Comparables Analysis and

Precedents Transactions
November 3, 2012

In partnership with the

Joshua Jia
Jules Koifman
Alexander Banh

| Instructor / CEO
| Instructor
| CSO

Recruiting

Finance Interview Preparation Workshops

Preparing for finance recruiting isnt just skimming The Vault anymore. Students
should study for recruiting like a course and do their homework, because the final
exam is the interview. VP, recruiter for Queens

Like a course, there should be:

Homework: regular readings are necessary
Practice (mock interviews)
Comprehensive, accessible resources for all interested students

The most important exam of any Commerce students life

Introduction

Enterprise

Comparables

Precedents

Limestone Capital Offering

Finance Interview Preparation Workshops

6 Sessions: Saturdays at 4 p.m., Thursdays at 7 p.m.: November 3 November 22
1.
2.
3.
4.
5.
6.

Comparables Analysis and Precedent Transactions

Discounted Cash Flows and Accounting
Mergers & Acquisitions (M&A)
Leveraged Buyouts (LBO)
Market Questions
Fit / Deals / Networking

Rationale

Candidates differentiate themselves by knowing hard M&A and LBO questions

Queens needs to offer comprehensive resources to continue being competitive
Further Queens Commerces reputation as a career-minded institution

Introduction

Enterprise

Comparables

Precedents

The Process

Information Sessions

Second week of November

Look professional
Meet people, get business cards or remember names, follow up
Dont ask fluffy, general questions just for the sake of asking them
If you ask generic questions, you will get generic answers
Ask about the business, deals, what they like about working at X firm

Interviews

First rounds: third or fourth week of November

80% technical
Final rounds: fourth week of November or first week of December
Mostly fit
The dinner
Be ready for exploding offers

Introduction

Enterprise

Comparables

Precedents

Jobs in Capital Markets

Capital Markets
Investment Banking
Industry Groups:
Metals & Mining (BMO)
Financials
TMT (CIBC)
Real Estate (TD,
Brookfield)
Healthcare
Consumer
Infrastructure
Diversified
Oil & Gas (Calgary)

Equity Research
Groups:
Equity
Fixed Income
Economic
Quantitative
Sovereign

Sales & Trading

Groups:
Equity
Fixed Income
Derivatives
Currencies
Automated Trading
Asset-Backed
Securities

Product Groups
M&A
Equity Capital Markets
Debt Capital Markets
Syndication
Restructuring
Introduction

Enterprise

Comparables

Precedents

Enterprise Value

How is Enterprise Value calculated?

Two ways to think about Enterprise Value (EV)

Value of the firm: both debt and equity
Theoretical takeover price (no control premium)

Enterprise Value = Market Cap. + Preferred Equity + Minority Interest + Debt - Cash

Why do we use Enterprise Value?

Market cap. only measures the equity value

Ignores debt and preferred shares

Enterprise value represents the value of the firm to both debt and equity holders
The market value of all capital invested in the business

Multiples using EV are more comparable

Introduction

Enterprise

Comparables

Precedents

Enterprise Value

Why do we subtract cash?

Imagine buying a company that consisted of the following:

Piggy bank with $99 inside

The piggy is worth $1

EV represents the theoretical takeover price

Let the owner keep the $99, pay $1 for the piggy
Buying cash with cash is redundant, so we net it out

Paying off debt with cash

If a company only has $10 of debt and $10 of cash on its balance sheet, it has an
Enterprise Value of zero

You can pay off the $10 of debt with $10 of cash; this company is worthless
Debt - Cash = Net Debt

Introduction

Enterprise

Comparables

Precedents

Enterprise Value

Why do we add preferred equity?

In accounting, equity refers to both common and preferred equity

In finance, equity value (market cap.) only consists of common shares

Preferred equity is treated more like debt

Price doesnt move much, dividends are like interest

Introduction

Enterprise

Comparables

Precedents

Multiples

What are multiples?

When we buy stock, we are paying to own a piece of a companys cash flows
Although we dont receive the cash, market price should adjust to reflect changes

in expectations of these projected cash flows

Multiples: how much the market is valuing a company relative to the value
stakeholders are receiving, e.g. how much cash that company is generating

How long before I get my money back?

