Congoleum Case Salomé Lema Francesco La Masa Mehdi Boucetta
Financial Analysis Analysis and Management Spring 2016 23/05/2015
Cong Congol oleu eum m Corp Corpor orat atio ionn - Over Overvi view ew Key Figures
Organization and Projected deal
> Created Created in in 1911 1911 in Pensylv Pensylvania ania > Rapid Rapid growt growthh to beco become me the US leading producer of floor coverings by the 1940s > The corpo corporati ration on widened widened the the scope scope of its activities in the decades 6080 > 1978 : 576 M Sales Sales,, 42M$ 42M$ Profit Profitss
Organization
Proposed Deal
Corporation active in three product market segments > Home Home furnis furnishin hingg > Shipbuild Shipbuilding ing (Bath (Bath Iron Iron Work Works) s) > Auto Auto and Industr Industrial ial Distr Distribut ibution ion
> Congo Congoleu leum m Corpor Corporati ation on was was the target of the largest leveraged buyout ever operated to date. Two phases:
551 576
Sales (M$)
21%
+13% +13% p.a p.a 345
386 377 396
389
38%
216 30%
AID
27%
BIW
43%
HF
295 251 190 188 41%
– Acquir Acquiring ing and integ integrat ration ion of of BIW by by the hoding company (92,3M$) – Acquir Acquiring ing of of the rest rest of the company for $371,3M > Financed by $379,6M of debt securities, preffered stock and bank loans > All All play player erss invo involv lved ed would would ge gett titles with the same composition of securities
Offer (June 79) On
69 70 71 72 73 74 75 76 77 78
Sales
Assets
Purchase Purchase of Congoleu Congoleum m stock for for $38 per share share (vs mark market et closing price of $25,375 the day before)
Valua aluatition on I – Sum Sum of the the Par Parts ts meth method od
Justification and assumtions > Technique generally used to value value conglomerate with separate types of activities > Assu Assump mptition onss – Net income income from from Lazar Lazardd est. est. – Median Median P/E P/E multi multiple ple compute computedd with available data. Differences with Lazad explained by the lack of data > Results to be considered as a low valuation – P/E of the the con conglom glomera erate te of of 6,63x vs global multiple of 10,65x EPS of [US$ [US$ 24,89 24,89 – 39,98 39,98]
Sum of the parts computation
Valuation II – Disc scoounted Cash Flows method (1) Unlevered Free Cash Flows computation
Ac tual UFCF Calculations Operating inc ome (Exhibit 15) 95,50 Less: c orporate expenses 7,50 deprec iation & amortization 6,70 Earnings before interest and taxes 80,30 EBIT (1-tc ) Adjustments Add bac k deprec iation & amortization (b (b) Less c apital expenditures Less inv estment in work ing c apital required U FCF
1979e 105,90 8,60 7,50 89,80 46,70
1980e 111,50 4,30 35,51 71,69 37,28
1981e 132,20 5,10 36,26 90,84 47,24
1982e 158,70 5,90 37,07 115,73 60,18
35,51 -15,00 -2,00 55, 79
36,26 -16,20 -14,00 5 3, 3 0
37,07 -17,50 -23,30 56 ,4 5
1983e 1984e 1985ee 175,90 166,10 6,80 7,60 37,95 21,23 113,15 137,27 58,84 71,38 78,52 37,95 -18,90 -11,20 66 , 69
21,23 -20,40 -12,80 59, 4 1
31,42 -31,42 -18,94 5 9 ,5 7
Valuation II – Disc scoounted Cash Flows method (2) Computing the cost of Capital Cost of Equity
Cost of Debt
> Use Use of the the CAPM – Risk free rate of 9,5% – Risk Premium of 8,6% > Betas calculated calculated for every year using using the formula formula starting from the 1,25 of 1979 with a 0,08 D/E ratio
> Amounts considered considered by tsubst tsubstracting racting the forcasted forcasted repayments to the debt initial values > Cost of debt estimated by computing a weighted average interest rate on the instruments listed on Exhibit 14 > The D/E ratio moves substancially during the period: – Pre LBO LBO : 0,08 0,08 – 198 9800 : 12 12,,6 – 1984 : 0,8
Cost of Equity D/E Beta Cost of Equity 9,50% RF MRP MRP 8,60%
1979
19 1 980
19 1 981
19 1 98 2
19 83
19 1 984
19 1985
0,08
12,6
3, 3 ,9
2,9
2,0
1,3
0, 0 ,8
1,250
9,051
3,633
3,012
2,436
1,985
1,700
20,25%
87,34%
40,75%
35,40%
30,45%
26,57%
24,12%
Valuation II – Disc scoounted Cash Flows method (3) Computing the cost of Capital ������� ��������� ��� ���� ����
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Valuation II – Disc scoounted Cash Flows method (4) DCF com compu putat tation ion Results > EBIT (1-t) growth at an estimated 10% per year (based on past years Balance Sheets) > Normalization of the UFCF assuming a constant evolution of the Working Capital and a maturity phase with Deperciation = CAPEX > Terminal value computed computed with with the the following formula
T e rminal inal Value Value UFCF 1985 Growth WACC
T e rm Valu
59,57 8%
15,2%
8 2 7 ,3 4
Valuation II – Disc scoounted Cash Flows method (5) Terminal value calculation Results
> Cas Cash flo flow ws discounted using the different WACCs to reflect the change in capital structure > Equity Value obtained obtained by taking the cash cash held by Bath Iron Works and substracting the values of preffered shares and a nd stock options exercisable by the management
Discounted Cash Flows
Conclusions
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> We used the case case informations informations to compute a price per share through two different methods – Sum Sum of of tthe he Part Partss – Discou Discounte ntedd Cash Cash Flows Flows
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> These These metho methoss were were then then compared to Lazard Valuation > We no notice th that the 38$ per share lies on the upper range of the median we computed computed