Project Report
Introduction (20%)
This section identifies the cu
ent situation, financial objectives and the scope and scale of the analysis
Qualitative Assessment (20%)
This section provides an analysis of the company’s cu
ent strategic options and discuss the qualitive
impacts on the company and shareholder interests.
Valuation (30%)
This section demonstrates the valuation results and address assumptions and methods being
conducted. What Type of Valuation? Why this type? And Result. Using the excel template as the
eference.
Recommendation (30%)
This section provides recommendations for the board ‘s decision.
FNCE Project – M&A, IPO, and Business Valuation
Company Background
Telecom Inc. is a family-owned business founded in 1985, and it has been providing TV
oadcasting in east Canada. In 2008, it planned to go public and list on the Toronto exchange.
However, the financial market collapsed, and the company had to withdraw from the IPO
process. Instead, Telecom proceeded with a private placement with a syndicate of local private
equity groups and issued 5 million shares at $20 per share. After issuing, Telecom has 10 million
shares outstanding.
Five years ago, the company also bo
owed a $20 million long-term loan outstanding at a 6.5%
annual interest rate to expand its satellite TV business. Telecom's marginal tax rate is 34%.
Industry Outlook
In 2019, the tv
oadcasting industry generated $2.8 billion in revenue, with a compounded
annual growth rate of 1%. The industry is profitable but highly saturated. Cu
ently, there are
five major players dominating the market.
• Bell Blue Media, 35% market shares
• CBC News, 20% market shares
• Corus Live Inc., 15% market shares
• Rog Entertainment 10% market shares
• Rouge Stone Inc. 6% market shares
• Others, 14% market shares
According to the industry report, this industry in Canada will continue to be challenged by a
shifting media environment over the next decade. The main threat to this industry is primarily
online streaming platforms in the USA, and this competition is expected to intensify and
plummet industry growth and revenue. Consumers continue to lower their reliance on TV
oadcasts for their media source as they increase their dependence on digital forms, including
tablets and mobile phones. This trend lures advertisers to increase their commercial budget for
new media outlets.
In response, the Canadian Radio-television and Telecommunications Commission (CRTC) has
lessened content rules and increased funding and pilot programs to provide new avenues for
Canadian
oadcasting companies, but this may ultimately not be enough to offset further
evenue declines.
The board of Telecom, mainly controlled by the private equity groups, called a board meeting to
urge the management to develop a forward-thinking strategy and reevaluate the IPO opportunity.
The board concluded that they must restructure their business models, add digital platform
infrastructure, and generate online advertising revenue. The private equity groups have held their
investment for more than ten years. Now it is time for them to exist and capitalize on their return
via IPO in the stock market. The board wants to know the intrinsic value of their holdings.
Board's Agenda
One of the directors suggested that the company invests in online streaming platforms and set up
a few content-creating studios in-house. She believes this strategy will create synergy between
new streaming and cu
ent
oadcasting. Telecom is able to utilize cu
ent employees' talent and
maintain content quality and
and identity. She also holds a seat on another company,
LimeStreaming Inc. as an independent director. LimeStream has been growing rapidly in the
online stream space. She knows that the founders of LimeStreaming are looking for buyers. She
suggested the board consider an acquisition as an option to expand Telecom's online business
advertising service.
The board requests a second opinion on the acquisition deal and the IPO. They want to know
whether the acquisition will benefit their shareholders and how much would be the fair value of
LimeStreaming Inc. Also, all the board members agree to proceed with the IPO and determine
the fair share price before moving forward.
Valuation Methods
In valuing a business, there is no single or specific mathematical formula. The particular
approach and the factors to consider will vary in each case. Where there is evidence of open
market transactions having occu
ed involving the shares, or operating assets, of a business
interest, those transactions may often form the basis for establishing the value of the company.
Because LimeStreaming and Telecom are private companies, which lack open market
transactions, the generally accepted approaches for valuing a private business interest are:
Method 1: The Capitalized Earnings Approach (LimeStream)
Method 2 The Capitalized EBITDA Approach (LimeStream)
Method 3: The Market Approach (Telecom)
The Capitalized Earnings/EDITDA Approaches are a general way of determining a business
value by using one or more methods wherein a value is determined by capitalizing or discounting
anticipated future benefits. This approach emphases on the continuation of the operations as if
the business is a "going concern".
The Market Approach to valuation is a general way of determining a business value or equity
interest by using one or more methods that compare the subject entity to similar businesses,
usiness ownership interests, and securities that have been sold in the public market at a fair
price.
