“price is what you pay. value is what you get” · founded in october 2007 by sachin and binny...
TRANSCRIPT
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“PRICE IS WHAT YOU PAY. VALUEIS WHAT YOU GET”
WARREN BUFFET
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Agenda
One size doesn’t fit all
Due diligence is key
It seems cash is not always the king
Timing is everything
Personality bias
Health check on valuations
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One size doesn’t fit allOne sizedoesn’t fit all
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Challenges in valuing companies across the business lifecycle
Introduction Growth Maturity Decline
ü Valuation iscomplex
ü Limited history
ü Small revenueswith bigoperatinglosses
ü High probabilityof failure
ü Multiple claimson equity
ü Limited marketpeers forcomparison
ü Relatively easy to value
ü Multiples fairly reflect thecompany’s intrinsic value ¤t management, butmanagement could change forthe better or worse
ü Declining markets
ü Negative earnings
ü High debt load
ü Likelihood ofdistress
Financial servicefirms
Commodity andcyclical firms
Firms with onlyintangible assets
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Due diligence iskey
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Valeant’s meteoric rise was entirely driven by acquisitions
Valeant businessmodel of growth
through acquisitions
► 23 acquisitions totaling $26.4 billion during 2013-2015
► 18 out of the 23 were private companies
► 2 major acquisitions of a public company (Salix for $12.5 billion) and one of aprivate business (Bausch and Lomb for $8.7 billion)
5,770
8,206 10,447
9,6748,724 8422
-
2,000
4,000
6,000
8,000
10,000
12,000
2013 2014 2015 2016 2017 2018LTM
Rev
enue
($m
)
Revenue ($m)
Valeant has seen explosive growth since 2010, with revenues increasing from $1.2 billion to almost $10 billion in 2015 and EBITDAsurging from $450 million to $5 billion during the same period
Source: Publicly available information
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Valeant’s acquisitions, price inflation business model drew in thelikes of Sequoia Fund and Bill Ackman
► Main acquisition strategy was buying companies that owned the rights to"under priced" drugs and repricing to what the market would bearBuy low, Sell high
► Valeant had no qualms about using its borrowing capacity to fund itsacquisitions, unlike other mature drug companies
Use debt capacity
► Valeant was one of the few companies in the business that viewed R&D likeany other capital investment and scaled it back, as the payoff decreasedR&D is not sacred
► Its acquisitions seemed to translate quickly into revenues and operatingincome, vindicating their strategy
► As an added bonus, the company used its acquisition-related expenses tokeep its tax bill low, keeping its effective tax rate below 10%
Quick conversion toearnings
Source: EY analysis
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Valeant’s the pharmaceutical equivalent of Enron?
► Citron Research, known for its investigations on short-selling strategies,published a report aiming to challenge Valeant’s accounting policies
► That report claimed that Valeant had hidden a relationship with shadowypharmacy entities and that it had used that relationship to cook its books
What triggered itsdramatic collapse?
CEO (Now Ex) of Valeant,Michael Pearson, wasforced to sell $100 millionof his shares in thecompany to cover a margincall
Hillary Clinton slammedValeant for its drug pricehikes and vowing to’ goafter’ them as acampaign promise
21/10/15: Report byCanon, a short seller,expanding discussions onValeant/Philidor link andmaking a case foraccounting fraud
26/10/15: Valeant had apress conference, defendingoperating and accountingpractices, and announcingchanges to these practices
19/10/15: SRFreports on a courtfiling by P&O andimplications forValeant
0.0x
50.0x
100.0x
150.0x
200.0x
0.0
20.0
40.0
60.0
80.0
100.0
P/E
mul
tipl
ean
dEV
/EB
ITD
Am
ulti
ple
Mar
ket
Cap
($b)
Bausch Health Companies Inc. (NYSE:BHC) - Market CapitalizationBausch Health Companies Inc. (NYSE:BHC) - TEV/EBITDABausch Health Companies Inc. (NYSE:BHC) - P/Normalized EPS
(20.0)30.080.0
130.0180.0230.0280.0
Feb-
10A
pr-1
0
Jun-
10A
ug-1
0O
ct-1
0D
ec-1
0Fe
b-11
Apr
-11
Jun-
11A
ug-1
1O
ct-1
1
Dec
-11
Feb-
12A
pr-1
2Ju
n-12
Aug
-12
Oct
-12
Dec
-12
Feb-
13A
pr-1
3
Jun-
13A
ug-1
3O
ct-1
3D
ec-1
3Fe
b-14
Apr
-14
Jun-
14A
ug-1
4O
ct-1
4
Dec
-14
Feb-
15A
pr-1
5Ju
n-15
Aug
-15
Oct
-15
Dec
-15
Shar
epr
ice(
$)
Source: Publicly available information
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It seems cash is notalways the king
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Why did Walmart pay $16 billion for a 70% stake in Flipkart?
