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Running Head: VALUATION of MBANK AS an ACQUISITION TARGET of PZU GROUP

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Running Head: VALUATION of MBANK AS an ACQUISITION TARGET of PZU GROUP Running head: VALUATION OF MBANK AS AN ACQUISITION TARGET OF PZU GROUP VALUATION OF MBANK AS A POTENTIAL ACQUISITION TARGET OF PZU GROUP A Thesis Presented to the Faculty of Finance Programme at ISM University of Management and Economics in Partial Fulfillment of the Requirements for the Degree of Bachelor of Management by Arnas Zygmantas Advised by Assoc. prof. Dmitrij Katkov December 2020 Vilnius VALUATION OF MBANK AS AN ACQUISITION TARGET OF PZU GROUP 2 Zygmantas, A., Valuation of mBank as a Potential Acquisition Target of PZU Group. [Manuscript]: Bachelor Thesis: Finance. Vilnius, ISM University of Management and Economics, 2020. Abstract The objective of this paper is to estimate the value of mBank as a potential acquisition target of PZU Group. To achieve the aim of the thesis, the target company and the acquirer are overviewed. Additionally, the situation in the Polish banking sector is presented and the macroeconomic environment in Poland is analyzed in detail covering the effect of the COVID- 19 pandemic on the economy. Based on the research performed, a combination of the DCF method using FCFE (75%) and relative valuation (25%) is chosen for the estimation of mBank value. The total value of equity of mBank calculated using the FCFE valuation method is equal to PLN 12452.78 million. The estimated mBank share price using the FCFE valuation method is PLN 294.04. Moreover, the sensitivity analysis is performed to check how the equity value of mBank would change if different risk-free rate, beta, and growth rate would be used. The average share price of mBank using relative valuation approach equals to PLN 361.72. The determined final share price of mBank obtained utilizing the set weights for each of the selected methods is equal to PLN 310.96. Consequently, the final estimated value of mBank is PLN 13,169.31 million. Accordingly, the value attributable to Commerzbank accounts for PLN 9,127.61 million, which could be paid by PZU Group when acquiring mBank. Keywords: Valuation, discounted cash flow, relative valuation, banking sector, free cash flow to equity, mBank, Poland Word count: 16151 VALUATION OF MBANK AS AN ACQUISITION TARGET OF PZU GROUP 3 Table of Contents Introduction ..................................................................................................................................... 7 Relevance of the topic. ................................................................................................................ 7 Problem of the research. ............................................................................................................. 8 The aim of the thesis. .................................................................................................................. 8 Thesis objectives. ........................................................................................................................ 8 Research methods. ...................................................................................................................... 8 Situation Analysis ........................................................................................................................... 9 Overview of the target company. ................................................................................................ 9 Overview of the acquirer. .......................................................................................................... 10 European banking industry analysis. ........................................................................................ 10 Polish banking sector analysis. ................................................................................................. 12 Overview of economic situation in Poland. .............................................................................. 15 PESTEL analysis................................................................................................................... 15 mBank business segmentation analysis. ................................................................................... 23 Financial risk assessment of mBank. ........................................................................................ 27 Profitability. .......................................................................................................................... 27 Efficiency. ............................................................................................................................. 29 Capital structure. ................................................................................................................... 29 Cash flow management. ........................................................................................................ 30 Shareholders’ return of mBank. ................................................................................................ 32 Summary of situation analysis .................................................................................................. 33 Theoretical Justification and Research Methodology ................................................................... 34 Value definition, valuation approach and purpose of valuation. ............................................... 35 Challenges in bank valuation. ................................................................................................... 36 Overview of valuation methods. ............................................................................................... 38 Discounted cashflow valuation approach. ............................................................................ 39 Asset-based valuation approach. ........................................................................................... 42 Relative valuation approach. ................................................................................................. 43 Contingent claim valuation approach. .................................................................................. 44 Valuation approach for mBank. ................................................................................................ 44 Inputs of discounted cash flow valuation approach. ................................................................. 46 Discount rate. ........................................................................................................................ 46 Free cash flow. ...................................................................................................................... 49 Growth rate. .......................................................................................................................... 49 VALUATION OF MBANK AS AN ACQUISITION TARGET OF PZU GROUP 4 Terminal value. ..................................................................................................................... 50 Sensitivity analysis.................................................................................................................... 50 Valuation of mBank ...................................................................................................................... 50 DCF valuation method application. .......................................................................................... 51 Cost of equity. ........................................................................................................................... 51 Risk-free rate. ........................................................................................................................ 51 Beta. ...................................................................................................................................... 52 Equity risk premium. ............................................................................................................ 53 FCFE and growth rate. .............................................................................................................. 54 FCFE valuation method results. ................................................................................................ 57 Sensitivity analysis.................................................................................................................... 58 Sensitivity analysis of risk-free rate. ..................................................................................... 58 Sensitivity analysis of beta.................................................................................................... 59 Sensitivity analysis of steady growth rate. ............................................................................ 60 Multiples analysis. .................................................................................................................... 61 Value of mBank......................................................................................................................... 63 Consideration of synergies. ....................................................................................................... 64 Conclusions ................................................................................................................................... 65 References ..................................................................................................................................... 68 Appendices .................................................................................................................................... 74 Appendix A. Formulas of financial ratios ................................................................................
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