The Master in Corporate Finance is a 100 % finance-focused program in English, designed to provide the most sophisticated techniques and tools of Financial Management

1. MASTER IN CORPORATE FINANCE
MULTIPLES: THEORY AND PRACTICE
Alberto Dell’Acqua, Ph.D.

2. 1 Intro & valuation road map
2 Identifying/selecting comparables
3 Types of multiples
4 Multiples in practice: input the correct data
5 Interpreting results
6 Conclusions
SUMMARY

3. Comparable
Companies’
Multiples
Market
Information
Current Market Valuation Company Valuation
DCF
Analysis
In-Depth Analysis
Comparable
Transactions’
Multiples
Comparable Companies’ Trading Multiples and Comparable Transactions’ Multiples
represent the “market perspective” and the most commonly used valuation instrument
1. INTRO TO “COMPS” VALUATION
Overview of Valuation Process
Source: Merrill Lynch (M&A)

4. COMPARABLE
COMPANIES’
TRADING
MULTIPLES
Comparable Companies vs. Comparable Transactions
AGGREGATE VALUE REFERENCE DATE
COMPARABLE
TRANSACTIONS’
MULTIPLES
 Market value of a standalone
company
 Consideration paid by an acquiror
for a company acquisition
 Value includes takeover premium
(“premium for control”)
 Value of a company’s shares
today
 Multiples are expressed relative
to current or expected
performance
 Value paid in transactions
occurred in the past
 Multiples are expressed relative
to historical financials of target
company
1. INTRO TO “COMPS” VALUATION

5. EQUITY MULTIPLES
ENTERPRISE
MULTIPLES
WHO
USES
IT
WHAT IT GIVES
YOU
Financial
Analyst
Key
Pros
DCF LEVERAGED VALUE
Retail
Investors
Financial
Analyst
Private
Equity
Common Equity
Value only
Firm value which
can be converted
to equity value
Fundamental value
of a company
including value of
control
How much debt
a company can
bear
Easy to calculate
and to understand
Avoids worst
accounting
distorsions
Not distorted by
market events
or accounting
policies
To estimate how
much a financial
buyer can pay
1.VALUATION ROAD MAP

6. EXCESS CASH
OPERATIONAL
ASSETS
OPERATIONAL
LIABILITIES
Blue = Assets and liabilities determined by a company’s financial strategy
DEBT
EQUITY
Grey = Assets and liabilities driven by everyday strategic operational and
investing decisions
The Balance Sheet will help you understand the relationship
between Equity Value and Enterprise Value or Firm Value
Fixed Claims
Residual Claims
Excess cash means….
remaining cash
after operational
needs are met
1. THE FOUNDATION

7. Alpha’s Enterprise Value: an example
- The market capitalisation of Alpha is 1.500.000
- The total value of short and long term debt on Alpha’s balance sheet
is 7.500
- The value of cash on Alpha’s balance sheet is 106.000
- The value of short-term investments on Alpha’s balance sheet is 50.000.
We treat short-term investments as cash equivalents.
 Calculating Enterprise Value:
Equity value 1.500.000
+ Debt 7.500
- Cash 106.000
- Short-term investment 50.000
= Enterprise Value 1.351.500
1. THE FOUNDATION

8. Enterprise value to equity value – and back
- Enterprise Value represents the market value of the company’s net
operational assets plus the value of its future growth opportunities and
intangible assets not on the balance sheet.
- Equity value represents the market value of the shareholders’ investment
in the business.
- The following equations provide simple conversions between Equity and
Enterprise Value:
Market Capitalisation = Share price * shares outstanding
Enterprise Value = Market capitalisation + net debt
Enterprise Value = Market capitalisation + debt - cash
Equity Value = Enterprise value + cash - debt
1. THE FOUNDATION