Drivers
Tools
► India’s growth story
► Online growth
► First mover advantage
Valuations
► Synergy valuation
The value process
► Emerging market entry
► Online model
► Surplus cash
► Walmart market price
► Emerging marketmultiples
The price processUS$ 20.8b
Revenue multiple: 4.5x
Source: Publicly available information
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Flipkart’s losses have scaled up despite strong revenue growth
1 4 11 98 252489
1,645
2,325
3,061
(0) (1) (2) (22) (52) (121)(310)
(803)
(1,352)-38%
-25%-19% -22% -21%
-25%-19%
-35%
-44% -50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
(2,000)
(1,500)
(1,000)
(500)
0
500
1,000
1,500
2,000
2,500
3,000
3,500
2008-09 2009-10 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17
Net
Mar
gin
(%)
Rev
enue
/N
etIn
com
e(U
SDm
)
Revenue (USD m) Net Income (USD m) Net Margin (%)
► Founded in October 2007 by Sachin and Binny Bansal, with about $6000 in seedcapital
► Revenues increased from less than $1 million in 2008-09 to c. $100 million in2011-12 and accelerated, with multiple acquisitions along the way, to reach $3billion in 2016-2017
► Losses widened over the years despite drastic increase in revenues
Operating History
Source: Publicly available information
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Flipkart has attracted a series of high-profile investors over theyears
0.0
0.80.8
1.01.6 2.6
7.0
11.0
15.5
11.011.5
5.6
11.611.6
12.5
20.8
0
5
10
15
20
25
Valu
atio
nin
(US$
bn)
Walmart’sInvestment
SoftbankInvestment
Existinginvestorsreprice
holdings
GIC SingaporeInvestment
NaspersInvestment
MorganStanley
Source: Publicly available information
Existinginvestorsreprice
holdings
MorganStanleyreprice
holdings
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Valuation markdown with slowing growth
11.0
9.49.0 8.8
11.6
5.6
8.7
10.3
7.3
9.9
5.6
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
February2016
March2016
June 2016 July 2016 August2016
September2016
November2016
November2016
December2016
January2017
February2017
MorganStanley
MorganStanley Morgan
Stanley
T RowePrice
FidelityPartnersVanguard
Funds
VALIC
Fidelity
VALIC
MorganStanley
T-RowePrice
VanguardFunds
FidelityPartners
With slowing growth, unit economics and profitabilityremained pipe dreams
&the Amazon juggernaut was gaining market – Leading to
valuation markdowns
Source: Publicly available information
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Timing iseverything
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Why the GE Alstom deal—worth c.US$16bn—made sense back then
► GE announced its acquisition of Alstom's Thermal, Renewables and Grid businesses onApril 30, 2014. GE closed the transaction on November 2, 2015, after a lengthyregulatory review process
TransactionOverview
► c.$16bnPurchasePrice
► All-cash transaction valued the Alstom assets at c.8x pro forma EBITDATransaction
Multiple
Source: Publicly available information
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Why did GE buy Alstom?
GE's vision of becoming a global powerhouse for thermal power equipment
Alstom hasover $20 billionin revenue and65k employees
PowerGrid
Thermal
Rev: $13b;IFO: 10%
Renewables
Thermalservices
50%Steam40%
Gas10%
Rev: $2b;IFO: 5%
Hydro78%
Wind20%
Other2%
Rev: $5b;IFO: 6% Product, system
& services80%
Power electronics& Automation
20%
Alstom brings complementary technology, global capability, a large installed base and talent to GE
Financially attractive with US$ 1.2b of synergies within 5 years based on optimization of manufacturing andservices footprint
► 85% revenues outside N. America► 34% revenues from services
$20.0
$1.3
Revenue EBIT
6.0%
EBIT (%)
LTM Sept.’13 financials
25.0%80.0% 100.0%
Year 1 Year 3 Year 5
Synergyrealizationtiming
Source: Publicly available information
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Victim of poor timing?
