Analyst Training

Advanced Comps & Pre-Paids

2011
Analyst Training

Table of Contents

Section 1 Overview

Section 2 Comps Pitfalls

Tab A Classic "Easy" Pitfalls

Tab B Equity Participations / Non Operating Assets

Tab C Accounting Differences

Tab D Different Class of Shares

Tab E Provisions, Off Balance Sheet Liabilities

Tab F Options

Tab G Convertibles

Tab H Pro Formas

Section 3 Pre-Paids Specific

Analyst Training

Section 1

Overview
 Analyst Training Overview

Overview
Theory

Know everything about Banker, not accountant

accounting but think like a
banker and not an What matters is not what happened but what you are expecting to happen. Is what you are
accountant calculating reflect what is likely to happen in the company next year?
When in doubt on how to
compute a comp item
Always remember that a A Yield or a par value
comp is a yield or a par
value Almost all of the comps multiple you will be dealing with are
A yield if you consider 1 / Multiple
P/E, P/CE, AV /EBIT(DA), AV / Sales, and all multiples based on a Balance Sheet Item /
Flow item
Essential in order to compute tricky calculations
The basic is to understand: What do I need to pay in order to be the full beneficiary of a flow
Or a par value
P/ Book Value, Per capita comps (PoPs, Subscribers)

When in a tricky situation always remember

Am I calculating a yield or a par value?
What do I want to be the beneficiary of (sales, earnings) or own (book value, subscribers)?
What do I need to PAY in order to own it over the years to come with the company running in
the same way?
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 Analyst Training Overview

Overview
Sanity Checks

Do not spend too much time Re-read your final output sheet
modeling tricky comps
adjustments Always look at your final output sheet and check your multiples are making sense. Would you
Instead, identify which invest your money at such a yield?
pitfalls are relevant for
your comps Are your multiples decrasing over time?
ALWAYS re-read a comp Are Sales multiples < EBITDA multiples < EBIT Multiples?
sheet before bringing it to
your associate Have you quickly checked your multiples range vs. latest published research multiples,
Be ready to explain Blommberg P/E (DES page)?
awkward looking multiples
Have you checked your earnings forecast are not too far away from IBES (in case you are not
Be ready to answer taking IBES). IBES is the reference, you should be able to explain why you did not take it and
questions on the pitfalls.
You do not have to model why there is a difference
all of them but should be
able to confirm to him they
are not relevant and why Less time on Excel sophistication, more identifying the Pitfalls
Do not try to model an Excel comp sheet which will include a calculation for all of these pitfalls
items
Instead do a quick calculation on your note book (keep the sheet!) to show there is no need to
compute this adjustment if asked
Be ready to answer a question on each awkward looking multiple (outlier, N/A)

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Analyst Training

Section 2

Comps Pitfalls
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Tab A Classic "Easy" Mistakes
Analyst Training Comps Pitfalls

Classic Easy Pitfalls

Stock Split
Always check on Bloomberg (CACS) if any stock split has occurred between the financials
(AR, broker report, prospectus) you have and today
All pre-stock split financials should be adjusted to today (TSO x 2, EPS / 2, No of option x
2, strike /2, underlying shares in convertibles)
Note a stock dividend is equivalent to a stock split (also disclosed on CACS). For instance a 1
for 4 stock dividend is equivalent to a 5 for 4 stock split
Calendarisation
Always make sure all your P&L items are December to December items, especially for
seasonal businesses (e.g. retailers)
Ex Dividend Date
If your balance sheet is pre the ex-dividend date and your are post the ex-dividend rate. You
should remove the total dividend amount from the cash item, especially for exceptional
dividends
Non Recurring Items
Exclude if unlikely to happen again next year
Make sure you tax the adjustment (at the MARGINAL tax rate)
If you take a 100MM cost away as exceptional, make sure you adjust your actual earnings
by 100 MM x [1- Tax Rate]

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Tab B Equity Participations / Non Operating
Assets
 Analyst Training Comps Pitfalls

Equity Participations

This only applies for

An equity participation consolidated with the equity method (or as a liquid investment, i.e.
substantial participation in
listed companies (e.g. LVMH <50%) should be considered as cash for Aggregate Value multiples (i.e sales, EBITDA and
20% in Gucci) EBIT multiples):
The market Cap of the company reflects this holding
The earnings reflect it also (share of net income added after the EBIT line)
Sales and EBITDA DO NOT reflect it (except in proportionate accounting for JVs, only in the
UK)
As a non contribution to the operating line, the value should be taken out of the operating
assets value (i.e. aggregate value) hence considered as cash
In order to adjust the comp, the methodology is to consider a sale of the stake for cash. The
following calculation should be applied
Compute the market value of the stake
Apply a liquidity discount (to be discussed with ECMS if critical, put 5-10% otherwise)
Subtract the capital gain tax: i.e. ~20% of market value after discount - book value
Add the resulting amount to the cash line (= subtract it from the aggregate value)

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Analyst Training Comps Pitfalls

Equity Participations Example

Question Answer
(Taken LVMH / Gucci)(1)

LVMH ?
TSO: 500,000,000
Share price: 50
Net debt: 10 Bn
2000 EBITDA: 2.0 Bn
20% stake in Gucci
20 MM shares = 2.0Bn at market price
0.5 dividend per share
Stake book value: 1.4 Bn
Liquidity discount: 10%
Capital gain tax rate: 20%

What should be the adjusted net debt of LVMH?