9. Principle: multiples valuation starts with identifying appropriate comparable
companies.
Take the perspective of an investor in equities (shares) when you are identifying comparables. Equity
investors focus on companies’ future profitability, so choose companies with comparable drivers of
future profitability.
Steps: STEP ISSUE
1. Identifying/selecting
comparables
 Verifying the meaning and
the coherence of the
multiples
 “Cleaning” the sample
2. Choosing the proper grid
of multiples for the
evaluation
 Searching for relevant
relationships among
multiples, business models
and value drivers
 Use the same approach in
comparing multiples of
different companies
(restatement methods,
accounting standards)
3. Analysis of results  Choosing the proper grid of
multiples for the evaluation
2. BASIC COMPARABLES

10.  Select the right comparable companies’ universe
 Input the correct data
 Interpret results
 Apply results
Doing the “Comps” through four stages:
Doing the comps in practice
2. BASIC COMPARABLES

11. Principle: in general, in order to identify the appropriate combination of
companies you should analyse the following factors:
KEY DRIVERS
• Business
• Business mix (conglom. vs pure player)
• Perspective of growth
• Size of business
• Business profitability
• Geographic presence
• Stock liquidity
• Level of investment
• Financial strength
• …
PARAMETERS
• Activity
• Revenues split, EBITDA
• Growth rate of sales and profits, market
share, quality, economics
• Sales
• Margins (EBITDA/EBIT margin, ecc..)
• Geographic sales mix
• Free float
• Capital expenditures (capex)
• Debt ratios (D/E, Net Debt/EBITDA,…)
• …
Where you can get these numbers:
Analyst researh, research company database (Bloomberg, Facset,..), annual reports,
specialized industry publications, broker reports.
2. COMPARABLES CHECKLIST

12. You can choose either an enterprise or an equity value multiple. Enterprise
multiples use earnings above the interest line; equity multiples use earnings
below the interest line.
3. TYPES OF MULTIPLES
ENTERPRISE
VALUE
DEBT• Ent Value/Sales
• Ent. Value /EBITDA
• Ent. Value / EBIT
• Ent. Value /CF
• P/E
• P/Cash
Earnings
• P/BV
EQUITY
VALUE

13. 

 

1
0
1t
t
e
t
)k(
DIV
P
ek
E
P 0
0 
ekE
P 1
0
0

3. TYPES OF MULTIPLES
PE with no growth: determinants and equations

14.  
gk
gDIV
P
e 


10
0
 


 


1
0
0
1
1
t
t
t
)k(
gDIV
P
e
 
gk
gpayout
E
P
e 


1
0
0
gk
payout
E
P
e 

1
0
DIV0 =E0payout
E0 (1+g) = E1
g = (1-payout)ROE
PE with growth: determinants and equations
3. TYPES OF MULTIPLES

15. WACC
t
EBIT
EV c

1
0
0
WACC
tEBIT
EV c )1(0
0


EV/EBIT with no growth: determinants and equations
3. TYPES OF MULTIPLES

16. WACC
tEBIT
EV c )1(0
0


WACC
tROSSales
EV c )1(
0


Sales × ROS
WACC
tROS
Sales
EV c )1(00 

EV/Sales with no growth: determinants and equations
3. TYPES OF MULTIPLES

17. PROSMULTIPLES CONS
EV/CF
• It is not affected by accounting
policies
• It takes into account only
monetary costs
• FCF are more complex to
calculate
• The volatility of cash flows could
affect the effectivness of the
valuation.
EV/Sales
• It is used when sales are the
main key driver
• Negative margins, cash flow
• It implies the same level of
profitability
• It could be considered as a
proxy of the operating cash flow
(before capex)
• It is not affected by accounting
policies
• It doesn’t take into account the
invested capital (depreciation)
EV/EBITDA
• It takes into account the
invested capital
• It is a measure of the operating
profitability of the firm
• It is affected by accounting
policicies (ie depreciation)
EV/EBIT
Enterprise Value
3. TYPES OF MULTIPLES

