Enterprise Value

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Relative Valuation – Based on Multiples

Bharti Airtel and Zain Africa recently announced signing of the definitive merger agreement, wherein Bharti will acquire African operations of Zain Group. The deal was valued at an enterprise value of USD 10.7 billion or on an 8.2x EBITDA Multiple. Goldman Sachs has invested USD 450 million in online social networking portal Facebook, which is valued as the number one social networking network at USD 50 billion. At an enterprise value of USD 50 billion, Facebook is trading at a multiple of about 100 times of its earnings. Newspapers and television channels make it their headlines whenever a major deal (private equity, acquisition, etc.) happens. And we normally wonder how these valuations or multiples were calculated. “What is the worth of my company?” “How much funds can I raise via private placements, and how much stake I have to dilute?” “How much can I raise from the market if I decide to take my company public?” So, whatever the purpose is (acquisitions, private equity, joint ventures, IPOs, etc.), valuation remains the centre of the talks. The two most common valuation methodologies include (1) Discounted Cash Flows, and (2) Relative Valuation (Valuation Based on Multiples). Read on to know more…

CA. Tapan Jindal (The author is a member of the Institute. He can be reached at eboard@icai.org)

There is no one way to establish what a business is worth. That's because business value means different things to different people. There are numerous ways to value a company. In determining value, there are several basic analytical tools that are commonly used by financial analysts. The methods, to value a company, have been developed over several years of research and refinement and are based on financial theory and market reality. However, these tools/ methods are just the tools/methods and should not







be viewed as final judgement, but rather, as a starting point to determination of value. The two most common valuation methodologies include (1) Discounted Cash Flows, and (2) Relative Valuation (Valuation Based on Multiples).

Relative Valuation Relative Valuation or Comparable Company Analysis or Valuation based on multiples is the most common valuation tool used by analysts, fund managers, investment bankers and consultants while making a deal happen. The end objective is to drive equity based and enterprise based multiples so that two companies can be compared to each other, as its very difficult to tell which company is a good investment and which is not, just on basis of absolute numbers. For example consider the two companies A and B having net sales of R10,000 and R15,000 respectively. Just looking at these numbers we cannot pass a judgement as to which company is a better investment. However, with multiples like EV/Sales, it becomes easy to make analysis and passing a judgment. If company A has EV/Sales multiple of 3x and Company B has multiple of 4x, it tells that Company A is a cheaper buy compared to company B as for every rupee of sales of A, one has to pay ` R3 while for B one has to pay R4. When someone talks of valuation, we tend to focus most on DCF valuation. However, the reality is that most valuations are relative valuations. The value of most assets, from the house you buy to the stocks that you invest in, are based upon how similar assets are priced in the market place.

Relative valuation or the analysis of selected publicly traded companies is basically the multiples comparisons with other similar or comparable companies in the same sector. This valuation methodology values a target company based on the operating multiples and financial ratios of its industry peer group. Simply, it gives us a means to compare a company’s current valuation to that of its peer group and determine if it is over or under valued in the market. The simple fact why relative...
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