Assume price to earnings ratio of 5

Paying $5 for $1 of earnings
5 years before those earnings add up to original price paid

Introduction

Enterprise

Comparables

Precedents

Common Multiples

Equity Multiples

Enterprise Multiples

Price / Earnings: how much are

Enterprise Value (EV) / EBITDA: how

shareholders paying for $1 of earnings?

much are stakeholders (both

Price / Book: how much are

bondholders and shareholders) paying

shareholders paying for $1 of equity

for $1 of EBITDA generation?

book value?

Book represents book value of

EV / EBIT

EV / Revenue

equity per share

Price / Tangible Book Value

Tangible Book Value does not
include intangible assets like
patents and Goodwill

Price / Cash Flow

Operating cash flow per share

Introduction

Enterprise

Comparables

Precedents

Forward Multiples

10

Valuing future growth vs. historical growth

Historical last twelve months (LTM) vs. projected next twelve months (NTM)

Historical multiples include EV / LTM EBITDA, EV / LTM Revenue, and Price / LTM EPS

Forward multiples include EV / NTM EBITDA, EV / NTM Revenue and Price / NTM EPS

Price / Earnings-to-Growth
Known as PEG

Price / Earnings Ratio

Annual EPS Growth

Most people prefer forward multiples because it accounts for projected growth

LTM results may be a poor proxy for projected growth because of:
One-time charges
Tax (NOLs)
Past Future circumstances have changed

Introduction

Enterprise

Comparables

Precedents

Apples-to-Apples

11

Multiples must be consistent

Numerator / Denominator must be the same unit

Dividing kilometers by miles is not meaningful
Apples-to-Apples vs. Apples-to-Oranges

Equity value metrics and enterprise value metrics are different

Value to shareholders vs. value to ALL stakeholders (shareholders, bondholders,
preferred shareholders)

Introduction

Enterprise

Comparables

Precedents

Apples-to-Apples

12

Multiples must be consistent

Price / Revenue is not meaningful

Price represents the market value of equityholders holdings
Revenue goes to ALL stakeholders

EV / Earnings is not meaningful

Enterprise value represents the value of the entire firm

Earnings represents value to shareholders since interest has been deducted

Introduction

Enterprise

Comparables

Precedents

EV / EBITDA vs. P / E

13

Why is EV / EBITDA generally better than P / E?

P / E is an equity metric, while EV / EBITDA is an enterprise metric

P / E only looks at equity portion, ignores debt / preferred shareholders

P / E is not capital structure neutral

P / E is highly dependent on leverage
More debt more risk to shareholders shareholders demand lower P / E
Even if debt is cheaper than equity, the P / E metric will penalize companies who
choose to finance through debt
Using P / E to value companies violates M&M theory

EV / EBITDA is capital structure neutral

The mix of equity and debt does not change EV assuming similar cost of capital
Doesnt matter how you slice the pie, total EV is the same

Introduction

Enterprise

Comparables

Precedents

Earnings vs. EBITDA

14

What are some issues with using earnings?

Earnings are subject to manipulation, one-time charges, differing accounting policies,

non-cash expenses, and ambiguity

e.g. Enron

Why do we like EBITDA?

EBITDA is more similar to cash flow and is capital structure neutral

Less room for manipulation
Ignores D&A, a non-cash expense
Ignores interest expense; EBITDA is available to shareholders, bondholders, and
preferred shareholders

EBITDA is a proxy for cash flow available to all stakeholders

Introduction

Enterprise

Comparables

Precedents

Advantages of P / E

15

When is P / E better than EV / EBITDA?

If interest is a part of a companys cost of doing business

Banks, financial institutions

Financial

If companies in the industry have negligible amounts of debt

Tech companies
Junior mining companies
Volatile businesses (e.g. startups)

If you are valuing a minority investment

Equity investments with <50% ownership
No control over enterprise, therefore enterprise multiples are inappropriate

P / E is easier to calculate than EV / EBITDA

Introduction

Enterprise

Comparables

Precedents

Minority Interest

16

What is minority interest?