18. P/E
P/Cash
Earnings
(1)
P/BV
• Semplicity
• Differences in accounting
policicies
• Differences in tax management
• Differences in financial
structure choice
• It is not affected by accounting
policies
• Not popular
• Differences in taxation
• Differences in accounting
principles (except depreciation
policy) and in financial structure
choices
• Importance of tangible assets in
the valuation
• Differences in accounting
principles could lead to a
misleading interpretation in
comparing companies.
(1) Net profit + Depreciation + Amoritsation
Equity Value
PROSMULTIPLES CONS
3. TYPES OF MULTIPLES

19. PRICE
– Source data (Facset, Bloomberg, Datastream)
– Market stock price
– Period of flows to use to estimate multiples :
o Current multiples:
– are obtained by comparing stock
prices and the last available balance
sheet
o Trailing multiples:
– are obtained by comparing stock
prices and the results of the last
twelve months before the date chosen
to calculate the index. Results on the
previous twelve months are taken by
the four quarterly report or the last by-
yearly report, provided by the
companies
o Leading multiples:
– are obtained by comparing stock
prices and the expected results of the
following year or those of the next
ones. Estimations are usually taken by
the consensus forecast, published by
financial analysts associations. In
Europe the most reliable are IBES and
DataStream
T0
0
E
P
L12M
0
E
P
T1
0
E
P
Current
multiple
Trailing
multiple
Leading
multiple
Where:
EL12M = earnings per share referring to the last 12
months
ET1 = earnings per share expected for the next year
E T0 =earnings per share generated in the last year.
Current, Trailing and Leading Multiples
3. TYPES OF MULTIPLES

20. BALANCE SHEET VALUES
 Equity  Market Value
 Debt
 Financial Debt
 ST/LT Borrowings
 Bond/Convertible bond
 Others (Preferred shares, Operative leasing, Pension
funds, ..)
 Book value (last balance sheet/available interim)
 Book value (last balance sheet/available interim)
 Market value if available
 Book value/Market value if available
 Liquid assets
 Cash
 Stocks
 Sum of money as security
 Book value
 Market value if available
 Book value
 Minorities  Market value or Book value (last balance sheet/available
interim)
 Equity investments  Market value or Book value (last balance sheet/available
interim)
4. MULTIPLES IN PRACTICE
the numerator

21. Shares
1. First Method: number of outstanding shares (without considering treasury stock)
2. Second Method: number of outstanding shares (including treasury stock). The
market value of treasury shares is added to the liquid assets of the company.
 The first method is the most used.
EQUITY VALUE = Price x N. shares
Data Method 1 Method 2
Price (euro) 10 10 10
n. share issued (mln) 10 10 10
n. treasury shares (mln) 2 2 0
n. shares (mln of euro) 8 10
Equity value (mln of euro) 80 100
Debt (mln of euro) 50 50 50
Cash (mln of euro) -10 -10 -30
Net Debt (mln of euro) 40 20
Enterprise value (mln of euro) 120 120
4. MULTIPLES IN PRACTICE
dealing with treasury stocks

22. The Market value of debt:
- Typically, book value of debt is a good proxy for market value
 For highly distressed companies and hybrid debt, use market value
- Figure for cash balances and short-term liquid investments excludes cash balances
needed to run the business
- Use most recent balance sheet, adjust for any material changes (acquisitions, disposals,
capital increase)
- Always check whether anything material happened since the last balance sheet
- Always check the consistency between your balance sheet data and your operating
data
Example:
Latest balance sheet is published in March 05, for FY ending Dec 04
In April 05, the company issue a US$100m bond
You do the comps today and your forecasts include the interests paid on this bond (say
US$5m a year) and future yield on new investments
4. MULTIPLES IN PRACTICE
dealing with financial debt