► GE plunged into natural gas power market but faced challenges due to shift inmarket’s focus on renewable energy and cheap oil and gas prices
► Its natural gas turbines market shrinked so fast that its EBIT dropped more than80% YoY in its latest quarter
Timing
GW installed shows significant increase inrenewables at expense of fossil
Declining gas turbine orders for utility (c.88% of global turbineorders)
Gas Turbine Order for Utility UseGW 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017EEurope 13.0 6.8 4.9 2.7 1.6 1.8 0.8 0.4 0.0 0.3 0.4UnitedStates 6.1 7.9 5.2 4.1 5.3 5.7 5.7 10.2 10.7 6.9 6.5
ME + NorthAfrica 31.0 18.4 17.0 18.2 20.8 15.7 21.6 14.5 18.1 16.7 11.0
Asia exJapan, China 5.0 6.8 1.9 7.9 10.2 7.5 7.3 5.7 7.8 3.9 5.0
China 1.3 1.6 1.4 3.5 11.9 9.4 6.6 2.7 5.9 5.1 5.0Japan 0.9 1.6 0.6 2.1 5.1 2.1 0.8 4.0 1.7 2.0 2.5Russia andCIS 5.3 9.7 4.3 2.6 6.0 4.7 5.6 3.0 3.8 2.7 3.0
Other 21.9 13.0 9.2 6.4 7.2 3.1 3.9 3.8 5.5 7.3 7.5Total 84.7 65.9 44.4 47.7 68.0 49.9 52.2 44.3 53.5 44.9 40.9
Source: McCoy and JP Morgan estimates
30% 30% 26%
28% 19%12%
16%20%
19%
11% 15%26%
7% 7% 11%7% 6% 4%0% 3% 2%
Dec'14 ('13-'23) Nov'15 ('14-'24) Mar'17 ('17-'26)
Gas Coal Wind Solar Hydro Nuke Other
(100%)
(50%)
0%
50%
100%
2015 Q3 2015 Q4 2016 Q1 2016 Q2 2016 Q3 2016 Q4 2017 Q1 2017 Q2 2017 Q3 2017 Q4
Sales change (YoY) Operating income change (YoY)
Source: Publicly available information
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What made things go from bad to worse? – Alstom acquisition is theanswer
Sale of wrong businessMismanagement or bad choices?Operational costs pilled up
► Operating costsincreased significantlywith the addition of~65,000 employees
► GE Power ramped up its production whendemand waned, resulting in huge inventorybacklog
► Cash flow was severely depressed due to:
► falling operating income
► rising inventory
► In March 2017, GEannounced to sell itsprofitable waterbusiness to Frenchutility Suez SA and aCanadian pension fund,as a result of itscombination with BakerHughes (BHGE) whichhad an overlap with itswater business
► As of date, BHGE hasfailed miserably
The result of the misjudgment? GE announced a layoff of 12,000 people from its Powerbusiness in December 2017
Source: EY analysis
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How GE gained and then lost, goodwill
0
5
10
15
20
25
30
201720152014 June 30, 20182016 2018
GE’s purchase ofAlstom added
about US$12b ofgoodwill to its
books
Adjusted goodwilladded about
US$4b
Write downof aboutUS$1b
Write downof aboutUS$2b
GE has said it willwrite off ‘substantiallyall of the goodwill in
its power division
► Alstom assets actually had a negative net worth of $7bn. The differencebetween that and the $16bn price gives you close to $23bn that was laterwritten down
GE announced a $23bnwrite off in October2018
US$
b
Source: Publicly available information
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PersonalityBias
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Tesla is a ‘story stock’ where underlying value fades into background
► The story is so dominant in both how people price the stock and what determinesits value that the numbers fade into the backgroundStory Stock
CEO is woven into thecloth of the company
► Musk’s legion of fans are a passionate bunch, bordering on hero worship
► Musk inspires employees and despite having a reputation of being a difficult boss,augurs immense respect
Musk both an asset andliability
► Musk is the engine behind the corevision of the world’s transition tosustainable energy
► Musk’s recent erratic behavior,infamous ‘going private’ tweet hasled to sharp drop in valuation
“Working with him isn’t a comfortable experience, he is never satisfied with himselfso he is never really satisfied with anyone around him…the challenge is that he is amachine and the rest of us aren’t.” – Tesla Employee on Musk
Source: EY analysis
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Tesla: Irrational Exuberance or Foresight?
Irrational Exuberance orForesight?
Tesla already outperformed Ford and General Motors in market value last year and has thus risen to become themost valuable US carmaker.
In November 2018, it had surpassed BMW’s valuation also
► Most auto companies would be valued at a 6x – 10x EBITDA
► Tesla’s average EV/EBITDA multiple in 2018 was c.100x
0
50
100
150
200
250
300
EV/E
BIT
DA
Tesla (EV/EBITDA) Bayerische Motoren Werke Aktiengesellschaft (DB:BMW) - TEV/EBITDA
Ford Motor Company (NYSE:F) - TEV/EBITDA Ford Motor Company (NYSE:F) - P/Normalized EPS
Bayerische Motoren Werke Aktiengesellschaft (DB:BMW) - P/Normalized EPS
Source: Publicly available information
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Health checkon valuations
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Most common valuation issues
1. Selecting the right valuation approach and model // FCFF vs FCFE // PE vs EBITDA vs EBIT Vs Revenue
2. Earnings vs cash flows
3. Normalization adjustments
4. Flat growth vs Hockey stick projections // Growth // Risks //Earn out structures
5. Terminal value calculations (Capex / Working capital changes) // Discrete period // Perpetuity
6. Terminal growth rate // industry growth vs Exit multiple
7. Basis of discount rate // CoE vs WACC
8. Equity Value Vs Enterprise Value // Completion mechanism
9. Discounts and premia // DLOM
10. Valuation synthesis (Triangulation // football field)
Source: EY analysis