Also known as non-controlling interest

If we own more than 50% of a subsidiary, we consolidate our financial statements with

the subsidiarys

Even if we own only 51% of Company S, 100% of Company Ss income statement line
items are added to our income statement line items

However, only 51% of Company Ss balance sheet line items are added to our
balance sheet items
49% of Company Ss net assets (assets liabilities) go into minority interest

Minority interest is the part of a subsidiary that we dont own

Found in equity section of balance sheet (IFRS)

Introduction

Enterprise

Comparables

Precedents

Minority Interest

17

How do we consolidate the parent and subsidiary?

Parent Corp.

Subsidiary Corp.

-Income Statement

-Income Statement

-Balance Sheet

-Balance Sheet

Consolidated Entity
(Reported by Parent Corporation)
Combined Balance Sheet, line-by-line
Combined Income Statement, line-by-line
Eliminate things like
inter-company gains and losses
inter-company balances (Assets/Liabilities)
Parents investment in the subsidiary company
Minority interest reported (the percent of the subsidiary not owned by the
parent) on both statements

Introduction

Enterprise

Comparables

Precedents

Minority Interest

18

Why do we add minority interest to get Enterprise Value?

EV = Market Cap + Preferred Equity + Debt Cash + Minority Interest

In enterprise multiples, EV is the numerator, and an income statement line item is

often the denominator

Denominator: Income statement line items are consolidated and include 100% of the
subsidiarys (Company S) income statement line items

Numerator: Market Cap + Preferred Equity + Debt accounts for 51% of Company S
The 49% we dont own is not factored into the prices of the parents stock,
bonds, or preferred shares
To make the numerator consistent with the denominator, we add in the 49% of
Company S we dont own (minority interest)

To make multiples like EV / EBITDA, EV / EBIT and EV / Revenue an apples-toapples comparison, we add minority interest

Introduction

Enterprise

Comparables

Precedents

Minority Interest

19

EV / EBITDA Apples-to-Apples
Add the portion of the subsidiary we dont own so numerator and denominator are consistent

Market Capitalization + Minority Interest + Preferred Equity + Debt Cash

subsidiary consolidated by
adding minority interest

Enterprise Value

subsidiary consolidated
from accounting rules

EBITDA

Introduction

Enterprise

Comparables

Precedents

Equity Method

20

What if we only own 20 to 50% of a company?

Use the Equity Method

If we bought 20% of Company E, we get 20% of Company Es net income

Ignore Company Es stock price

Company E is worth $100, we pay $20

Balance sheet item Investment in Company E: $20

If Company E reports $10 of net income, we get 20% of that $2

Investment in Company goes up by $2 (Debit)
Investment income goes up by $2 (Credit)

Introduction

Enterprise

Comparables

Precedents

Investments

21

Short Term Investments

Short-term investments with less than 20% control

Also known as investments held for trading

Mark-to-market

Unrealized gains or losses flow straight to Net Income

Long Term Investments

Long-term investments with less than 20% control

Also known as investments available for sale

Unrealized gains or losses flow through Other Comprehensive Income (OCI)

Only flows through net income after investment is sold

Introduction

Enterprise

Comparables

Precedents

Comparable Companies Analysis

22

What is comparable companies analysis?

Looking at similar companies and seeing how they are valued on a multiples basis
Common multiples include EV / EBITDA, EV / Revenue, P / B

Taking the average (median) multiple

e.g. 6.0x EV / EBITDA

Apply to target companys metric to get implied valuation

Target companys EBITDA is $5 mm
6.0 x $5 mm = $30 mm implied enterprise value

Valuing a house

Similar to valuing a house

Look at how much surrounding houses are worth relative to square feet (or other metric)

Find median price-to-square feet multiple

Apply this multiple to number of square feet in target house to get implied valuation

Introduction

Enterprise

Comparables

Precedents

Comparable Companies Analysis

23

Issues?

Are mansions comparable to normal houses?

Size must be comparable

What other features might affect how much houses are worth?
Number of garage doors?
Number of bedrooms? Bathrooms?
Furnished?

Should price-to-square-feet be the only multiple?

