Valuation multiples in the context of Bucharest Stock Exchange and local M&A market www.pwc.ro Content 3 | Foreword 4 | Executive summary 5 | Scope and methodology 9 | Macroeconomic outlook 14 | Romanian Stock market performance 16 | Listed companies valuation multiples Key results in 2017 context Multiples trend analysis by sector between 2007 and 2017 Key highlights 25 | M&A valuation multiples M&A index in 2017 Multiples trend analysis by sector between 2007 and 2017 Foreword Valuation and Economics department of PricewaterhouseCoopers Romania is pleased to present the first edition of this study focused on the analysis of listed companies on the Regulated Market of Bucharest Stock Exchange and of the Romanian local M&A market. • The study presents the valuation multiples trend for 79 listed companies covering the period between 2007 and 2017 with a focus on the consumer, oil & gas, financial services, healthcare, industrial, materials and electricity sectors. We have also performed an analysis of valuation multiples trend based on 50 closed transactions between 2007 and 2017 for which robust financial data were readily available. • PwC V&E Romanian practice envisages that potential users of the study will gain insights on: • Overall equity market performance between 2007 and 2017 (BET, BET-Div.Adj.Value, BET-TR compared to the yield of Romanian government bonds); • The performance of valuation multiples on different sectors for listed companies over the shifting phases of the economy; • The analysis of valuation multiples derived from local transactions. • Such studies increase in value due to recurrence, while data from various years and sectors add to existing analysis with each new edition. We express our commitment to update this study, on an annual basis, in order to provide higher value added for our readers. Valuation and Economics, PwC Romania, Advisory - Deals 3 Executive summary Macroeconomic outlook Valuation multiples based Valuation multiples based and Stock market on listed companies on disclosed transactions performance • Despite the political uncertainties • Analysis conducted on companies • Analysis on the local M&A market determined by frictions over the listed on the Bucharest Stock activity includes a number of 50 judicial independence fuelled by Exchange displays the evolution of transactions completed over the public protests against the ruling multiples across economic cycles and period 2007-2017, for which robust coalition, the GDP growth in 2017 industries. financials have been reported. reached 7%, the highest GDP rate • The trend analysis performed at an • The historical average EV/EBITDA achieved in 8 years. The main driver aggregated level, over the period multiple for transactions closed over was private consumption, which grew 2007 – 2017, revealed that financial the period 2007-2017 is 8.3x, with the by 10.2%, boosted by expansionary multiples tend to decrease when highest EV/EBITDA multiple recorded fiscal policies, public and private wage the economy contracts. This finding in 2008 (11.2x) and 2010 being the increases and low inflation rates. confirms that financial multiples are year with the lowest multiple (2.6x). • The evolution of BET, BET–TR, BET- a relatively good proxy for investors • The average EV/EBITDA multiple for Div.Adj.Value as compared with the expectations. 2017 is 7.5x. evolution of CDS over 2007-2017 • In 2017, out of the 7 industries • Over the analysed period, the most shows that BVB is very sensitive to the analysed, the electricity sector active sector has been Consumer, country risk, which also influences recorded the highest median market which accounted for 49% of the total foreign capital investments. capitalisation and the highest PER, transaction value. • The Romanian stock market recorded whereas the lowest PER was displayed • The highest median EV/EBITDA one of the highest dividend yields by the financial services sector. multiple of 8.0x has been reported in the world in 2016 and 2017. BET • During 2007 – 2017, the market cap in Healthcare and the lowest median Takeaway total return index, which includes the of the companies operating in the EV/EBITDA multiple of 6.8x has dividends granted by the blue chips oil & gas and materials sectors were been reported in the Industrial sector, listed on BVB has increased by over the least influenced by the economic displaying a relatively narrow multiple 19% in RON terms in 2017. cycles, whereas consumer, healthcare range across the local industries. • A median excess return of up to 12% and financial services sectors were the • Most active sectors were Industrial of the indices over the Risk free rate most affected. and Consumer with 15 and 12 deals was estimated for the period 2012- • Over the same period of time, the closed during 2007 – 2017. 