Welcome back. Very nice to see you again. If this is your first one, then please do feel free to send anything you like into the chat function.

That'll be absolutely no problem at all.

Or alternatively, if you can't do that because of access restrictions within your organization, then uh, the q and a section works as well.

No problem. Either way round. Okay.

So in terms of, we're gonna be thinking about for today in terms of our proforma analysis.

We're going to be looking at, hopefully you can see us on the screen.

Okay. We're gonna be thinking about acquisitions and divestitures.

We probably won't get time to have a look at the debt and the equity issuances, how that might impact.

There is a out on the third tab of the Excel file that you can have a look at if you want to, and the solution files are there for you as well.

And we will touch on the relevant information towards the end as well.

Okay, so we're gonna dive in.

We've, uh, hopefully given people a few moments to join us.

I'm sure we'll get people joining us as we get going.

But in terms of what we're going to be looking at for today, if you could just grab the file that has the PowerPoint content in it.

Let me just grab the right slides that we go.

So this is what we're gonna be looking at pro forma adjustments.

What we're thinking about for our pro forma adjustments when we're thinking about trading comp analysis is to think about the impact and potential problems we might have if one of the companies in our comparable set has gone through some sort of business combination change during the course of the last year.

So that might be as a result of buying another company, might be as a result of disposing of one of their group companies.

The financing sider leases. Unfortunately, I don't think we're gonna get time to have a look at today.

And we're gonna go through each of these in turn, excuse me, let's just get rid of these notes.

We're gonna go through each of these in turn acquisitions. First of all, very quick talk about how the accounting works, but then we'll show you the examples to show what the problems are and also how we might go about fixing them and some of the problems we might face in doing this.

So that's what we're gonna be doing. We've got two examples to have a look at for acquisitions, one in relation to disposals, and that'll take us to, to a conclusion for this session.

So please shout if you've got any questions as we go.

Otherwise we'll dive in.

And the first thing we'll look at here is where we have a company in our comparable set, which has gone through an acquisition, bought another company into their group during the course of the last financial year.

So what problems has this caused? Well, in terms of the accounting, the first thing to note is that the reported data, the consolidated data, will only include the results in the income statement of the target company, of the acquired company after the acquisition date.

So we only include revenues, expenses, and then for profits of an acquired company into our group after they've actually become part of our group. Hopefully that makes intuitive sense.

But if we're looking at this company, for example, where the acquisition took place on the 30th of September, but where the acquirer has a 31st of December year end, the consolidated numbers here, let's just look at revenue for an example.

Those consolidated numbers, well, the buyer on their own, the full year had 8 75.

The target company on their own for the full year had 500 of revenue.

But we're gonna report in our group financial statements only sales of 1000 because we only own the target company for the last three months of the year.

So as a result, to get the thousand, we're gonna take the 875 of the acquirer and add to that one quarter's worth three months worth of the 500, assuming that the revenues are earned on a smooth basis through the course of the year, there's no seasonality in that earnings.

So that would be 125 added on, which should get us to the 1000.

If we carry this on through to the EBITDA number, same sort of approach we'll see that we might have a bit of a problem if we're trying to calculate revenue based or earnings based multiples using this company's reported data.

Because if we're comparing this company to another company in the sector, then those other companies are gonna have their enterprise value divided by their EBIT or EBITDA for the parent company and all the subsidiaries for the whole year.

Whereas our company here, we're looking at enterprise value at the year end, which includes the impact of any acquisitions, but dividing it by an EBIT or EBITDA number that doesn't reflect full year earnings for all of the subsidiaries in the group.

So might give us a bit of a problem.

We've got some numbers that demonstrate the problems and the kind of issues that this might create for us as a whole.

So we're gonna go through and try to pick some of those up in our work examples. So if you could jump in and grab the Excel file, the Trading comps, pro forma workout adjustment empty, what we'll do is have a look at the, some of the numbers we've got here just to demonstrate the point.

Definitely easier to see the numbers, see the point with numbers.

So make those as we go through.

So first thing to pick up here, uh, we're looking at a acquire company Health Inc.

That is acquiring another company, target company.

Now we've got the following data.

So this is the information as at some point after the end of the year for the acquiring company for Health Inc.