Introduction

Enterprise

Comparables

Precedents

Comparable Companies Analysis

24

Pros

Market-based valuation
DCFs often do not reflect short-term market conditions
Reflects market trends: poor market lower multiples lower implied value

Useful when a DCF is impossible or hard to do

IPO
Private companies with limited information
Minority investments

Shortcut to a DCF
Assume comparables are valued efficiently by the market in a DCF fashion
If every house around you has been appraised, do you really need an appraisal?

Less room for manipulation compared to DCF

Provides a benchmark value based on similar companies

Introduction

Enterprise

Comparables

Precedents

Comparable Companies Analysis

25

Cons

Does not account for synergies or control premiums in M&A analysis

Doesnt explain market inefficiencies

If market is irrational, then valuation may be irrational

Difficult to find comparable companies

e.g. Facebook

May not accurately reflect intrinsic value in small-cap, thinly traded stocks

Disconnect from companys projected cash flows

Ignores company specific issues

Introduction

Enterprise

Comparables

Precedents

26

Comparable Companies Analysis

Using the Quick Comps Capital IQ feature

1. Select company in Capital IQ search bar

2. Select Quick Comps

Introduction
Background

Enterprise
Situation

Comparables
Solution

Precedents
Implementation

Comparable Companies Analysis

27

Using the Quick Comps Capital IQ feature

1. Scrutinize automatically generated list of comparables
2. Add and delete companies

Export to
Excel

Add
Delete

Introduction

Enterprise

Comparables

Precedents

28

Comparable Companies Analysis

Using Bloomberg to build comps

1. Select company
2. Type in: RV (stands for relative valuation)
3. Add and delete companies to the list
4. Go to Edit Comparables if you want to add different columns (e.g. P / NAV)
5. Export to Excel
6. If file is saved on the same computer, file will automatically update

Introduction

Enterprise

Comparables

Precedents

Comparable Companies Analysis

29

Complete Process
1. Select the universe of comparable companies
Competitors, look at research reports
Pull research reports from Bloomberg / Capital IQ
2. Locate the necessary financial information
Canada: Pull annual / quarterly reports from SEDAR, pull investor presentations
United States: Pull 10Ks / 8Ks from EDGAR
Research reports / Factset / Bloomberg for forward estimates
3. Spread key statistics, ratios, and trading multiples
Measure profitability, growth, returns and credit strength
4. Benchmark the comparable companies
Scrutinize list of companies, delete ones that are not comparable
5. Determine valuation

Introduction

Enterprise

Comparables

Precedents

Comparable Companies Analysis

30

Selecting your universe of comparables

Make sure companies have similar traits in the following areas

Operational

Financial

Industry
Products
Business is this a pure play?
Location different tax codes
Cyclicality
Customers
Distribution channels

Introduction

Enterprise

Comparables

Size
Leverage
Projected growth
Risk profile
Shareholder base

Precedents

Comparable Companies Analysis

31

Valuation
Ticker

Current
Share
Price

% of
52-wk.
High

BBY:NYSE

$ 18.24

64%

RSH:NYSE
GME:NYSE
TGT:NYSE
WMT:NYSE

$ 2.79
$ 23.15
$ 64.67
$ 74.50

20%
87%
74%
99%

2013E
Sales

6,723

0.1x

0.1x

2.6x

$
288 $
450
$ 2,673 $ 2,535
$ 42,351 $ 58,673
$ 251,537 $ 254,048

0.1x
0.3x
0.8x
0.6x

0.1x
0.3x
0.8x
0.9x

Mean
Median

0.4x
0.4x

High
Low

0.8x
0.1x

Best Buy Co. Inc

6,238

Enterprise
Value

Enterprise Value /
LTM
2013E
EBITDA EBITDA

LTM
Sales

Company

Equity
Value

LTM
EBIT

2013E
EBIT

2.6x

3.1x

3.9x

4.6x
3.4x
7.9x
7.3x

3.7x
3.3x
7.7x
6.7x

20.7x
4.4x
11.0x
9.6x

16.5x
4.3x
10.9x
8.7x

0.5x
0.5x

5.8x
6.0x

5.3x
5.2x

11.4x
10.3x

10.1x
9.8x

0.9x
0.1x

7.9x
3.4x

7.7x
3.3x

20.7x
4.4x

16.5x
4.3x

Comparables
Radioshack
Gamestop
Target
Wal-Mart Stores

How can we find implied value?

