Underlying value is derived using comparable valuation multiples
Training course provider: Before I go onto that, I just want to emphasise to you I don’t sit at home making this stuff up. I’ve got an extract from a banker’s report on a business which is well known in the UK. So here we go we’ve got an investment banker, he’s not sitting at home he’s sitting in his office and what he’s doing is he’s trying to value this business and if you take the time to look at the business he’s looking at a few other multiples for other retailers, trying to value the business that we’ve got here.
So this is what your bankers have to do. They look at the multiples that the businesses are trading on and then they make a judgement, in this case it's a business called “Boots”, and they decide what they think Boots should be valued at. I don’t sit at home making this stuff up. Don’t worry too much about the detail.
[Aside]. Can I just ask you... if you were re-creating this spreadsheet… let me get it up on the screen actually. If you were re-creating this spreadsheet, working as an investment banker… this is what you’d have to do… and it’s probably at this point that The Law seems like the right option… …I’m going to zoom it up a bit so you can see where I’m pointing to.
From market cap (= shares value) to enterprise value
What he’s done is he has put his spreadsheet together with a whole lot of well known… they’re not just UK retailers they’re European as well and some of the columns in this spreadsheet here are inputs, some of them are inputs. So, for example, he’s got enterprise… do you see he has calculated enterprise value? And he’s got this thing called “market cap”. Market cap, you might be able to guess, is something you can get from the stock market and that’s the “shares value” [points to RHS of chart]. No prizes for guessing, to go from here [RHS] to here [LHS] what he has done is he has added the net debt of those businesses. To get from here [RHS] to here [LHS] he has added the net debt. He has gone from right to left to create this enterprise value column here.
Valuation multiples and the importance of the EBITDA multiple
Right, now the one I just want you to focus on just to prove that I don’t sit at home making this stuff up… do you see what he has done? He’s taken a selection, in the next three columns, of different kinds of multiples.
I said to you the most important one probably for a banker is the one that involves EBITDA, that’s the one that they’re going to concentrate on most and that’s probably why he has put it right here, but they don’t just look at that. They’ll look at a few other multiples as well. So the point for you is: this is what bankers really do – value businesses as multiples of earnings. You can see from that work it’s very very important to them. Don’t worry about the detail, it’s just to illustrate the point.
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I said to you the most important one probably for a banker is the one that involves EBITDA, that’s the one that they’re going to concentrate on most and that’s probably why he has put it right here, but they don’t just look at that. They’ll look at a few other multiples as well. So the point for you is: this is what bankers really do – value businesses as multiples of earnings. You can see from that work it’s very very important to them. Don’t worry about the detail, it’s just to illustrate the point.
