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Monthly Archives: November 2013

Clare Capital advises MetOcean on sale to MetService

Clare Capital was the financial adviser to MetOcean on their partial sale to MetService.

MetService, the nation’s state-owned weather forecaster, paid $3 million for a 49 per cent stake in privately owned New Zealand oceanographic consultancy MetOcean Solutions, giving it a foothold in a market worth more than $10 million.

The purchase will allow Wellington-based MetService to expand its research capability and add customised oceanographic forecasting and consultancy expertise to its global offering. For MetOcean, the tie up enables it to expand internationally with an established partner.

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The what and why Of EBIT and EBITDA

One of the common questions we get asked is why does the term EBIT or EBITDA get used so frequently in valuation work?

EBIT stands for Earnings Before Interest and Taxes (EBITDA is Earnings Before Interest, Taxes, Depreciation and Amortisation).

EBIT is sales less expenses (including depreciation) adding back any interest paid and subtracting any interest received.  The only change to EBITDA is that depreciation and amortisation are added back.

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Glossary

Here is a glossary of investment banking terms. We are going to reference this a lot in future posts.

Enterprise Value (EV) The value of the whole business, including debt and equity.
Equity Value The value of the equity portion of the business. Calculated as Enterprise Value less Net Debt.
EBITDA Earnings Before Interest, Tax, Depreciation and Amortisation. A measure of earnings that removes the impact of capital structure, tax loss positions generated by previous performance, and non-cash items depreciation and amortisation.
EBIT Earnings Before Interest and Tax. A measure of earnings that removes the impact of capital structure and tax loss positions generated by previous performance.
Net Debt The borrowings in the business, less cash and equivalents. Net Debt can be a negative figure if the cash and equivalents held by a firm exceed its borrowings.
Discount Rate The interest rate used in Discounted Cash Flow analysis to calculate the present value of future cash flows. This rate takes into account the time value of money (i.e. the notion that a dollar today is worth more today than a dollar tomorrow), and the risks and uncertainties associated with future cash flows.
WACC Weighted Average Cost of Capital. The proportionally weighted sum of the cost of debt and the cost of equity. The WACC is the appropriate discount rate to use when valuing a company’s cash flows, as a mixture of debt and equity finances the assets generating these cash flows.
Terminal Value (TV) The value of a company’s cash flows beyond the explicit forecast period, approximated by a perpetuity calculation.
Present Value (PV) The value of anticipated future cash flows discounted back to their value today, using a discount rate.
IPO Initial Public Offering. The listing of a private company on a public stock exchange, allowing its shares to be bought and sold by public investors. Funds raised either go to the company, if it issues new shares, or to existing shareholders, if they sell into the IPO. Often IPOs consist of a mixture of the two.
Rights Issue A method of raising capital whereby a company sells new shares, usually at a discount to the current price, to existing shareholders at a ratio dependent on the amount of shares they already own.
Private Placement A method of raising capital whereby a company sells a block of securities to a small number of investors.
Long Term Growth Rate The rate at which a company’s cash flows are expected to grow in perpetuity. Because a company cannot experience real growth forever, this long term growth rate should not exceed the long term estimated rate of inflation, implying zero real growth in perpetuity.
Net Tangible Assets A standard accounting measure of valuation. Calculated as Total Assets less Intangible Assets less Total Liabilities. Can be thought of a baseline to a valuation estimating what the business may be worth if it was liquidated.
Capital Structure The relative mixture of debt and equity that finances the business. There are numerous classes of debt and equity, and the structure varies from firm to firm.
Capital Expenditure (CAPEX) Funds used by a company to acquire and maintain its physical assets. Rather than be treated as an accounting expense, this expenditure is capitalised and spread over the life of the asset.

 

What is a share price

If you ask the simple question of “what is a share price?” – many people struggle to answer. People will have an opinion on whether the share price of Telecom or Air NZ is too low or too high – but they can’t answer the simple question of “why?”. I usually get an answer about assets – but nothing very specific.

So how does (or should) an investment banker think about the value of a business?

I am going to use a minimum of jargon here – I promise. Please see the glossary page for some definitions of valuation terminology, why various terms are used and more information about the valuation methodology.

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Cartoon Valuation

We are going to cover valuation techniques in a separate post – but here is the Valuation 101 of how investment bankers determine if a share is currently undervalued or overvalued. We use a piece of financial economics called a discounted cash flow (DCF) model. This is a key part of corporate finance. Now value does not always equal price – but as the Benjamin Graham quote goes, “In the short-term, the market is a voting machine and in the long-term a weighing machine”.

The DCF is the primary method in corporate finance theory for calculating value. In corporate finance – value is a DCF…

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