Swedish Tower Company
RCFA M&A Case Competition
Prepared for:CPP Investment Board
Prepared by: SiLu Liu
After in-depth financial analyses and qualitative considerations, we recommend CPPIB-Private Board proceed with the competitive auction of Swedish Tower Company (STC), a Swedish owner of television and mobile telecommunication towers. In particular, we identified a leveraged buyout capital structure to be suitable given STC’s proven earning growth and strong market position, along with significant opportunity for cost reduction. We conducted financial valuation using market comparison ...view middle of the document...
4. Exit year: We assume the STC will be sold off at the end of the 5th year.
Some company specific assumptions are made:
5. Growth rates: The growth rate of each stream of revenue is predicted to grow steadily. We provided 3 cases for each revenue and cost driver. There is less fluctuation between the 3 cases in the broadcast industry. The only potential upside increase comes from boxes upgrade. There is more flexibility in mobile tower industry because of a potential structure shift of hardware supplier.
6. Cost drivers: After the buyout, we expect a significant improvement in operating efficiency, which will be largely reflected through reduced salaries and maintenance capex.
Using transaction valuation method, STC is estimated to worth 2,948.1 million (as of Jan 1 2007). This is done by using the EBITDA of the company times the average EV/EBITDA multiple of the industry’s recent transactions. Shown as follows:
We decided not to include Company A because it has a significantly lower EV and EBITDA and high PE, which indicate it is still at growth stage, while STC is obviously in a more mature phase. We arrived the industry’s average EV/EBITDA ratio at 10.5. By multiplying this ratio to STC’s EBITDA (€282 million), we get 2,948 million for STC’s Enterprise Value.
We have also got the enterprise value of STC by deducting its debt and adding back their cash, shown as follows:
We allow a 10% range of price flexibility, in response to the nature of the competitive bid. Therefore, the purchase price of STC is in between of 2,653 million and 3,243 million.
IRR and Multiple of Capital
In this buyout practice, equity investors care about return on equity and thus the internal rate of return in which would make the NPV of this project zero. We used EV/EBITDA multiple to assess the magnitude of EBITDA multiple upon selling STC’s business. This multiple would allow us to obtain a comparable Enterprise Value of STC so that the equity contribution can be calculated by subtracting debt, transaction fees and add back the 2011 cash balance. The resulting equity value to sponsor will then be used to compute the annual IRR in which the initial equity investment on Jan 1st 2007 is a portion of the total source of finance (assume 30% equity finance, 70% debt finance).
Capital Multiple in 2007 is calculated by taking an average from three similar companies in the industry (figure 5), this result in a 10.45X EV/EBITDA multiple and we think it is an optimistic number which we decide to keep using this multiple for the valuation in 2011. Theoretically, analysts tend to assume higher multiple upon exit so that the merit of private investment can be reflected. An equal multiple is as good as a higher multiple in our case.
The resulting IRR is attractive, range from 21%(downside case) to 38%(upside case), with a base case of 28%. They are in general higher or at least as good as the private equity industrial minimum requirement...