Page 16 - SONEPAR 2021 - AcquisitionBook

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Valuation will require to have a clear visibility on the historical performance of the target and its perspectives.
A translation of the historical figures into URS format is required and will imply the following:
➜ apply IFRS rules: The objective is to estimate the target’s profitability using SONEPAR’s own accounting methods;
➜ normalized profitability: It will often be necessary to adjust the accounts to exclude certain exceptional items (particular attention must be paid to the interpretation of what is “exceptional”), or to integrate some costs that will become recurrent within SONEPAR;
➜ business needs to be “clean” before deal: The audited accounts must reflect the real and sustainable profitability of the target. Otherwise, there will be a financial risk on the target’s profits;
➜ 5-year plan: The purchaser needs to work with the target to build a forecast and realistic development plan.
There are different valuation techniques but the most commonly used are:
➜ multiples method: based on market valuation multiples used for similar or equivalent public companies in the same industry;
➜ comparable transactions method: using equivalent multiples for comparable transactions that have taken place within the GROUP or in the industry when information is available;
➜ DCF analysis: provides an estimation of the target company’s total value based on its future free cash flows discounted at the WACC.
2.3.5 KEY GROUP ACQUISITION RATIOS
SONEPAR will use the following criteria to assess the financial value of a potential target:
There is no standard range for these ratios, for each acquisition is specific and is subject to business, geographical and financial factors.
PHASE 2: EXPLORATORY PHASE
Prepare a BUSINESS CASE and an ACQUISITION SHEET
ENTERPRISE VALUE / SALES
ROCE AFTER 3 YEARS
ENTERPRISE VALUE/SALES
This multiple is the only ratio that can be used to value unprofitable companies.
ENTERPRISE VALUE/EBIT OR xEBIT
This EBIT multiple is meaningful only for profitable companies and if it is based on a recurrent EBIT, this is the reason why EBIT should normally be adjusted to exclude any exceptional item. This EBIT multiple is closely linked to the ROCE, as the ENTERPRISE VALUE reflects the market value of the capital employed.
The most popular ENTERPRISE VALUE multiple is usually the EV/ EBITDA. In this case, we will need also to translate it in terms of EV/ EBIT multiple.
GOODWILL/SALES
The GOODWILL generated by the transaction is the difference between the price paid for the shares or the assets and their book value. This book value of the acquired assets has to be restated according to IFRS rules (e.g. review stock valuation according to SONEPAR rules, review the tangible asset value, provision for pension costs, etc.).
Since the application of the IFRS rules, GOODWILL is not amortized unless an impairment is found. Each year the GROUP’s GOODWILL of the GROUP is tested for impairment at country level. If an impairment is found, there will be a loss in the EBIT. Therefore, the GOODWILL ratio is the main measure of the risk of an acquisition and the financial valuation must consider the amount of GOODWILL that the purchaser will be able to assume without any risk of impairment for the GROUP on a country level.
14 SONEPAR - ACQUISITION MANUAL - 2021 - FOR INTERNAL USE ONLY
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ENTERPRISE VALUE / EBIT
PAYBACK
FOCUS ON DCF ANALYSIS
➜ This method works best when:
• there is a high degree of confidence about the future free
cash flow over the next 5 years; and
• the purchaser wants to measure the impact of the potential synergies.
It can help the purchaser to analyze whether the requested price is justified or not.
➜ On the negative side:
• the DCF method tend to provide a very high valuation;
• valuation can fluctuate widely, depending on the free cash flow forecasts, discounted rate and the growth rates used.
Consequently, the DCF method shall be used with caution and as an indication of a maximum valuation not to get close to, otherwise there could be a significant risk of impairment of the acquisition investment in the near future.
GOODWILL / SALES
% VALUE RETAINED