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    Arcadian Business Case

    Uploaded by

    Heni
    Based on the information provided, a 5% nominal long-term growth rate seems most reasonable. This rate is: - In line with nominal GDP growth rates - Below the nominal growth rate for the pharmaceutical industry - Consistent with Arcadian's view that a 5% growth rate yields a total present value of $52 million, within a favorable range. A 5% growth rate implies the business will grow at a stable pace consistent with overall economic growth over the long run. This rate provides a balanced estimate of Arcadian's continuing value that factors in both industry trends and economic fundamentals.

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    © All Rights Reserved
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    Arcadian Business Case

    Uploaded by

    Heni
    111 views20 pages
    Based on the information provided, a 5% nominal long-term growth rate seems most reasonable. This rate is: - In line with nominal GDP growth rates - Below the nominal growth rate for the pharmaceutical industry - Consistent with Arcadian's view that a 5% growth rate yields a total present value of $52 million, within a favorable range. A 5% growth rate implies the business will grow at a stable pace consistent with overall economic growth over the long run. This rate provides a balanced estimate of Arcadian's continuing value that factors in both industry trends and economic fundamentals.

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    Arcadian Business case

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    Based on the information provided, a 5% nominal long-term growth rate seems most reasonable. This rate is: - In line with nominal GDP growth rates - Below the nominal growth rate for the pharmaceutical industry - Consistent with Arcadian's view that a 5% growth rate yields a total present value of $52 million, within a favorable range. A 5% growth rate implies the business will grow at a stable pace consistent with overall economic growth over the long run. This rate provides a balanced estimate of Arcadian's continuing value that factors in both industry trends and economic fundamentals.

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    111 views20 pages

    Arcadian Business Case

    Uploaded by

    Heni
    Based on the information provided, a 5% nominal long-term growth rate seems most reasonable. This rate is: - In line with nominal GDP growth rates - Below the nominal growth rate for the pharmaceutical industry - Consistent with Arcadian's view that a 5% growth rate yields a total present value of $52 million, within a favorable range. A 5% growth rate implies the business will grow at a stable pace consistent with overall economic growth over the long run. This rate provides a balanced estimate of Arcadian's continuing value that factors in both industry trends and economic fundamentals.

    Copyright:

    © All Rights Reserved
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    of 20

    Akua Acheampong

    Jody Grewal
    Kieng Iv
    Rhea Rasquinha
    Background and Current Issues
    Terminal Value
    Estimators of Terminal Value
    Forecast Horizon
    Quantitative Analysis
    Recommendations
    Arcadian:
    Gene diagnostics industry

    Investment Opportunity:
    Original Offer: 60% equity interest in Arcadian
    for $40M

    Value of the Investment:


    Determined through estimating terminal value
    Itis the lump sum of cash flows at the end of a
    stream of cash flows, which represent:
    The proceeds from exiting an investment;
    The present value of all cash flows beyond the
    forecast horizon

    Terminal values are important because:


    They are present in the valuation of almost every
    asset
    They measure the continuing value derived from
    the going concern of the business.
    Importance of Terminal Value
    Terminal
    Value

    Liquidation Going Concern


    Assumption Assumption

    Liquidation Market Constant


    value Multiples growth
    Approach Advantages Disadvantages When to use approach

    Book value Simple Ignores some assets and liabilities Appropriate when the
    Historical cost: backward looking minimum value of a
    Subject to accounting manipulation company needs to be
    determined.
    Replacement Current Subjective estimates Appropriate when a
    Value Value may be difficult to come by company is deciding
    whether to buy another
    company or build a new
    one from scratch.
    Liquidation Conservative Ignores going concern value Appropriate when assets
    Value Uncertainty about value of assets in the are marketable
    market
    Multiples Simple Earnings subject to accounting The approach is used as a
    Widely used manipulation business valuation
    Snapshot estimate: may ignore cyclical, benchmark
    secular changes
    Provides relative value, not absolute value

    Constant Reflects the Errors in growth rate and/or discount rate Appropriate when cash
    Growth time value of can provide improper value flows are strong and
    Method money Easy to abuse or misuse relatively consistent
    Requires estimate on when firm will grow at
    stable rate
    Going Concern Timeline

    Forecast Horizon Cash Flows beyond the


    Forecast Horizon

    Terminal Value

    As far into the PV of future cash Importance: All future cash flows,
    future as CFs can flows beyond the not only the ones that you can
    be forecasted forecast horizon forecast, determine value

    KEY: When Stable Growth Begins


    Set the forecast horizon
    Stop Forecasting Cash Flows
    Estimate a Terminal Value
    Projected Cash Flows by Investment
    $350
    $300
    $250
    Movie
    $200 Studio
    $Millions

    $150 Bottling
    Plant
    $100
    Toll Road
    $50
    $0
    ($50) 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29
    Year Stable growth of 2%
    ($100)
    begins in year 27:
    ($150) -Production capacity
    Stable growth of 2% Stable growth of 2% reached
    begins in year 3: begins in year 12: -Estimate TV at yr 27
    -Operational capacity -Plant reaches capacity
    reached -Estimate TV at yr 12
    -Estimate TV at yr 3
    Arcadian Growth Rate vs. Cash Flows
    Very unstable
    500
    growth 200
    Growth Rate
    400 150
    Resembles

    Cash Flows ($M USD)


    Cash Flow Bottling Plant
    300 Forecast 100
    Growth Rate

    200 50

    100 0

    0 -50
    1 2 3 4 5 6 7 8 9 10 11 12

    -100 -100
    Year
    Limitations:
    Forecasts for 10 and 11 years, but neither attains stable growth
    Ideally, we should continue forecasting until stable growth begins
    Difficult due to the company being in its early stages

    When should TV be estimated?