23. COMPARABLES- MINORITIES
MARKET VALUE BOOK VALUE
Change = - 1,1x
EXAMPLE: TELECOM ITALIA 16/11/2004
Market cap (in €mm) 42.766,7
Net debt/(cash) 31.421,0
Minorities 4.249,0
Altro (2.198,0)
Firm value (in €mm) 76.238,7
2004A 2005E 2006E
EBITDA (€ mm) 14.532,0 15.131,3 15.589,3
EV/EBITDA 5,2x 5,0x 4,9x
Market cap (in €mm) 42.766,7
Net debt/(cash) 31.421,0
Minorities 20.116,6
Others (2.198,0)
Firm value (in €mm) 92.106,3
2004A 2005E 2006E
EBITDA (€ mm) 14.532,0 15.131,3 15.589,3
EV/EBITDA 6,3x 6,1x 5,9x
MINORITIES
Participation To do: adjust: Equity Income
Listed Participation % hold % no holdMarket Cap Value in
TIM 56% 44% 43.604 19.128
TI Media 62% 38% 1.056 396
Ente Chile 55% 45% 1.310 593
xxx
Sub-total 20.117
Discount 0%
Sub-total (a) 20.117
4. MULTIPLES IN PRACTICE
dealing with minorities
Minority interests should be added to net debt and calculated at market value

24. COMPARABLES METHOD
EQUITY VALUE
NET FINANCIAL
POSITION
MINORITIES
ADJ. NFP
EXAMPLE: TELECOM ITALIA 16/11/2004
Market data Share B Share A
Stock price (Last) as of : I:TIT 2,18 2,95
12 months high 2,18 2,98
12 months low 1,62 2,34
Number of shares Issued (mm) 5.795,9 10.315,3
Treasury Shares (101,2)
Shares issue from Options (Treasury Method) na
Fully diluted number of shares (mm) 5.795,9 10.214,1
Market cap (in €mm) 42.766,7
Net debt + minorities + other 49.339,6
Firm value (in €mm) 92.106,3
Capitalised Leases na
Adjusted Firm value (in €mm) 92.106
Balance sheet elements as at 31/09/2004
Financial debt (incl. Financial Lease) 31.421,0
Cash
Net debt/(cash) 31.421,0
Minorities 20.116,6
Net debt/(cash) + Minorities 51.537,6
Underfunded Pension Plan na
Equity Method - Participations (2.198,0)
Preferred na
Net Debt + Minorities+ Other 49.339,6
Capitalised Leases na
Shareholders equity group share 14.730,0
Net debt / Market Value 73,5%
4. MULTIPLES IN PRACTICE
an example

25. – The economic-financial variables of the companies in the sample must be
consistent with the economic-financial data of the company that you intend to
evaluate.
– Reconciliation of the historical/forecasted data:
• Restatement of the
Income Statement
with an adequate
level of detail…
• Time horizon
coherence
• Normalization
• Consistency between
numerator and denominator
• Different accounting standards
• Homogeneous time horizon
• Adjust. for exceptional events
(extraordinary items,
restructuring costs, goodwill,
accounting changes…)
4. MULTIPLES IN PRACTICE
consistency of the valuation

26. As Reported
EBIT 100
Restructuring
Charge
(50)
Pre tax Profit 50
Tax (33%) (17)
Net Income 33
Restated
EBIT 100
Pre tax Profit 100
Tax (33%) (33)
Net Income 67
4. MULTIPLES IN PRACTICE
exceptional non-recurring items - example
All exceptional items should be restated in order to normalize the result the
valuation will be based on.