Take median multiple (e.g. EV / LTM Sales, EV / 13E EBITDA)
Multiply with BestBuys corresponding metric (e.g. LTM Sales, 13E EBITDA)
Valuation typically presented in a range

Introduction

Enterprise

Comparables

Precedents

Comparable Companies Analysis

32

Issues?
Ticker

Current
Share
Price

% of
52-wk.
High

BBY:NYSE

$ 18.24

64%

RSH:NYSE
GME:NYSE
TGT:NYSE
WMT:NYSE

$ 2.79
$ 23.15
$ 64.67
$ 74.50

20%
87%
74%
99%

2013E
Sales

6,723

0.1x

0.1x

2.6x

$
288 $
450
$ 2,673 $ 2,535
$ 42,351 $ 58,673
$ 251,537 $ 254,048

0.1x
0.3x
0.8x
0.6x

0.1x
0.3x
0.8x
0.9x

Mean
Median

0.4x
0.4x

High
Low

0.8x
0.1x

Best Buy Co. Inc

6,238

Enterprise
Value

Enterprise Value /
LTM
2013E
EBITDA EBITDA

LTM
Sales

Company

Equity
Value

LTM
EBIT

2013E
EBIT

2.6x

3.1x

3.9x

4.6x
3.4x
7.9x
7.3x

3.7x
3.3x
7.7x
6.7x

20.7x
4.4x
11.0x
9.6x

16.5x
4.3x
10.9x
8.7x

0.5x
0.5x

5.8x
6.0x

5.3x
5.2x

11.4x
10.3x

10.1x
9.8x

0.9x
0.1x

7.9x
3.4x

7.7x
3.3x

20.7x
4.4x

16.5x
4.3x

Comparables
Radioshack
Gamestop
Target
Wal-Mart Stores

Are these companies really comparable with BestBuy?

Sometimes it is difficult to find truly comparable companies

Introduction

Enterprise

Comparables

Precedents

Comparable Companies Analysis

33

Establishing Multiple Range

Note: this example is unrelated to the BestBuy example

Closest
Comparable A
4.0x

Low

Closest
Comparable A

5.0x

Closest
Comparable C
6.0x

6.5x

Median

High

Mean

Selected Multiple Range

Introduction

Enterprise

Comparables

7.0x

Precedents

Comparables Valuation

34

EV / EBITDA Valuation

Establish EV / EBITDA range from comparables

Decide range by analyzing closest comparables, median, mean, high and low
Build range for LTM, 2012E, and 2013E

Multiply to companys EBITDA (LTM, 2012E and 2013E)

Arrive at Implied Enterprise Value range

Less: Net Debt (Debt Cash)

Assume no minority interest or preferred equity in this case

Arrive at Implied Equity Value

Divide by Fully Diluted Shares Outstanding

EBITDA
LTM
2012E
2013E

Introduction

Less:
Financial
Implied
Net
Metric Multiple Range Enterprise Value Debt
50
55
80

10.0x - 13.0x
9.0x - 12.0x
8.0x - 11.0x

Enterprise

$500 - $650
495 660
640 880

Implied
Equity Value

($100) $400 ($100)

395 ($100)
540 -

Comparables

$550
560
780

Precedents

Fully
Diluted
Shares

Implied
Share Price

100
100
100

$4.00 - $5.50
3.95 - 5.60
5.40 - 7.80

Precedents Transactions

35

Similar to comps, but focused on transactions

Comparable transaction analysis

Looks at historical transactions

Similar multiples, but EV is based on EV paid as opposed to market-implied EV

EV Paid / EBITDA, EV Paid / Revenue

Valuation derived from precedents will typically be higher than comparables and DCF
because of control premium

Control premium:
Synergies
Ability to control timing of cash flows
Ability to change management, improve business

Precedents are similar to valuing your house based on how much surrounding houses
were bought for on a price-to-square-feet basis