Okay, so on a particular point in time after the financial statements have been published, they've got a share price of 50, a 100 million shares, outstanding debt of 250 and cash of 45.

Now, from all of that, we can calculate and we've got this now for you that already their enterprise value.

So the enterprise value's gonna come from the share price multiplied by the shares outstanding.

And then we're gonna add onto that the net debts, which is all of their debt minus their cash of 45.

So this will give an enterprise value for the acquired company.

So this is a date after the end of the year, after the financial statements have been published of 5205.

And that's the enterprise value of that particular company's based on the share price on that particular date.

If we then try and calculate some valuation multiples from this enterprise value we give can give some data here in terms of the operating profit from the financial statements and depreciation and amortization from the published financial statements for the last 12 months of the acquiring company Health Inc.

We've also got some forecasts for what the future's gonna look like as well for this company.

Okay, so we go through and just calculate our valuation multiples. Our EBITDA is gonna be the operating profit plus the depreciation operating profit, plus the depreciation amortization.

I'll just copy that to the right for all of these time periods.

And then our enterprise value multiple is gonna be the enterprise value as at today based on today's share price.

Some point after the most recent financial statements have been published, and now that's always gonna be one value. So I'm gonna hit F4 to lock onto it, and then we divide that by whatever the profit metric might be, the historic profit metric, the LTM profit or the future forecast EBITDA for this company next year, year after, and then the year after that for those three years individually.

Now, as you'd expect with your different denominators of this valuation multiple, the further into the future, assuming the company's growing, the higher the ebitda and because we're dividing it just by the current enterprise value, you're gonna end up with lower valuation models.

Seems totally reasonable.

The problem we've got here though, that there are very, there's a very big drop off in the valuation multiple based on the historic data points, the LTM EBITDA compared to the future forecast EBITDA, the forward or leading multiples.

So this might look a bit odd, you might say this, it's really strange, this pattern that we got from year one, year two, year three makes total sense, but there's a almost a third drop off in that multiple from using the historic data points to using the future forecast data points.

So hopefully, given the slide we just looked at, that isn't a huge surprise because in the historic operating profit and depreciation amortization, we might not have the full year of target company's earnings.

So workout two helps us to solve that problem.

What Workout two says gives us a bit more detail on this transaction.

So, uh, it says, okay, well that transaction closed, the acquisition took place halfway through last year.

So Health Inc's financial statements include half a year's worth of target company's earnings.

We're assuming no seasonality in the earnings, and we're asked to restate the multiple based on the data that we got below this restated multiple, we'll call a proforma ltm.

Essentially it's trying to say what would the EBITDA last year have been if the target company had been acquired at the start of the year if the acquisition had always been there.

So we've got the same data points in terms of share price, shares outstanding and debt and cash.

We've got the same data points here really in terms of the acquiring company in that they got operating profit of 200 and depreciation and amortization of 100.

But now we've found some extra information in terms of the target company or the target company on a standalone basis, looks likes, looks like.

And what they've got is operating profit of one 90 for the whole of last year and depreciation of 10 for the whole of institute.

So what we've got so far for EBITDA is the Health Inc, the acquiring company of their operating profit plus their depreciation amortization 300.

Now this 300 is the full year of how Inc ignoring the acquisition of Target company plus half a year's worth of the target company's EBITDA already in this EBITDA number.

This is the period from when we acquired them to the end of the year.

A pro forma number will try to pick up what happened before then to give us the full picture for the whole year for Health Inc.

So what we need to do is to add on half a year's worth, so 0.5 times the EBITDA of target company, which is one 90 plus the 10 of depreciation amortization.

So the numbers are nice and straightforward here, but you can see they've made 200 of EBITDA last year.

Half of that 100 is already in the Health Inc group numbers of 300.

But we've got another a hundred to add in for the first half of the year to get us to the pro forma LTM EBITDA number for the group as a whole, as if health as if the target company had always been part of the group.

This will give us our pro forma EBITDA of 400 as if the target company was part of the group for the whole year.

Okay, so what does this do for us in terms of our valuation multiple, the LTM valuation multiple? Well, our market capitalization, same as before, but we've broken it out here for you.

So it's gonna be share price times number of shares, not a huge bit of complexity here.

The net debt, again, we've broken it out here, it's gonna be a total debt of two 50 minus the cash of 45.

