Mergers and acquisitions

Fin 408 Fall 2021 Homework 2

DCF Homework Assignment: Valuation of AEP Industries as a Stand Alone Firm

The assignment is designed to give you a trial run at valuing a potential target firm using Comparable Companies valuation and DCF valuation. Then, later you will have to go through the process again for a different company as part of the second project.

There is a zeroed DCF spreadsheet in the Homework 2 file on the Blackboard site for you to download.

1. The entire set of possible trading comps for AEP Inc. is in the Excel file in a worksheet labelled Trading Comps. The value drivers are sorted according to the same process we followed for the Pinnacle/Conagra acquisition we performed in class in a worksheet called Sort Summary. Use your own judgement to decide how wide to make your comparable company bands and how many value drivers a given firm will have to have in common with AEP to be included in the final comp set. Show your work and provide an explanation of what you are doing that is specific enough that you would feel comfortable sending this to a prospective employer who has not read this assignment. You can put your explanations directly into the Excel sheets if you use a text box and professional looking formatting, or import the spreadsheets into a powerpoint or a doc file. You should have at least 4 comps and might decide to use all of the possible firms.

2. Once you have decided on the final comp set collect the EV multiples for those firms from the spreadsheet (they are in the Base Data worksheet in the Excel file) and compute the mean and median for each multiple. Use the method we used in the class example to decide which multiple you are going to select to estimate the intrinsic Enterprise Value of AEP Inc. Then compute the intrinsic Enterprise Value and back out the implied Intrinsic Equity value per share.

3. There is a worksheet in the file labelled AEPI Historical. It is historical values for AEPI like the ones we have been using for the DCF examples. Use this information to develop a set of assumptions for the blue cells in the DCF for AEPI as a stand alone company as of the date of the announcement of the acquisition by Berry (August 25, 2016). Explain each set of assumptions in a text box near the assumptions. The revenue growth forecast is especially important but you also need assumptions for the EBITDA margin, the tax rate, depreciation, capex and net non-cash working capital. All of the forecasts should be done as a percentage of revenue EXCEPT the tax rate, which is a percentage of EBIT. The percentages can change over time if you see trends in the historical values. For this question you should work only with AEP Industries’ financials. Also, don’t forget the relationships between Revenue Growth and Capex and Capex and Depreciation.

4) Use the information from your trading comps valuation in (1) to decide on a Terminal Value calculation for AEP Industries. You can use a Revenue Multiple, an EBITDA Multiple or an EBIT Multiple. If you want to do so for extra credit you can also do this valuation with a constant growth terminal value calculation but you will have to program that in Excel for yourself. (NOTE: I will show you how to do this in a recording that replaces our face to face class on October 21st).

5) AEPI’s WACC on the announcement date was 5.5% Use this and its Balance Sheet information as of the announcement date to complete the DCF. (The AEPI Balance Sheet is in the Homework 2 excel file). Explain why you included any stronger claims besides debt you include. Adjust the bottom of the spreadsheet as needed to incorporate these items.

6) Compare your intrinsic equity value per share for AEPI Industries to its trading range in the weeks before the Berry acquisition was announced in August 2016, the cash price Berry paid for AEP and your trading comps valuation. Based on your analysis, does it look like Berry paid too much for AEPI or got a good deal or paid the right price?

7) Compare the historical values tables for AEP Industries and Berry Inc. and the two firm’s WACCs at the date of the announcement to see where Berry Inc. might be able to improve upon the DCF assumptions for AEP Industries[footnoteRef:1]. Identify any specific areas of improvement you think will occur after the merger is complete and explain how you could incorporate those changes in the DCF model. [1: Berry’s WACC page is in the Excel worksheet in the Berry Historical worksheet]

8) The pre-announcement risk factor pages for AEPI and Berry are up on Blackboard on the Homework 2 section. Compare the UNIQUE risks for the target and the acquirer. Do you see any areas where the acquisition has the potential to reduce the risk of the combined firm? If so briefly explain each risk and explain how you could incorporate the financial impact of reducing that risk into your DCF model of AEPI. Use a separate worksheet for your risk analysis and put your thoughts in a text box if you are working in Excel.