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Valuation of A.P. Møller - Mærsk A/S - the Impact of a Conglomerate Discount

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Valuation of A.P. Møller - Mærsk A/S - the Impact of a Conglomerate Discount Valuation of A.P. Møller - Mærsk A/S - The impact of a conglomerate discount Copenhagen Business School Master Thesis Authors: Simon Tjessem (AEF) and Henrik Tveiterås (AEF) Supervisor: Tim Mondorf Number of standard pages: 109 Number of characters: 160 446 Executive summary Executive summary The primary objective of this thesis has been to estimate the theoretical share price of A.P. Møller – Mærsk A/S (APMM) through a sum-of-the-parts valuation of APMM as of 1st of April 2016. The stock of a company engaged in multiple unrelated business segments typically trades below the combined value of its separate entities – a phenomenon known as the conglomerate discount. The effects of being a conglomerate thus need to be accounted for when estimating the theoretical share price of the sum-of- the-parts. APMM is a Danish business conglomerate founded in 1904 with a long and proud history, which operates in global trade, shipping, and energy. It employs some 89.000 employees and has activities in more than 130 countries. Its core business comprises eight business units; Maersk Line, APM Terminals, Maersk Oil, Maersk Drilling, Maersk Supply Services, Maersk Tankers, Svitzer, and Damco. In recent years, APMM has divested several companies such as Maersk FPSOs, Maersk LNG, Danish Supermarket, and most recently its share in Danske Bank, which makes the company significantly more focused than few years ago. We valued each of the core business units using a fundamental analysis and discounted cash flow approach. Other assets and liabilities that were not a part of the eight reportable business segments were valued at book value, whereas eliminations and other unallocated activities were valued with a Gordon Growth model. The sum-of-the-parts valuation yielded a theoretical share price of 10.700 DKK, above the trading price of 8.455 DKK. However, the sensitivity analysis revealed that the fundamental value of APMM is highly sensitive to external factors such as freight rates and the oil price. By analyzing APMM through the lens of conglomerate diversification, we found it unlikely that the benefits of diversification outweigh the costs, and a conglomerate discount in the range of 5-15% is warranted. The exact number of the discount is, however, hard to pinpoint, illustrated by the wide range of supporting arguments from the empirical literature. Even amongst equity analysts, who have a significant influence on the actual trading price, there does not seem to be any consensus as into how and why a conglomerate discount should be applied. In light of the likely presence of a conglomerate discount we recommend a hold position for APMM. Page 1 of 158 Executive summary Contents Executive summary ....................................................................................................................................... 1 1.0 Introduction ............................................................................................................................................ 5 1.1 Context and motivation ...................................................................................................................... 5 1.2 Problem Formulation .......................................................................................................................... 6 1.3 Methodology ....................................................................................................................................... 9 2.0 Theory of the Conglomerate Discount .................................................................................................. 12 2.1 Conglomerate perspectives .............................................................................................................. 12 2.1.1 Three dominating rationales for the conglomerate structure ................................................... 13 2.1.2 Best owner perspective ............................................................................................................. 14 2.1.3 Costs of the conglomerate structure ......................................................................................... 16 2.2 Is the conglomerate structure creating or destroying value? .......................................................... 16 3.0 Theoretical Framework ......................................................................................................................... 17 3.1 Strategic Analysis .............................................................................................................................. 17 3.1.1 PESTEL ........................................................................................................................................ 17 3.1.2 Porter’s Five Forces .................................................................................................................... 18 3.1.3 VRIO ........................................................................................................................................... 18 3.1.4 SWOT .......................................................................................................................................... 19 3.2 Financial Analysis .............................................................................................................................. 19 3.2.1 Credit analysis ............................................................................................................................ 19 3.3 Cost of Capital ................................................................................................................................... 20 3.3.1 Cost of Debt ............................................................................................................................... 20 3.3.2 Cost of Equity ............................................................................................................................. 21 3.3.3 Capital Structure ........................................................................................................................ 22 3.4 Valuation ........................................................................................................................................... 23 3.4.1 Pro forma statements ................................................................................................................ 23 3.4.2 Discounted Cash Flow model ..................................................................................................... 23 3.4.3 Relative Valuation ...................................................................................................................... 24 4.0 A.P. Møller - Maersk A/S ....................................................................................................................... 26 4.1 History ............................................................................................................................................... 26 4.2 Historical performance ..................................................................................................................... 27 Page 2 of 158 Executive summary 4.2.1 APMM’s financial performance ................................................................................................. 27 4.2.2 Share price performance ........................................................................................................... 29 4.3 Economic factors affecting all business units ................................................................................... 31 4.4 Credit analysis ................................................................................................................................... 33 4.5 Peer groups ....................................................................................................................................... 35 4.6 Estimating Cost of Capital ................................................................................................................. 36 4.6.1 Cost of Debt ............................................................................................................................... 36 4.6.2 Cost of Equity ............................................................................................................................. 36 4.6.3 Capital Structure ........................................................................................................................ 37 4.6.4 WACC in each business unit ....................................................................................................... 38 5.0 Business Units Valuation ....................................................................................................................... 42 5.1 Maersk Line ....................................................................................................................................... 42 5.1.1 Overview .................................................................................................................................... 42 5.1.2 Strategic Analysis ....................................................................................................................... 44 5.1.3 Forecasting ................................................................................................................................. 50 5.1.4 Valuation .................................................................................................................................... 52 5.2 Maersk Oil ........................................................................................................................................
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