FINA535 - Acova

Philip Wan

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Dec 4, 2006, 9:03:29 PM12/4/06

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Hi there,

here it comes the last assignment!!!!!

to get started, I've drafted the valuation model, still trying to
figure out the WACC and some other paramenters (highlighted in
green)...

there's another pdf file that I got it from John, seems to be graded
assignment from last year's class. There're some points that I don't
fully agree with, but may serve as a reference.

I'll be travelling on Thursday and coming back on Friday night. we
can discuss thru email / msn.

philip

Acova.xls

Acova.pdf

Frances Chin

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Dec 5, 2006, 12:45:27 AM12/5/06

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Hi Philip,

Thanks very much for your input, you're really the batman of our team :)

Hi All,

As a matter of fact I haven't read through the case and hence having a meeting tonite might be a bit tough to me.

Is it Ok for you guys to have a conf. call tomorrow, 11pm, which lasts for one hour at most? Our discussion will be based on Philip's spreadsheet and last year's reference assignment.

Please revert to confirm your availability, or counter-propose.

Thanks & best regards,

Frances

Joseph Lam

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Dec 5, 2006, 1:29:28 AM12/5/06

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Dear Francis and Philip,

Thanks a lot. It is fine with me.

Regards,
Joseph

Aslan Lam

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Dec 5, 2006, 3:42:58 AM12/5/06

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Thanks. I am reading the case and is okay for tomorrow's conference call.

Aslan

SIT Kwok Choi, Pitney

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Dec 5, 2006, 6:29:55 AM12/5/06

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Thanks to Philip's work. I may be a bit late coming back home tomorrow night. (e.g. 11:30pm) See if I can use mobile to participate in the conference call tomorrow. Or you can start first.

I have read the case and Philip's work and would like to check / discuss for the following: (since i don't know the answer either :P)

1) Should we use FCF figures in Exhibit 3 directly instead of having our estimated growth rate? As Exhibit 3 has already quite a lot of assumptions set.

2) But if using Exhibit 3, the sales figure may not be so high in 1994. Refer to Exhibit 1C, in 1994, 57% x 840mm = 478.8. Not sure the 561,427 has included some expansion outside France.

3) Also, should we include projected interest payment after buyout in FCF calculation? Then a revised valuation should be obtained.

4) In fact whether Acova is a suitable candidate for buyout by Baring depends on

a) Cash flow to cover interest payment - have to calculate - should be ok for Acova from first glance

b) ROIC - which should be improved in the following years as expected by management - ok also

c) growth rate - may not be so optimistic if it is bought by Baring instead of Zehnder, as only Zehnder can bring synergy effect and opportunity for growth (outside France) For this point, Baring may not buy Acova (see what conclusion we want to draw)

5) As reasonable P/E = 13 (page 4), but the acquisition price implies P/E = 16, which may even not be reasonable if Baring buys Acova without opportunity of high growth rate afterwards. So at least we should not use 340mm as acquisition price. If we want to conclude Baring should still purchase Acova (which is not a must), we have to decrease the acquisition price according to our estimated value after consideration of the interest payment. It should still be justified for Baring as Baring needs 30-35% IRR, but not 43% as in Exhibit 5B.

See how u think and we can discuss tomorrow.

Pitney

Joseph Lam

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Dec 6, 2006, 7:42:19 AM12/6/06

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Thanks Philip.

Agree with Pitney that Acova is a good LBO candidate that it had decent cash flows; good PE; Strong brand and a strong position in a marketplace and can survive a price war with competitors; but there are doubts on if growth and ROI be up to Barings' assumptions.

Also attached a good article on LBO found on the web.

In the article, the specific criteria for a good LBO candidate include the following that we may include in the answers..

Steady and predictable cash flow
Divestible assets
Clean balance sheet with little debt
Strong management team
Strong, defensible market position
Viable exit strategy
Limited working capital requirements
Synergy opportunities
Minimal future capital requirements
Potential for expense reduction
Heavy asset base for loan collateral

Joseph

LBO_Note.pdf