    At end of 2013?
    Cash flow growth is volatile after 2013
    At end of the Forecasted Cash Flow period?
    Cash Flow growth has declined and will further decline until 5% is
    reached

    It is reasonable to assume that growth will fall to 5% by


    2016 given the pattern of decline since 2013

    Use the End of the Forecasting Period to Estimate TV


    Best Options:
    1. Price/Earnings Ratio
    2. Price/Book Value Ratio
    3. Constant Growth Rate

    Assumptions:
    1. WACC 20%
    2. At end of forecast horizon Arcadian is a
    mature company
    Arcadian Sierra
    P/E 15 20 P/E 15 20
    2014 Net Income $ 203 $ 203 2015 Net Income $ 162 $ 162
    Terminal Value $ 3,045 $ 4,060 Terminal Value $ 2,430 $ 3,240
    PV Terminal Value $ 492 $ 656 PV Terminal Value $ 327 $ 436
    PV 05-14 CF $ (151) $ (151) PV 05-15 CF $ (118) $ (118)
    PV $ 341 $ 505 PV $ 209 $ 318
    60% Ownership $ 204 $ 303 60% Ownership $ 125 $ 191

    Terminal Value Explanation


    PE 15 20 PE 15 20
    Arcadian 144% 130% Sierra 157% 137%
    Arcadian Sierra
    Price to Book Ratio 8.5 Price to Book Ratio 8.5
    BV of Equity $672 BV of Equity $199
    Terminal Value $5,708 Terminal Value $1,691
    PV Terminal Value $922 PV Terminal Value $228
    PV 05-14 CF ($151) PV 05-15 CF ($118)
    PV $771 PV $109
    60% Ownership $462 60% Ownership $66

    Terminal Value Explanation


    Arcadian 120% Sierra 208%
    Options:
    1. Real growth rate in the economy = 3%
    2. Real growth rate in the Pharmaceutical Industry = 5%
    3. USA Population growth = 1%
    Fisher Equation
    Inflation=2%

    g No min al (1 g Re al ) x (1 g Inflation) 1

    Nominal Rates
    1. Nominal growth rate in the economy ~ 5%
    2. Nominal growth rate in the Pharmaceutical Industry ~ 7%
    3. USA Population growth = 1%

    Best Rate: Nominal growth rate in the economy ~ 5%


    Arcadian's View
    Annual growth rate to infinity 2% 3% 4% 5% 6% 7%
    Weighted average cost of capital 20% 20% 20% 20% 20% 20%
    Adjusted free cash flow 2015 202 194 185 180 174 165
    Terminal value 2014 1,142 1,173 1,200 1,257 1,314 1,355
    PV of terminal value 2014 185 189 194 203 212 219
    PV free cash flows 2005-2014 ($151) ($151) ($151) ($151) ($151) ($151)
    Total Present Value $33 $38 $43 $52 $61 $68
    60% Ownership $20 High
    $23 Range
    $26 $31 $37 $41
    Terminal Value Explanation 554% 495% 455% 392% 347% 324%

    Sierra Capital's View


    Annual growth rate to infinity 2% 3% 4% 5% 6% 7%
    Weighted average cost of capital 20% 20% 20% 20% 20% 20%
    Adjusted free cash flow 2016 185 177 168 163 157 148
    Terminal value 2015 1,049 1,073 1,093 1,142 1,189 1,219
    PV of terminal value 2015 141 144 147 154 160 164
    PV free cash flows 2005-2015 ($118) ($118) ($118) ($118) ($118) ($118)
    Total Present Value $23 $26 $29 $35 $42 $46
    60% Ownership $14 Low
    $16 Range
    $17 $21 $25 $27
    Terminal Value Explanation 619% 555% 513% 436% 384% 359%
    Arcadian Sierra Difference Applicable

    Price/Earnings Ratio
    Low End: 15 204 125 79 No

    High End: 20 303 191 112 No

    Price/Book Ratio 462 66 396 No

    Constant Growth
    31 21 10 Yes
    Rate
    Arcadian Sierra Difference

    Constant Growth Rate


    122 92 30
    Option on Future Opportunities
    Further financing needed
    40M barely covers 2005 projected cash deficit
    Debt financing
    High debt financing costs: low current earnings -> low interest coverage,
    low operating income margin -> high cost of debt
    Impact on WAcc

    IPO/Early Exit
    Distribute shares to clients tax-free
    Compare with
    Affymetrix (P/E 50.09, P/B 8.56,P/FCF 97.5, P/SALES 7.49)
    Illumina (PB 8.46, P/SALES 8.82)

    Current Average Investment weighting: $31.25M


    Counteroffer: $21M
    Abandonment Point: $31M

    Management Bonus
    If management hits forecast in years
    2013-2014, 5% incentive $2M present
    value 2013 2014
    Arcadian's Forecast $134 $231
    Sierra'sForecast $28 $98
    Difference $106 $132
    5% $5 $7
    PV $2

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