But what that will get us to if we add those two together is the 5,205 that we had before for our enterprise value and work out one.

And then we need to take this 5,205 and divide it by our proforma LTM EBITDA to give us a valuation multiple of 13 times.

Now this 13 times, if we compare it to what we got, just using the financial statements in terms of the reporting numbers for the Health Inc parent company, we're now saying that we think this really a better metric here for the LTM enterprise value to EBITDA shouldn't be 17.4, that's the reporting number.

But if we make the adjustments, assuming target company was part of the group for the whole year, we would get 13 in here as our LTM or enterprise value to LTM EBITDA multiple, which is much more consistent with what we get in later years in terms of the degradation, the, the decline in that valuation multiple as revenues grow.

The key point being that this 300 doesn't include the full year results for the acquired company.

Our pro forma L10 EBITDA number does, which is one of the 13 LTM multiple is a more realistic, a more comparable multiple.

This hopefully will stop us from looking at this company and saying, wow, they've got 17.4 times valuation multiple, it looks like they're massively overvalued. Maybe it's a selling opportunity for this company.

Whereas actually that is only because we're underestimating a comparable EBITDA number and therefore overestimating the multiple in comparison to other companies.

The pro forma numbers adjust that out for us and gets us to a more comparable number of 13 times.

Okay, so that's the whole point here.

We've looked at some, hopefully we can see some nice straightforward numbers here In this first example.

What we're going on to have a look at now is a slightly more involved number where we're trying to think about doing this in the real world.

Okay? So we're gonna look at some actual real world data points here. So we're gonna look at workout three next and we'll out three picks up for us is a real world transaction.

Okay? So we're looking at being in May of 2018, so Santa there May of 2018.

We're gonna actually, if we look at this specifically, we can say we're on the 11th of May, 2018.

And what we'll doing is we're doing is looking at the luxury products sector and trying to pull up some valuation multiples.

And we're asked to calculate the multiples for their last 12 months.

So it's the last 12 months of reported data and also for calendar year one, that's the year that we're in 2018.

EBITDA based valuation multiples for tapestry.

Now we've got some data points in terms of tapestry here.

We've got their current share price on the date where we're at 11th of May, 2018.

We've got their fully DI shares outstanding so we can get our equity value and we've got their net debt from the most recent 10Q.

Okay? The key point to note here is that the financial year ends for tapestry on the 1st of July, 2017. That's the most recent full year results.

We've also then subsequent to that published already for where we're standing on 11th of May, we've got the first nine months of the 2018 financial year.

So that's the nine months up to the 31st of March, 2018.

We've also got comparable numbers for the prior year to calculate our LTM numbers.

It's always easiest if we try to do this with a quick diagram.

Let's just have a look and see if we can pull this together in terms of what this might mean for us.

So drawing diagrams always useful in terms of thinking about our timeframes and our time horizons.

So this is the year end of July of 2017, and this is the year end of July of 2018.

Okay, now we're standing there in May.

So we've got nine month results.

So we've got the first nine months, the first three quarters of the 2018 year that data's been published.

That will get us to March of 2018.

But we're standing there some point here, 11th of May, 2018.

So this is where we're currently standing.

So that's our situation at the moment. Okay. We do also have the full year results for the 2017 4 year ended 2017, and we also have the Q3 or three Q results first three quarters of 2017 available as well.

So they're the published data points.

If we're trying to calculate the LTM number, then our LTM is the most recent 12 months of published data.

So if we count back from the most recent published data point back 12 months, these is the LTM time period and how do we get the results for that time period? Well, we take the full year results for 2017, strip out from that the first nine months of the prior year and add into that the first nine months of the year that we're in that we haven't reached the end of yet.

So that's our analysis in terms of the LTM calculation.

So we can do that calculation with the published data points that we've got available to us.

So let's just go back into our Excel wireless, dr. Pull this together. We've got the data points in terms of sales and operating profit and depreciation amortization.

We're also told that there is a restructuring charge that we've seen over the last couple of periods as well.

And then we've got some forecast data for the full year, the calendar year to the 31st of December, 2018.

Okay, first question we're asked here is what we noticed about the financials.

And if we look just at revenues, it's maybe easier to see here.

We can see that well sales for the first nine months of the current year that we're still in are pretty comparable to the full year for the prior year.

