“PRICE IS WHAT YOU PAY. VALUE IS WHAT YOU GET” · Founded in October 2007 by Sachin and Binny...

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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 &current 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

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dEV

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Am

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ple

Mar

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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-

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Aug

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Oct

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Aug

-15

Oct

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Dec

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Shar

epr

ice(

$)


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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


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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


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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


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

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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


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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


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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


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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)


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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


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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

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150

200

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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


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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

“PRICE IS WHAT YOU PAY. VALUE IS WHAT YOU GET” · Founded in October 2007 by Sachin and Binny...

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Transcript of “PRICE IS WHAT YOU PAY. VALUE IS WHAT YOU GET” · Founded in October 2007 by Sachin and Binny...