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Capstone: Valuation 28C00500 Capstone: Valuation 28C00500 21 March 2019 Strictly private and confidential Agenda 1 Introduction to Investment Banking and valuation 3 2 Valuation methods and an example of private company valuation 11 3 Special Situations 24 4 IPO valuation 31 5 Special situation – Demerger 37 6 Introduction to Nordea Investment Banking 39 1 | Capstone: Valuation 28C00500 Present today Nordea Markets Investment Banking is the leading Nordic merger & acquisitions advisor. Investment banking division advises on mergers, acquisitions, divestments, spin-offs and public offers Jaakko joined Nordea in 2009. He has extensive experience from various cross-border M&A transactions and several ECM transactions Prior to Nordea he worked for ABN AMRO / Alfred Berg for over 5 years Jaakko holds an MSc degree in Finance from Wholesale Banking Retail Banking Wealth Management Aalto University Advisory FICC Debt Capital Markets Financial Institutions Group Jaakko Eteläaho Nordea’s Corporate Corporate & and Investment Director Private Equity clients Banking International Division Shipping, Offshore & Oil Equities C&IB country units 2 | Capstone: Valuation 28C00500 Introduction to Investment Banking and valuation 3 | Capstone: Valuation 28C00500 What we actually do – a whole spectrum of IB products Acquisitions – Konecranes’ EUR 1.1bn acquisition of IPOs – Altia IPO Mergers – Ahlstrom-Munksjö EUR 1.2bn merger Terex MHPS Share issues – Ahlstrom-Munksjö EUR 150m Sale of a company – Fortum 700m acquisition of rights issue Ekokem Public take-out – Nokia’s EUR 347m acquisition of Comptel 4 | Capstone: Valuation 28C00500 But before all the media coverage and champagne, there’s a whole lot of demanding yet interesting, intensive yet meaningful, good-old hard work that needs to be done We help our clients in many fronts… …and our work tends to get top management’s / board’s / owners’ attention Valuation ▪ One of the most well-known expertise of any Investment Banker The Client ▪ “How much should we pay for the Terex MHPS business?” Negotiation tactics We assist in key strategic Owners & ▪ It is our job to ensure our client has the best possible tools and arguments to decision making, e.g. formulating Board of Directors strike a deal with good terms a bid and its terms ▪ “They told us that the merger consideration should be X per Ahlstrom share because of [this and that]. How should I revert back?” Preparation of the “Equity story” and sale material ▪ As with anything you intend to sell, you need to market it! Over the course of a project we ▪ “Here is a 60 page investor presentation of the company. You will find all the CEO & CFO spend most of our time working necessary information there to make your investment decision.” with the CEO/CFO Process design ▪ Ultimately, our client hires us to design, coordinate and execute an entire process We also work with the broader ▪ “Your company would be a nice match to a number of industrial companies. But Business unit management team particularly we think you could receive a good valuation by listing the company as well. We heads and other during preparation when we need propose a dual-track process to investigate both options!” management team specific insight relating to the business Analysis and advice ▪ And of course, we advice our clients whatever questions/problems they may face ▪ “How do we finance this deal? Could we issue new shares? What do you recommend?” 5 | Capstone: Valuation 28C00500 Practical valuation: Stocks are correctly valued? Financial instruments are generally valued based on their ability to generate cash flow / returns Long bull market indicates over valuation – average annual return of 12.3% over the last 10 years 350 +218.5% 300 250 200 150 100 50 0 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Mar-16 Sep-16 Mar-17 Sep-17 Mar-18 Sep-18 Mar-19 STOXX Europe 600 1 In relation to LT history earnings based valuation indicated “high valuation” Or have the parameters changed? Return % -94.9% 8.8% 8.6% 8.4% 7.0% 7.1% 7.0% 6.3% 6.4% 6.5% -5.6% 6.0% 5.9% 3.3% -5.9% 2.8% 2.6% Target return 1.6% 1.6% 1.2% R 0.5% 0.5% 0 0.1% 0.4% 0.2% 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 STOXX Europe Earnings Yield2 Germany Bund 10 Year Yield1 Note: 1) Dividends reinvested on paydate 2) Calendar year averages Source: FactSet as of 12 March 2019 6 | Capstone: Valuation 28C00500 How to assess value of a firm? Components impacting corporate value ▪ General economic growth Growth ▪ Market specific growth ▪ Company specific growth ▪ Industry features Enterprise value, Margin ▪ Growth of margin value of a firm ▪ Interest rate level ▪ Taxation “Discount factor” ▪ Risk premia ▪ Political risk ▪ Capital weights ▪ Legal Value can only be defined in a context; Several affecting factors 7 | Capstone: Valuation 28C00500 Structural changes or major disruptions are difficult to forecast Paper industry Retail industry Market capitalization (EURbn) Large paper companies, total Market capitalization (EURbn) Sears Walmart Amazon Apple 921 748 248 319 183 157 64 75 60 57 40 16 15 3 0 13/01/2006 13/01/2012 19/10/2018 13/01/2006 13/01/2012 19/10/2018 Note: 1) Large paper companies: International Paper, Stora Enso, UPM Kymmene, SCA, Metsä Board, Mondi, Nippon Paper, Smurfit and DS Smith Source: Factset 8 | Capstone: Valuation 28C00500 Case Nokia: Financial market value always correct? EUR Oct, 2007: Nokia acquires Jul, 2013: Nokia acquires Jan, 2016: Nokia acquires 70.0 20 Jun, 2000 NAVTEQ Corp. Siemens’ stake in NSN Alcatel-Lucent 64.88 Market cap.: EUR 303,190m Deal value: EUR 5,150m Deal value: EUR 1,700m Deal value: EUR 15,600m EV: 308,521m EV/sales: 10.0x EV/sales: 0.1x EV/sales: 0.7x 60.0 EV/sales: 15.5x EV/EBITDA: 29.0x EV/EBITDA: 1.4x EV/EBITDA: 7.6x P/E: 115.9x EV/EBIT: 34.1x EV/EBIT: 2.4x EV/EBIT: 13.2x Sep, 2013: Microsoft acquires 50.0 Feb, 2017: Nokia offers to 1 Oct, 2007: Nokia’s devices and services acquire Comptel Market cap.: EUR 102,993m business Deal value: EUR 355.9m EV: 96,398m Deal value: EUR 5,440m 40.0 EV/sales: 3.2x EV/sales: 2.3x EV/sales: 0.4x EV/EBITDA: 19.1x P/E: 24.7x EV/EBIT: neg. 26.17 30.0 3 Sep, 2013: Current: Market cap: EUR 5,134m Market cap.: EUR 30,309m EV: 1,881m EV: EUR 29,251m 20.0 EV/sales: 0.25x EV/sales2: 1.27x P/E: neg. P/E2: 19.2x Annual growth 10.0 (CAGR) 97% 5.42 1 in years 1.37 1994-2000 0.0 Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Note: 1) Nokia Oyj share price minimum L19y occurred on 18 Jul 2012 2) Consensus estimate for FY’19 Source: FactSet as of 12 March 2019, Nokia releases 9 | Capstone: Valuation 28C00500 Valuation in public and private context ▪ Easy to invest in, stocks are traded in exchange ▪ Floor valuation from the equity market (Current price) ▪ Valuation is de facto fair and transparent ▪ Further assessment needed to define the value of the - According to securities legislation everything that impacts or company to a buyer and the value the owner is willing to could impact pricing of a security must be made publicly accept available - Synergies must be taken into account – a premium is Public normally a must companies ▪ Performance can be easily assessed and followed - To acquire profitably a buyer must believe in something ▪ Special case: What is the value of a division of a listed others do not (synergies or better understanding of the company? potential development of an industry/company) - Conglomerate structure might have hidden value ▪ Valuation is typically non-transparent ▪ Non-transparent / subjective valuation - Might be difficult to assess ▪ Requires significant analysis and understanding of how to ▪ Difficult to invest in develop the business, why to own the business - Illiquid by nature Private - No marketplace for shares companies ▪ Synergy assessment / business plan needed ▪ Valuation should rely on exit value or valuation of the dividend streams Hockey club Acquiring shares (part of the firm) Acquiring the firm 10 | Capstone: Valuation 28C00500 Valuation methods and an example of private company valuation Case Hartwall 11 | Capstone: Valuation 28C00500 Different valuation methods and underlying metrics Commonly used valuation methods Relative multiple valuation logic Relevance level Income Balance ▪ Review of the EV/EBITDA and EV/EBIT Valuation trading multiples of comparable quoted Statement Sheet Trading multiples companies in the selected peer groups analysis (TMA) EV/EBITDA ▪ Takes into account the valuation levels Sales on the stock market Enterprise EV/CE EV/Sales Capital EBITDA Value Employed ▪ We asses by a leveraged buyout (EV) analysis how much a potential financial EV/EBIT buyer would be willing to pay for the EBIT Leveraged buyout target analysis (LBO) ▪ The LBO analysis is based on assumptions on the financial buyer’s = = investment return requirement and availability of leverage Net Debt Net Debt Financial Items & & & Minority Interest Minority Interest Discounted cash flow ▪ Takes into account the time-value of Minorities analysis money by discounting future cash flows (Market Value) (Book Value) (DCF) to their present value + + ▪ Review of historical transaction multiples (EV/EBITDA) P/E Equity Value P/BV Equity Value Net Result ▪ Takes into account the valuation levels (Market Value) (Book Value) M&A multiples observed in actual transactions ▪ Availability of comparable transactions and valuation multiples is limited Relevant for trade/owner of whole firm Relevant for shareholders (w/ dividends) 12 | Capstone: Valuation 28C00500 Key drivers in valuation Understanding what drives the business is key in successful modelling and thus valuing correctly ▪ Industry ▪ Company specific − Technological / structural changes − Company guidance and analyst reports (if Find a driver for sales − Retail / e-tail any) growth Growth & Margin − Paper industry / mobile devices − Ability to tackle potential technological / GDP vs.
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