That seems pretty high.

Sounds like something might have changed after or during the course maybe of the last financial year.

There's also a substantial growth in revenue from the first nine months of last year to the first nine months of this financial period.

So it looks like something's going on here. So a little bit odd, but let's just plow on with the data points as we've got them.

So same analysis as we did before.

We want to calculate an enterprise value to EBITDA multiple for the LTM EBITDA and also for CY + 1.

So we need enterprise value. First of all, enterprise value, we've made it easier for us here is our share price times number of shares plus the net debt.

So that will give us 14,118 as our um, enterprise value where we're standing on the 11th of May.

Next thing we've gotta do is calculate our cleaned EBITDA.

Okay, I've got sales here as well. We're gonna use the sales number later on in terms of our analysis.

So our sales is gonna be based on this analysis.

We take the full year, deduct the old quarter results, add in the new quarterly results to get the LTM numbers.

So I'm gonna take the sales sales, I'm gonna deduct from that the old quarter results.

I'm gonna add into that the new quarter results to get the LTM sales and I'll just put that formula over here for us so we can see that.

Okay, so that's our LTM sales.

When we come down to EBIT though, what I really wanna do is look at the cleaned EBIT number.

So I'm gonna need to take my full year number operating profit, the 787 reported.

But I'm gonna add back to that the restructuring charge.

And then I'm gonna deduct from this, the adjusted first nine months of 2017.

Add back to that the restructuring charge and then add on to this the first nine months of 2018.

Add back to that the restructuring charge, their response.

So that's my cleaned LTM EBIT number cleaned LTM EBIT.

But we also need to calculate the cleaned LTM EBITDA.

So same adjustment, in that we can just pick up the same analysis as before.

So let's just say, well I've already got the LTME bit and then let's just add onto that because I'm gonna add back the depreciation amortization, but on an LTM basis, full year minus the first nine months for the last financial year plus the first nine months of this year.

So that will work for us to get those numbers coming out.

So nine 15.6 is my LTM EBITDA, but I've cleaned it up because I've removed the non-recurring item.

The restructuring charge.

If we do the same thing for the calendar year, one numbers, nothing too complicated here, the sales, I can just pull down the EBITDA.

I can also just pull down assuming there's nothing already in the forecast period.

And then my EBITDA is gonna be operating profit plus the depreciation and amortization.

So 1318, what does it give us in terms of valuation multiples? Well, we take the enterprise value today and again therefore to lock onto that and divide it by either our LTM EBITDA on a clean basis or copy that to the right, the calendar year one as well.

And here we're left in the same situation as we were with our first example in that as we move forward from our LTM number to the full year results.

And we're remember here, we're only actually rolling forward nine months as a three month overlap because our reported data takes us up to the 31st of March already.

So we're already looking at slightly overlapping period.

But despite that, looking at the historic data point, historic profit, we're getting an enterprise value to EBITDA multiple of 15.

We move just effectively nine months further into the future, we're gonna get a valuation multiple of 10.7. So again, a third reduction in that multiple, which seems like a pretty big movement given that we've got a pretty big overlap in terms of those time periods.

So it might suggest something a bit odds going on here for us.

So if that is the case, then we might need to go a bit further and see if there's anything else going on here in this analysis that would actually help us to understand why this multiple is there and maybe if we need to make any adjustments to it.

So let's try and find the data points so we can see what information we can get.

So we've rev reviewed TAPESTRY'S accounts and within Tapestry's account there's a footnote.

It's great, it talks about acquisitions.

It's nice and interesting for us.

So first thing that says to us is that on the 11th of July of 2017, the company Tapestry bought Kate Spade and Company.

Okay? So if we look at our timeline here, we can say that at some point here.

Okay, 11th of uh, July, 2017, this is when we made an acquisition.

So we made an acquisition on the 11th of July.

Now this is helpful for us on some levels because what it gives us is the Q3 results or the first three quarters of 2018.

They're gonna include almost all of those results, but not exactly because that period started on the 2nd of July.

So there's still a couple of weeks out. We can't just assume that those Q3 results are the pro forma numbers, what they would look like if we had had that acquisition taken place already.

But also for sure the first three quarters of 2017 and the full year of 2017 don't include any impact from this case SPA acquisition.