What is LVMH AV / EBITDA?
What is the adjusted interest expense?
Should there be an adjustment for the PE
calculation?

Notes
1. Taken as an illustrative example as of 2 years ago. LVMH stake in Gucci has been modified since then. Do not assume these num bers to be exact 5
Analyst Training Comps Pitfalls

Equity Participations Example

Question Answer
(Taken LVMH / Gucci)(1)

LVMH Adjusted Net Debt:

TSO: 500,000,000 2.0 x [1 - 10%] - 20% x [2.0 x[1-10%] -1.4]] =
Share price: 50 1.7 Bn adjustment

Net debt: 10 Bn LVMH Adjusted Net Debt = 8.3 Bn

2000 EBITDA: 2.0 Bn Adjusted Interest Expense

20% stake in Gucci 20 MM x 0.5 = 10 MM => 310 MM

20 MM shares = 2.0Bn at market price AV / EBITDA

0.5 dividend per share Pre adjustment: (25 + 10) / 2.0 = 17.5x

Stake book value: 1.4 Bn Post adjustment: (25 + 8.3) / 2.0 = 16.7x

Liquidity discount: 10% No need for any adjustment in the PE calculation

as the dividend income (or other income if equity
Capital gain tax rate: 20% consolidated) is already included in the earnings

What should be the adjusted net debt of LVMH?

What is LVMH AV / EBITDA?
What is the adjusted Interest expense?
Should there be an adjustment for the PE
calculation?

Notes
1. Taken as an illustrative example as of 2 years ago. LVMH stake in Gucci has been modified since then. Do not assume these num bers to be exact 6
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Tab C Accounting Differences
 Analyst Training Comps Pitfalls

Accounting Differences

It is impossible to list all the

Accounting procedures tend to converge (slowly) towards a US GAAP / IAS standard
accounting differences
between each countries You should be aware of the main accounting pitfalls in the sector / industry you are covering
Know the classic changes in
your country / sector Real Estate Net Asset Value: In England appraised every year, in France carried at historical
cost and depreciated
Italy and France sales can include a portion of Increase of Inventory
There is no precise and recommended best method for all these adjustments. You should
always
Discuss it with your team
Apply the same accounting treatment to all the company in your universe
Items you should be cautious about are
Option treatment
Treasury stock treatment
Sales recording date (contract signed, implementation of services, cash settlement)
Sales discount for immediate payment
Employees profit sharing programs (above or below EBIT lines)
Goodwill amortization

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Tab D Different Class of Shares
Analyst Training Comps Pitfalls

Different Class of Shares Capital

2 (or more) class of shares

If both are listed (e.g. Italian ordinary and saving shares, German prefs and ordinary shares).
The market cap should be the sum of the 2 market caps (hence applying a different stock price
for each class of shares).
Bloomberg will most of the time give you the detailed calculation (on the DES page go to 4)
MSH). Always check it with annual report data
If one class is not is not listed, most of the time the shares are convertible into ordinary shares
(founders extra voting rights founder shares for instance)
Check the shares exact mechanism (annual report, most recent prospectus)
Check 2 or 3 different research report market cap calculation
Most of the time, the shares will be considered as ordinary shares for comps calculation
purposes without applying a discount or a premium to the ordinary listed ones. Discuss it with
your team
Preference Shares
Should be considered as part of financial debt if redeemable
Should be considered as equity if not redeemable. Refer to the above paragraph for the market
cap adjustment calculation
Minorities
They should be added to the net debt at their market value and not their book value

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Analyst Training

Section 3

Pre-Paids Specific
 Analyst Training Pre-Paids Specific

Pre-Paids Specifics

Comps Like
Pre-paids are just comps at a
specific point in time Everything previously said on comps fully apply to Pre-Paids. Pre-paids are just comps at a
Expected to reflect a specific point in time
premium for a change of
control Earn-out Structure
Everything previously When a the transaction price include a portion link to the post transaction performance of the
mentioned for Comps fully target (earn-out), you should not include it in the consideration. If you do for specific reasons,
apply to Pre-Paids
make sure your looking forward multiples take the earn-out forecast into account
Stock market premium
Always double check what is the unaffected share price. Triple check the announcement hour.
If the deal was announced after market hours, take the same day close price. If during market
hours, take the previous day close
Note: In order to find a For a stock for stock deal, when analyzing the average premium over a period of time (pre-
transaction valuation, you announcement, during tender offer period) make sure you are computing the average of the
add the control premium to
premia and not the premium of the average
the comps valuation
But not to the DCF value. Updating the Pre-Paids!
The control premium is
normally already reflected As a general rule pre-paids are never updated
in the forecasts on which
For stock transaction (more likely 100%) with extensive lock-ups you should theoretically
you are assuming control
update the premium as long as the lock up has not expired. Provided:
The change in the offer stock price is not due to a change in its forecasts but to a derating of
the sector multiple in the mean time
Once the offer / lock up period has expired for a period of time you can refer to the price on
announcement
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