¢â‚¬“PRICE IS WHAT YOU PAY. VALUE IS WHAT YOU...

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Transcript of ¢â‚¬“PRICE IS WHAT YOU PAY. VALUE IS WHAT YOU...

  • 1

    “PRICE IS WHAT YOU PAY. VALUE IS WHAT YOU GET”

    WARREN BUFFET

  • 2

    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

    1

    2

    3

    4

    5

    6

  • 3

    One size doesn’t fit allOne size doesn’t fit all

  • 4

    Challenges in valuing companies across the business lifecycle

    Introduction Growth Maturity Decline

    ¸ Valuation is complex

    ¸ Limited history

    ¸ Small revenues with big operating losses

    ¸ High probability of failure

    ¸ Multiple claims on equity

    ¸ Limited market peers for comparison

    ¸ Relatively easy to value

    ¸ Multiples fairly reflect the company’s intrinsic value & current management, but management could change for the better or worse

    ¸ Declining markets

    ¸ Negative earnings

    ¸ High debt load

    ¸ Likelihood of distress

    Financial service firms

    Commodity and cyclical firms

    Firms with only intangible assets

  • 5

    Due diligence is key

  • 6

    Valeant’s meteoric rise was entirely driven by acquisitions

    Valeant business model 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 a private business (Bausch and Lomb for $8.7 billion)

    5,770

    8,206 10,447

    9,674 8,724 8422

    -

    2,000

    4,000

    6,000

    8,000

    10,000

    12,000

    2013 2014 2015 2016 2017 2018LTM

    R ev

    en ue

    ($ m

    )

    Revenue ($m)

    Valeant has seen explosive growth since 2010, with revenues increasing from $1.2 billion to almost $10 billion in 2015 and EBITDA surging from $450 million to $5 billion during the same period

    Source: Publicly available information

  • 7

    Valeant’s acquisitions, price inflation business model drew in the likes 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 its acquisitions, unlike other mature drug companies

    Use debt capacity

    ► Valeant was one of the few companies in the business that viewed R&D like any other capital investment and scaled it back, as the payoff decreasedR&D is not sacred

    ► Its acquisitions seemed to translate quickly into revenues and operating income, vindicating their strategy

    ► As an added bonus, the company used its acquisition-related expenses to keep its tax bill low, keeping its effective tax rate below 10%

    Quick conversion to earnings

    Source: EY analysis

  • 8

    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 shadowy pharmacy entities and that it had used that relationship to cook its books

    What triggered its dramatic collapse?

    CEO (Now Ex) of Valeant, Michael Pearson, was forced to sell $100 million of his shares in the company to cover a margin call

    Hillary Clinton slammed Valeant for its drug price hikes and vowing to’ go after’ them as a campaign promise

    21/10/15: Report by Canon, a short seller, expanding discussions on Valeant/Philidor link and making a case for accounting fraud

    26/10/15: Valeant had a press conference, defending operating and accounting practices, and announcing changes to these practices

    19/10/15: SRF reports on a court filing by P&O and implications for Valeant

    0.0x

    50.0x

    100.0x

    150.0x

    200.0x

    0.0

    20.0

    40.0

    60.0

    80.0

    100.0

    P /E

    m ul

    ti pl

    e an

    d EV

    /E B

    IT D

    A m

    ul ti

    pl e

    M ar

    ke t

    C ap

    ($ b)

    Bausch Health Companies Inc. (NYSE:BHC) - Market Capitalization Bausch Health Companies Inc. (NYSE:BHC) - TEV/EBITDA Bausch Health Companies Inc. (NYSE:BHC) - P/Normalized EPS

    (20.0) 30.0 80.0

    130.0 180.0 230.0 280.0

    Fe b-

    10 A

    pr -1

    0

    Ju n-

    10 A

    ug -1

    0 O

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    0 D

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    A pr

    -1 1

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    11 A

    ug -1

    1 O

    ct -1

    1

    D ec

    -1 1

    Fe b-

    12 A

    pr -1

    2 Ju

    n- 12

    A ug

    -1 2

    O ct

    -1 2

    D ec

    -1 2

    Fe b-

    13 A

    pr -1

    3

    Ju n-

    13 A

    ug -1

    3 O

    ct -1

    3 D

    ec -1

    3 Fe

    b- 14

    A pr

    -1 4

    Ju n-

    14 A

    ug -1

    4 O

    ct -1

    4

    D ec

    -1 4

    Fe b-

    15 A

    pr -1

    5 Ju

    n- 15

    A ug

    -1 5

    O ct

    -1 5

    D ec

    -1 5

    Sh ar

    e pr

    ic e(

    $)

    Source: Publicly available information

  • 9

    It seems cash is not always the king

  • 10

    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 market multiples

    The price processUS$ 20.8b

    Revenue multiple: 4.5x

    Source: Publicly available information

  • 11

    Flipkart’s losses have scaled up despite strong revenue growth

    1 4 11 98 252

    489

    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

    N et

    M ar

    gi n

    (% )

    R ev

    en ue

    / N

    et In

    co m

    e (U

    SD m

    )

    Revenue (USD m) Net Income (USD m) Net Margin (%)

    ► Founded in October 2007 by Sachin and Binny Bansal, with about $6000 in seed capital

    ► Revenues increased from less than $1 million in 2008-09 to c. $100 million in 2011-12 and accelerated, with multiple acquisitions along the way, to reach $3 billion in 2016-2017

    ► Losses widened over the years despite drastic increase in revenues

    Operating History

    Source: Publicly available information

  • 12

    Flipkart has attracted a series of high-profile investors over the years

    0.0

    0.8 0.8

    1.0 1.6 2.6

    7.0

    11.0

    15.5

    11.0 11.5

    5.6

    11.6 11.6

    12.5

    20.8

    0

    5

    10

    15

    20

    25

    Va lu

    at io

    n in

    (U S$

    bn )

    Walmart’s Investment

    Softbank Investment

    Existing investors reprice

    holdings

    GIC Singapore Investment

    Naspers Investment

    Morgan Stanley

    Source: Publicly available information

    Existing investors reprice

    holdings

    Morgan Stanley reprice

    holdings

  • 13

    Valuation markdown with slowing growth

    11.0

    9.4 9.0 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

    February 2016

    March 2016

    June 2016 July 2016 August 2016

    September 2016

    November 2016

    November 2016

    December 2016

    January 2017

    February 2017

    Morgan Stanley

    Morgan Stanley MorganStanley

    T Rowe Price

    Fidelity Partners Vanguard

    Funds

    VALIC

    Fidelity

    VALIC

    Morgan Stanley

    T-Rowe Price

    Vanguard Funds

    Fidelity Partners

    With slowing growth, unit economics and profitability remained pipe dreams

    & the Amazon juggernaut was gaining market – Leading to

    valuation markdowns

    Source: Publicly available information

  • 14

    Timing is everything

  • 15

    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 on April 30, 2014. GE closed the transaction on November 2, 2015, after a lengthy regulatory review process