So they aren't on a pro forma basis.

The Q3 2018 is pretty close, but we want to get as accurate as possible.

But definitely the 2017 full year results and the first three quarters of 2017 don't include any impact of the case, better acquisition.

And as a result, the LTM numbers are not representative of a forecast of a full year's worth of results of every company that is today on the 11th of May within the group.

So we're gonna need to make some adjustments here.

We're gonna need to recalculate all of those three component parts on a proforma basis to say what they would've been, what the EBITDA would've been, had Kate Spade been part of the group for the entire time period.

That's what we need to do. Now, restate those three component parts that represented by the black horizontal lines to say what they would've been.

Had Kates paper been part of this all the time.

You might look at the Q3 2018 results and say, well, it's almost close enough.

And if there's no better information, you might just take that as almost being a proforma number already.

But if you can get better data, you should probably use it.

So let's go and see what data we can find.

The first thing we can find here is that we've got our reported data for sales and net income for the first nine months of the year. That's in the most recent 10 q and that's kind of helpful, but doesn't give us the number we need, which is EBITDA.

So, okay, we've got the numbers there.

Also, if we had the footnote presented to us for net income and sales, it would explicitly say it says these are the pro forma numbers, these are the numbers we would have if Kate Bader and part of the group for the whole time, for the whole time period.

So these are a really good starting point.

We've got some sales, but I don't want sales, I want EBITDA.

But we do also have pro forma numbers for the first three quarters of 2017.

So that's definitely helpful as a starting point. Okay? But then we look at bit further and we note that when Tapestry was going out to acquire Kate Spade, they needed to issue a bond to do this and to issue that bond. They needed to release some data to the public, to the bond market, to potential bond investors to tell them what the group would look like if this acquisition went ahead.

And really helpfully here what we've got is a proforma, combined data points here up to the 1st of April, 2017.

So this is for the first three quarters, first nine months of the 2017 year.

So another kind of really good data point here.

And really helpfully what this gives us is operating profit.

Operating profit that we can then use as a basis for trying to forecast what our EBIT diaries.

So let's go back and see what we can actually put in place.

Now in relation to this, we scroll down further on.

What we're gonna need to do, first of all, is well, let's have a look at what we need.

What I need to find is EBITDA for the full year of 2017 EBITDA for the first three quarters of 2017, and also EBITDA for the first three quarters of 2018 as well.

So let's start with the full year results here. We can get that. Well, the problem is through these two extracts, we don't have full year results for 2017 for either.

We do have data points in terms of the first nine months of 2017 in terms of the operating profit.

That is the 739.

So let's start to build what we've got here.

What actually we do have.

So we do have sales for the first nine months of 2017, which is that 4414.

We also can then say we also have, sorry, the operating profit of 739.

Okay? So those two points I'm picking up from the prospectus that was issued for the bond issuance to finance the acquisition of Kate Spade.

So those, those are our two start first starting data points.

Okay, well this is only nine months, it's not the full year.

We're gonna make our first assumption.

And the first assumption is that Kate Spade earns their revenues and profits smoothly through the year. There's no seasonality. And if that is the case, well then you can take this nine month number divided by nine times by 12 to turn it into a full year number and you could do the same thing for your operating profit.

That's our first assumption.

Next assumption we're gonna make is, we're gonna calculate a profit margin.

We might use that later on. It hopefully won't be a surprise that this is the same for this. Definitely should be the same for the same two time periods. There we go. So, the profit margin stays the same.

We just grossed up the sales and profit.

So the profit margin should stay the same for the first nine months or for the assumed implied full year number for 2017.

If Kate Spade had been part of the group for the full year of 20 seventeen's July 1st, July, 2017.

Okay, operating profit's good.

I've now got a full year to 1st of July, 2017 operating profit assumed for the group if Kate Spade was part of the group for the whole year.

That's not what I want though. I want EBITDA for this time period.

So I now need to get depreciation amortization.

How do we get depreciation amortization? Well, we need to make another assumption.

The assumption is gonna be, well what did we have before? If we just look at the full year results for 2017, you can see that depreciation amortization is 212 and sales is the 4488, okay? So that's higher up in the workout three.