Required
In the report, you need to address the board's concern regarding the LimeStream acquisition and
the company IPO, including the pros and cons of each strategy. Moreover, you are requested to
perform quantitative analysis and provide the business value of LimeStream and the fair share
price of Telecom Inc.
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LimeStreams
LimeStreams
Account 12/31/19 12/31/20 12/31/21 TTM
Total Revenue $15,073,000.00 $13,916,000.00 $14,655,000.00 $14,786,000.00
Cost of Revenue $8,861,000.00 $8,059,000.00 $8,768,000.00 $8,751,000.00
Gross Profit $6,212,000.00 $5,857,000.00 $5,887,000.00 $6,035,000.00
Operating Expenses
Total Operating Expenses $2,488,000.00 $2,618,000.00 $2,585,000.00 $2,593,000.00
Operating Income or Loss $3,724,000.00 $3,239,000.00 $3,302,000.00 $3,442,000.00
Interest Expense $799,000.00 $844,000.00 $816,000.00 $860,000.00
Total Other Income/Expenses Net -$149,000.00 -$196,000.00 -$330,000.00 -$371,000.00
Income Before Tax $2,755,000.00 $2,172,000.00 $2,127,000.00 $2,183,000.00
Income Tax Expense $712,000.00 $580,000.00 $569,000.00 $594,000.00
Income from Continuing Operations $2,043,000.00 $1,592,000.00 $1,558,000.00 $1,589,000.00
Net Income $2,043,000.00 $1,592,000.00 $1,558,000.00 $1,589,000.00
EBITDA $6,119,000.00 $5,711,000.00 $5,596,000.00 -
Cash and Cash Equivalents $ 250,000.00
Long Term Loan $ 1,000,000.00
Perfe
ed Shares $ - 0
Minority Interests $ - 0
Telecom
2021 TTM
Revenue $ 154,000,000.00 $ 153,500,000.00
Operating Income $ 37,000,000.00 $ 36,800,000.00
Net Income $ 17,000,000.00 $ 15,800,000.00
EBITDA $ 103,000,000.00 $ 102,500,000.00
Diluted EPS $ 83,000,000.00 $ 82,500,000.00
Normalized Diluted EPS $ 85,000,000.00 $ 84,300,000.00
$ - 0 $ - 0
In Billion $ - 0 $ - 0
Cash and Cash Equivalents $ 4,000,000.00 $ 4,200,000.00
Long Term Loan $ 10,000,000.00 $ 10,000,000.00
Perfe
ed Shares $ - 0 $ - 0
Minority Interests $ - 0 $ - 0
Comps
US$ MM Listed Market Enterprise TTM TTM TTM TTM EV/ EV/ EV/ EV
Name Ticker Exchange Shares Price Capitalization Value Revenues EBITDA Net Income Cash Flow Revenue EBITDA Net Income Cash Flow Cash Debt, Prefs, MI
Bell Blue Media BBME TSX 55.8 35.0 1,951.4 1,951.4 3,245.5 350.0 306.0 186.0 0.6 5.6 6.4 10.5 75.0 75.0
CBC News CBCN TSX 44.7 22.5 1,006.4 1,895.9 11,453.5 1,235.0 860.0 460.0 0.1 0.8 1.2 2.2 345.5 1,235.0
Corus Live CORS TSX 45.6 3.8 170.8 156.8 1,453.8 115.0 65.0 29.0 0.1 1.5 2.6 5.9 162.0 148.0
Rog Entertainment ROGE TSX 88.2 28.8 2,536.9 2,428.9 1,243.7 125.0 68.0 80.0 2.0 20.3 37.3 31.7 120.0 12.0
Rouge Stone ROUG TSX 75.4 32.7 2,462.0 2,873.5 564.5 95.0 55.0 75.0 4.4 25.9 44.8 32.8 8.5 420.0
Multiple
Capitalized Earnings Method
Cost of Equity Low High
Long-term government bond yields 2.31% 2.31%
Adjusted large cap equity risk premia 4.20% 4.20%
Small cap equity risk premia 3.50% 3.50%
Company specific risk 11.00% 12.00%
Required equity return 21.01% 22.01%
Long-Term Growth in Earnings 1% 1%
Capitalization Rate 5.00 (x) 4.76 (x)
Capitalized EBIDTA Method
Support for Discount to Comparable Company Multiplies
Size 10.0% 15.0%
Liquidity 15.0% 20.0%
25.0% 35.0%
Discount Range
EBITDA Multiple Multiplie
5.50 25% 4.13
5.50 30% 3.85