF) and leveraged buyout valuation (LBOs).
Please read my other blogs for more info on these topics and concepts.
Next blog and more detail
My next blog will be on “Precedent Transaction Analysis”. Stay tuned!
And when you are interested in being able to prepare all the main valuation models for real in excel, then follow my valuation training in Amsterdam South (6 days from 2 until 8 October 2019). Here I will explain you all the valuation models in great detail with excel.
More info can be found below, and here you can also find my profile as an international trainer in Corporate Finance.
Training Business Valuation & Deal Structuring
This is a practical 6-day training in “Business Valuation & Deal Structuring” (Investment Banking M&A) and the main topics are: valuation, leveraged buyouts (LBO’s) and mergers & acquisitions (M&A’s).
The training mainly focusses on giving the participant hands on tools to build financial models in excel to determine the value of a company on 1) a stand-alone basis, 2) in a LBO situation and 3) in a buy-side M&A scenario.
In the training we will look at different valuation techniques to calculate “enterprise value” like: 1) Comparable companies analysis, 2) Precedent transaction analysis, 3) Discounted cash flow analysis (DCF), 4) LBO analysis and 5) Buy-side M&A analysis.
And we will look at different techniques to get from “enterprise value” to the “value of the shares” taking (adjusted) net debt into account.
The training is very practical in a sense that the trainer will explain the concepts first and will then apply them in class to real life companies with the participants. With all the calculations “Microsoft excel” is used to build the needed financial models.
This training is meant for analysts and associates from international investment banks. Moreover, the training is meant for analysts and consultants in: M&A, private equity, venture capital and strategy. In addition, the training is meant for accountants, tax lawyers, bankers in credit analysis, financial managers, CFO’s etc.
During the training will be focused on international companies listed on the stock exchange. But the valuation techniques are also applicable to (non-listed) private firms.
For any more question on this training feel free to contact by email: joris@kerstencf.nl and/ or by phone: +31 6 8364 0527 (time zone: Amsterdam).
Planning & location:
1. Wednesday October 2nd2019: 10 AM – 6 PM;
2. Thursday October 3rd2019: 10 AM – 6 PM;
3. Friday October 4th2019: 10 AM – 6 PM;
4. Saturday October 5th2019: 10 AM – 6 PM;
5. Monday October 7th2019: 10 AM – 6 PM;
6. Tuesday October 8th2019: 10 AM – 6 PM.
Sunday October 6th: Not a training day.
Location: Crowne Plaza Hotel – Amsterdam South. George Gershwinlaan 101. 1082 MT Amsterdam.
The hotel is located in Amsterdam South (financial district), right across train station “Amsterdam South” and about 15 minutes from “Schiphol Airport”.
Price & payment:
The price for this 6-day training is 3.900 euro excluding vat. And only 2.900 euro ex vat when you book before 31stJuly 2019 (1.000 euro early bird discount).
This price is for the 6-day training including study materials (A hardcopy of the theory + workbook of: Investment Banking: Valuation, leveraged buyouts and mergers & acquisitions of Joshua Rosenbaum & Joshua Pearl), coffee and tea all day, luxury lunch at lunchtime and a snack in the afternoon.
There is a maximum of 20 participants for the training based on first come first served. This way there is room for interaction in class.
You can register yourself by sending an email to: joris@kerstencf.nl.
You will then receive a registration form and additional details for registration. Or download the registration form and training manual at: www.kerstencf.nl/training
Trainer & Consultant: J.J.P. (Joris) Kersten, MSc BSc RAB
· 130 recommendations on his training can be found on: www.kerstencf.nl/referenties
· His full profile can be found on: www.linkedin.com/in/joriskersten
J.J.P. (Joris) Kersten MSc BSc RAB (1980) is owner of “Kersten Corporate Finance” in The Netherlands, under which he works as an independent consultant in Mergers & Acquisitions (M&A’s) of medium sized companies.
Joris performs business valuations, prepares pitch books, searches and selects candidate buyers and/ or sellers, organises financing for takeovers and negotiates M&A transactions in a LOI and later in a share purchase agreement (in cooperation with (tax) lawyers).
Moreover, Joris is associated to ‘AMT Training London’ for which he provides training as a trainer and assistant-trainer in Corporate Finance/ Financial Modelling at leading investment banks in New York, London and Hong Kong.
And Joris is associated to the ‘Leoron Institute Dubai’ for which he provides finance training at leading investment banks and institutions in the Arab States of the Gulf. This for example at Al Jazira Capital in Saudi Arabia and TAQA in Saudi Arabia.
In addition, Joris provides lecturing in Corporate Finance & Accounting at leading Universities like: Nyenrode University Breukelen, TIAS Business School Utrecht, the Maastricht School of Management (MSM), the Luxembourg School of Business and SP Jain School of Global Management in Sydney.
Moreover, he provides lecturing at partner Universities of MSM in: Peru, Surinam and Mongolia. And at partner Universities of SP Jain in Dubai, Mumbai and Singapore.
Joris graduated in MSc Strategic Management and BSc Business Studies, both from Tilburg University. In addition, he is (cum laude) graduated as “Registered Advisor Business Acquisitions” (RAB), a 1-year study in the legal and tax aspects of M&A’s. And Joris obtained a degree in “didactic skills” (Basic Qualification Education) in order to lecture at Universities.
Currently Joris is doing the “Executive Master of Business Valuation” to obtain his title as “Registered Valuator” (RV) given out by the “Netherlands Institute for Registered Valuators” (NIRV). This title will enable Joris to give out business valuation judgements in for example court cases.
J.J.P. (Joris) Kersten, MSc BSc RAB. Email: joris@kerstencf.nl. Phone: +31 6 8364 0527