That does give us some indication of what our depreciation amortization might look like as a percentage of our sales, okay? So we might assume therefore that depreciation amortization as a broad assumption is 4.7% of sales.

Okay? And again, another assumption, no guarantees about that, but just another assumption for us.

So how are we gonna deal with that? Well, if we make that assumption, then we can say that 4.7% of sales for those nine months is our depreciation amortization.

And then we can just gross this up to the full year number.

Gross that up to the full year number.

What we can now see is our EBITDA on a pro forma basis.

So assuming case Spade is part of the company for both the first nine months operating profit plus the assumed depreciation amortization, and also for the full year.

For the full year ended July, 2017, first July, 2017.

So we've now got this implied pro proforma EBITDA.

So what the proforma EBITDA would be for the whole year.

Proforma meaning assuming that we own Kate Spade for the whole time period.

Well that's great. What we've now got is this 1264, which is in terms of numbers, we're looking for this value here.

So we now, now, now have the pro forma full year results.

What else do we still need or we still need the pro forma results for the first three quarters of both the 2018 year and the 2017 year.

So let's see how we can go about getting those.

Well, we could use the data from way back before case bail acquisition took place, but we've got, you could argue better information because we have information from the most recent 10 Q, which is right up here.

So our sales of 4429.2 after the acquisition has taken place.

And then 4404.8 for the previous nine months.

So let's take the previous nine months.

4404.8,

Let's go and grab it. 8.

And then for the first nine months of 2018, we've got the 4429.2.

Now we've got a very similar number for the first nine months, 2017.

But this was data that was published way back before the case paid acquisition took place.

What we now have arguably is a better number, which is this 4404, okay? What we can then say is, well, let's apply a profit margin to that.

Let's assume the profit margin that we calculated previously is the right number value.

So that's 16.7 that we calculated previously.

And then we can take our implied operating profit for the old quarter and the new quarter as the 16.7% of the sales that we made for the old quarter.

First nine months of the 2017 year. We've now got 737, we had 739 before.

They're pretty much the same ballpark.

So the difference between doesn't make too much difference in the end.

And if we then apply this same assumed depreciation amortization rate of 4.7%, then we can calculate depreciation amortization as the 4.7%.

I'm gonna log onto that, multiply it by the sales that we now have better data, more up-to-date data for both the old quarter and the new quarter. First nine months of 2017, first numbers of 2018.

And then we can get our EBITDA numbers by adding together operating profit and depreciation and amortization.

Now we already had an implied proforma EBITDA for the first nine months of 2017 based on the reported data in that bond prospectus.

This 9 46 0.3 is not that different, but it's based on what UpToDate data.

So probably a better place to work from.

Okay, the starting point here though is just sales. We haven't got any other information other than the net income in terms of what things look like on a pro forma basis for 28.

But now what we do have is pro forma old quarter, we do also our pro forma new quarter data.

And as a result of that, we can then go ahead and calculate our LTM EBITDA on a proforma basis, assuming Kate Spade had been within part of the tapestry group for the whole time period, which would give us the full year number, which is the 12604.4, the first nine months at 9 46.3 as if Kate Spade had been part of the group First numbers 2018 with Kate Spade in the group.

Okay, that's our 951.5.

So therefore our LTM EBITDA is gonna be the full year at minus the old quarter plus the new quarter to give us 12609.6.

Okay? Enterprise value hasn't changed.

All we've done is made some changing assumptions in terms of what's going on.

So enterprise value can bring down from workout free and then our LTM EBITDA multiple is gonna be enterprise value divided by that LTM EBITDA to give us 11.1.

Now, the full year number that we had, again from workout free was 10.7.

And you can see, just looking here up there on row 86, previously we had an LTM enterprise value to EBITDA multiple of 15.4.

That was when we didn't include any impact of this case paid transaction.

Now we've restated the LTM EBITDA from 915 to what it would've been had Kate Spade been part of the group for the whole 12 months.

And that gives us a much more comparable 11.1 in comparison to that 15.

So again, we're getting an LTM EBITDA multiple that is more comparable, more reflective of what things look like on a forward going basis on a full game basis and also what things look like more comparable between different companies in this luxury products segment.

And so next section we're gonna go and have a look at is to do with disposals.

And on our disposals, what we're gonna be thinking about is just what we've gotta be careful with, again, with disposals.