Introduction

Enterprise

Comparables

Precedents

Precedents Transactions

36

Precedents Example
Enterprise Value /
Date
Announced

Acquirer Target

03/11/2010
30/10/2010
22/06/2010
15/04/2010
01/10/2009

A
B
C
D
E

K
L
M
N
O

01/07/2009
06/07/2008

F
G

P
Q

09/11/2008

21/06/2008

20/03/2007

Transaction
Type

EBITDA
Margin

Equity Value /

Premiums Paid

LTM
Days Prior to Unaffected
Net Income
1
7
30

Cash
Cash / Stock
Cash
Stock
Cash

$1,600
900
600
1,300
200

$1,900
1,200
800
1,350
250

1.5x
1.2x
1.1x
1.6x
1.3x

8.0x
7.6x
7.1x
8.5x
7.7x

9.1x
8.7x
8.1x
12.5x
9.2x

18%
16%
15%
19%
17%

13.6x
13.9x
12.0x
14.4x
13.3x

30%
29%
NA
29%
NA

27%
32%
NA
36%
NA

33%
31%
NA
34%
NA

Stock
Cash

2,800
1,600

3,000
2,000

1.4x
1.2x

8.0x
7.5x

10.7x
9.3x

18%
15%

17.7x
12.4x

33%
38%

31%
42%

36%
43%

Cash

900

950

1.2x

7.3x

8.3x

16%

13.1x

34%

35%

36%

Cash

1,300

1,800

1.0x

7.2x

8.3x

13%

16.0x

35%

37%

39%

Cash

370

600

0.9x

6.5x

8.1x

14%

10.6x

NA

NA

NA

Mean
Median

1.2x
1.2x

7.5x
7.5x

9.2x
8.9x

16%
16%

13.7x
13.4x

33%
33%

34%
35%

36%
36%

High
Low

1.6x
0.9x

8.5x
6.5x

12.5x
8.1x

19%
13%

17.7x
10.6x

38%
29%

42%
27%

43%
31%

Introduction

Public / Public
Public / Public
Public / Private
Public / Public
Sponsor /
Private
Public / Public
Sponsor /
Public
Sponsor /
Public
Sponsor /
Public
Public / Private

Purchase
Equity Enterprise LTM
LTM
LTM
Consideration Value
Value
Sales EBITDA EBIT

LTM

Enterprise

Comparables

Precedents

Precedents Transactions

37

Pros

Market-based
Based on actual acquisition multiples paid for comparable companies
Recent transactions reflect current market trends, economic conditions, etc.

Simple to use
Recent, key transactions provide a benchmark acquisition multiples

Objective
Based on actual acquisitions, does not make assumptions about the future

Introduction

Enterprise

Comparables

Precedents

Precedents Transactions

38

Cons

Time lag
Markets could be very different during the time the acquisition took place

Lack of comparable acquisitions

May be difficult to find recent acquisitions with similar deal terms, line of business,
financial ratios, scale, context, etc.

Information could be hard to find

Private and / or small transactions sometimes have very little data

Each acquisition is unique

Different deal terms
Different motivations, plans to turn around business
Different synergies to be realized

Introduction

Enterprise

Comparables

Precedents

More Multiples

39

Resource

P / NAV: used in mining and energy

NAV is a DCF on each of a

Finance / Real Estate

P / B and P / E for banks

EV / AUM for asset management firms

companys assets, using a different

discount rate for each project

AUM = Assets Under Management

EV / Production

FFO = Funds from Operations

Measured in BOE / day (barrels of

oil equivalent) or Tonnes / day
(metric tons)

EV / Reserves
EV / Proven Reserves (1P)
EV / Proven + Probable (2P)
1P 90%, 2P 50%, 3P 10%

EV / FFO for REITs

Net Income + D&A

EV / AFFO
AFFO = Adjusted Funds from Ops
FFO + Rent Increases + Certain
CAPEX Items

More Multiples

40

Tech

Retail

EV / Registered Users

EV / Square Feet of Retail

EV / Pageviews

EV / EBITDAR

EV / Unique Visitors

Add back rent to EBITDA

EV / Subscribers

Some retail firms choose to rent,

others choose to buy stores

EBITDAR does not penalize retail

Airlines

EV / Planes

EV / Passengers

firms for renting