Simmons Japan Limited
As mentioned in class, the ANPV method is best suited for valuation of this sort of situation (leveraged buyout – LBO) where capital structure changes over time. The buyer initially borrows a lot and plans to pay back later, as shown in Exhibit 6. The valuation process is nothing but an application of the ANPV we covered in class. First, you should identify FCF that can be discounted by unlevered cost of equity. You may have to make some assumptions about working capital. Second, identify financial side effects arising from amortization and various debts.
9
1. Is SJL worth the $29 million asking price? What value would you assign to the company? Assume U.S. equity premium is 6-8%. Pay attention to what discount rates to use for cash flows and different tax shields.
2. Does PruAsia’s target dollar returns (that is, IRR) of 20-25% appear achievable for this deal under the proposed terms? What must be done over the next 5 to 10 years to realize these returns? Is it realistic? (Hint: In answering this question, consider PruAsia’s exit strategy. PruAsia is investing in both subordinated debt and equity of SJL. The sub-debt offers only 9.5%, which is not enough to attain 20-25% return So PruAsia would have to sell equity to someone in 5 to 10 years at a high enough price to achieve IRR of 20-25%. The question is: how much do they have to sell the equity for?)
3. To whom would you try to sell the subordinated debt for this deal? What are likely to be their concerns and reservations with regard to this debt?
4. Would you accede to Wesray’s request for a five-year option for 10% of SJL’s equity? Why or why not?
As mentioned in class, the ANPV method is best suited for valuation of this sort of situation (leveraged buyout – LBO) where capital structure changes over time. The buyer initially borrows a lot and plans to pay back later, as shown in Exhibit 6. The valuation process is nothing but an application of the ANPV we covered in class. First, you should identify FCF that can be discounted by unlevered cost of equity. You may have to make some assumptions about working capital. Second, identify financial side effects arising from amortization and various debts.
9
1. Is SJL worth the $29 million asking price? What value would you assign to the company? Assume U.S. equity premium is 6-8%. Pay attention to what discount rates to use for cash flows and different tax shields.
2. Does PruAsia’s target dollar returns (that is, IRR) of 20-25% appear achievable for this deal under the proposed terms? What must be done over the next 5 to 10 years to realize these returns? Is it realistic? (Hint: In answering this question, consider PruAsia’s exit strategy. PruAsia is investing in both subordinated debt and equity of SJL. The sub-debt offers only 9.5%, which is not enough to attain 20-25% return So PruAsia would have to sell equity to someone in 5 to 10 years at a high enough price to achieve IRR of 20-25%. The question is: how much do they have to sell the equity for?)
3. To whom would you try to sell the subordinated debt for this deal? What are likely to be their concerns and reservations with regard to this debt?
4. Would you accede to Wesray’s request for a five-year option for 10% of SJL’s equity? Why or why not?