27. General rule:
Use max, min, median and mean
formulas - exclude outliers
Projections based on research reports from investment banks
Share prices as of November 25, 2005
All multiples are calendarised to 31st Dec
Market Enterprise Enterprise Value as a Multiple of: EPS
Company Value Value Sales EBITDA Cash P/E 5-YR PEG
Name (EURm) (EURm) LTM 2005E 2006E LTM 2005E 2006E 2005E 2006E CAGR 2005E 2006E
Luxury/Fashion
Geox 2,374 2,357 5.27x 5.18x 4.09x 19.2x 19.2x 14.0x 32.8x 25.4x 18.0% 1.82x 1.41x
Bulgari 2,599 2,725 3.10 2.98 2.71 15.2 14.4 13.0 21.8 19.0 13.6 1.61 1.40
Richemont 18,858 18,480 2.80 2.73 2.48 14.8 14.7 12.6 23.2 18.9 9.5 2.44 1.98
LVMH 34,686 41,536 3.15 3.04 2.84 13.5 13.4 12.0 24.1 20.8 9.7 2.48 2.14
Tod's 1,614 1,562 3.19 3.14 2.76 14.5 13.9 11.7 29.5 23.8 12.7 2.33 1.88
Hermès 7,255 6,745 4.96 4.65 4.19 16.4 15.0 13.5 28.5 25.1 12.0 2.37 2.09
Tiffany & Co 5,441 5,676 2.89 2.76 2.53 13.7 13.5 12.0 26.2 23.6 13.0 2.02 1.82
Swatch Group 7,262 6,504 2.46 2.36 2.18 11.4 10.5 9.6 28.3 26.2 11.1 2.55 2.36
Burberry 3,026 2,778 2.63 2.60 2.47 9.9 10.3 9.5 19.5 16.8 11.0 1.78 1.53
Max 5.27x 5.18x 4.19x 19.2x 19.2x 14.0x 32.8x 26.2x 18.0% 2.55x 2.36x
Mean 3.38 3.27 2.92 14.3 13.9 12.0 26.0 22.2 12.3 2.15 1.85x
Median 3.10 2.98 2.71 14.5 13.9 12.0 26.2 23.6 12.0 2.33 1.88
Min 2.46 2.36 2.18 9.9 10.3 9.5 19.5 16.8 9.5 1.61 1.40
5. INTERPRETING RESULTS
key statistics
Source: Merrill Lynch

28. - Analyse company’s P/E in relation to earnings growth prospect
PE/G
P/E
LT Growth Rate=
- The higher the PEG is, the more you pay for growth
Company A: P/E = 25 growth 17% PEG: 1.47
Company B: P/E = 16 growth 10% PEG: 1.60
5. INTERPRETING RESULTS
adjusting for growth
The PEG tells you if your company is overvalued or (in other terms) if the market is
extremely confident in the expected growth rates implied in the current valuation.

29. The evidence reported in the Value Map analysis suggests undervaluation for
Swatch, Richemont and LVMH.
Source: FactSet and Reuters. Prices as of 21 September 2004
5. INTERPRETING RESULTS
comparison with peers in the luxury industry
VALUE MAP
The same analysis
can be developed
on the other
variables:
-EV/Sales vs
EBITDA margin
- EV/EBITDA vs
CAGR
- …

30. 1. Negative Earnings
- Loss-making
- Risk of bankruptcy
2. Absence of Historical Information
- Recent business transformation
- Recent IPO and privatization
3. Absence of comparable companies
Use DCF
Use DCF
Use DCF
Useful Hints
5. INTERPRETING RESULTS
Potential pitfalls of multiples valuation

31. Rationale
- Determine value of transaction
- Determine multiples compared to target’s financial performance and pre-
announcement market value
- Determine control premium of specific industries
Comparability
- Companies involved in transactions should have similar operating and financial
characteristics and be of similar size
- Recent transactions more accurate than transactions completed in the past
 and mind that:
- Transactions are rarely directly comparable
- Transactions may include different synergy rationale
- Public data can be misleading or unavailable
- Acquisition multiples can vary widely
- No current P/E or multiple benchmark
5. INTERPRETING RESULTS
Comparable Transactions’ Multiples

32. – No specific rules to identify the right multiples  It is up to the good
judgment of the analyst.
– Enterprise Value Multiples (in particular EV/EBITDA) are the most used
because not affected by capital structure and accounting policies.
– Time horizon choice
• Last year, current year, current year +1
• Historical average
– Main statistics:
• Average multiple
• Median multiple
•  Not consider the highest and the lowest value (extreme values)
6. CONCLUSION
summing-up