2017 and compensates investors for smallest variance in the PER of taking on the relatively higher risk of companies was displayed by the oil & equity investment. gas and healthcare. 4 Scope and methodology The Romanian equity market Top performing sectors over the performance is an indicator analysed period were identified of the prosperity and stability of the economic context. The increasing investment appetite for the listed companies on Equity Multiples Multiples Bucharest Stock Exchange market based on based on listed (BSE) enabled the evolution return transactions companies of the most important index of BSE, Bucharest Exchange Trading index (BET) that A trend analysis of exceeded the threshold of valuation multiples 8,000 points during 2017, observed over the period level which has not been covering 2007 – 2017 was reached since 2008. correlated with the shifting The purpose of the study is to provide BET, BET-Div. Adj. Value a comprehensive analysis of the equity and BET-TR vs Rfr over the phases in the economy market, from a valuation perspective, period 2007-2017 (economic cycles) over a ten year period, covering the following sectors: Consumer Industrial Materials Financial Oil & gas Electricity Services Healthcare Aggregated 5 Understanding the results • The financial information used in the present study was sourced from S&P CapitalIQ, Mergermarket and Bloomberg. PwC has not verified, validated or audited the data and cannot therefore give any M&A valuation undertaking as to the accuracy of multiples the study results. The timeframe selected for the present analysis • We have selected all included a 10-year period, from transactions closed January 2007 to December 2017 in Romania for which and encompassed the performance meaningful financial of the stock market sectors over the information was business cycles. Listed • The key conclusions of our available, sourced study were drawn following the companies from S&P CapitalIQ, comparative analysis between the valuation Mergermarket and/ results of the trading multiples or from PwC own paid for listed companies and those multiples research. The same derived from private transactions. sectors as the ones • Following the initial selected in the analysis company screening of the listed companies that resulted in 86 were considered. listed companies • Following the initial on the Regulated screening that resulted Market of BSE (85 in 463 transactions, local companies and 1 we have restricted our international), we have sample to 27 closed eliminated 4 companies deals for which we which were suspended had consistent and from trading and reliable information. another 3 companies Additionally, we for which no robust have analysed 23 data was available. As transactions that took a result, our analysis is place in 2017 and for based on a sample of 79 which the financial companies. details of the deal was • The selected sample is derived based on PwC’s covering the following database. sectors according to the S&P CapitalIQ industry classification: consumer, industrial, materials, financial services, oil & gas, electricity, healthcare. 6 The general methodology analysis of the multiples was based on a business cycle approach, where we have identified the different shifting phases of the Romanian economy and assessed the performance Business cycles of different sectors over the intermediate term. approach The analysis included the companies listed on Listed companies the Regulated Market valuation multiples of BSE and the financial data covering the period 2007 – 2017. M&A transactions valuation multiples The study covered transactions that took place in the Romanian market between 2007 and 2017, for which financial information was available. Business cycles approach • The business cycle approach offers an indication of the outperformance/ underperformance of sectors at a given shift in phase of the economy. It is a useful tool for investors because it provides the context for advantages in sectors with prominent financial returns while adjusting risk exposure to underperforming sectors. • Contraction in economic activity • Economy rebounds (GDP growth, • Corporate profits are declining Industrial production, profits) • Scarce credit • Credit become looser • Rising corporate defaults • Corporate profits grow fast • Inventory level is gradually falling • Inventories are low and sales are decreasing. • Sales are increasing. • Weaker economy • Economic consolidation • Inflationary pressure • Strong credit growth • Tighten credit conditions • Healthy profitability • Deterioration of corporate profit • Inventories and sales level on an margins increasing path. • Inventories build up and sales level slows down. 7 Multiples approach