So again, we'll jump back to the slide for just one quick slide here and then we'll go into the analysis around this.

And the key point to note in terms of the analysis here for these disposals is that if a company has made a decision to dispose of an asset or dispose of a business unit or to dispose of a subsidiary, if that has been taken either before the end of the financial year or even before the publication of the financial statements, then the balance sheets need to show the balance sheet needs to show those assets that we're looking to dispose of as a separate line on the balance sheet, which is referred to, which is referred to as held for sale.

Even if we haven't disposed of them by the balance sheet date, if we're looking to sell them, if we've made a concrete decision to sell those assets, then we categorize them on the balance sheet as held for sale.

Now those assets need to be stated at the lower of the balance sheet value in their fair value.

Now, if we're looking to dispose of a business unit that's performing badly, it may well be that the value carrying value or the fair value is lower and therefore what you'd shown on the balance sheet is their fair value.

However, if the market value is greater than what we had on the balance sheet previously, then we won't reflect that on the balance sheet. We'll just show the carrying value, what the balance sheet value was otherwise, okay? The other thing to be careful with is that financial statements don't allow us to net off assets and liabilities.

And if we're disposing of a business unit or disposing of a subsidiary, well that entity will have assets and liabilities.

So you may well find that you've got liabilities held for sale as well.

Again, something to be careful.

So if we're coming across a company that has a business unit they're looking to dispose of, gotta be careful to make sure that we don't miss the assets and liabilities, then our equity to enterprise value bridge, that we have both the asset and liability in there and that we treat and we haven't, they're fair, but market value.

But also when we're calculating a valuation multiple enterprise value in relation to some sort of profit driver EBIT, EBITDA economy, careful that we're consistent here.

If we're looking to dispose of this business unit or subsidiary, then the enterprise value on an ongoing basis, we'll assume that it's gone.

It's just asset that we're looking to sell.

But to make that comparable to our profit metric, we've gotta make sure there's no profit element from the disposed of the unit we're gonna be disposing of in our EBIT either.

We've gotta get rid of that as well. Okay? So let's get into our exercise, into our workout for that place. We've gotta go to the disposals tab.

And if we go to the disposals tab, we've got another example here to work through to demonstrate how this is all gonna work for us.

So we're looking at a company called Premier Inc.

Okay? We're asked to calculate the enterprise value to EBIT multiple.

We're looking at their financial statements. We've got sales, EBIT and net income from continuing operations.

We've then also got their balance sheets, okay? We've got assets and liabilities that we've just categorized as here into operating or financial.

So financial assets or investments, financial liabilities are sort of debt finance.

Okay? So let's go through another look at this. One thing to note as you go through, we've got assets held for sale, we've also got liabilities held for sale as well.

They're shown at their book value.

So the number in the financial statements, their fair value might be much higher than them.

So let's kinda have a look at calculating our enterprise value, multiple EBIT multiple, just using the numbers on the face of the balance sheet and income statement.

So let's go over our bridge.

Well, the equity value is gonna be the share price here, two 20 multiplied by the number of shares outstanding, totally diluted shares outstanding.

That gives us 221,100.

We've then got take, we can then add on to this over our normal bridge, the net debt.

So our net debt is gonna be all of our debts, which is gonna be our financial liabilities, long-term financial liabilities and short-term financial liabilities, minus any cash that we've got.

And we've got some cash and short-term investments up the top then.

So that's our net debt.

Again, we need to add on in calculating our enterprise value.

We've also got a non-controlling interest here.

Okay, so somebody owning some shares in a subsidiary in our group.

Great. We just need to add that on as well.

We've then got these non-operating assets. That's those financial assets.

So we've got some long-term financial assets, things that we own that we don't use in the data operations of the business.

Still an asset of the business still for the benefit of the people who have provided finance to the business.

And then we've also got this business unit subsidiary that we're looking to dispose of that has assets on the balance sheet that are the 11,203 and liabilities on the balance sheet of 2,890.

So the net assets held for sale.

So this business unit or subsidiary looking to sell has got a net asset assets minus liability balance sheet value 8313.

So if we were just, just, just to use these balance sheet values and calculate the enterprise value, you take your equity value, add on your net debts, add on the non-con controlling interest, take off the non-operating assets that not part of the day to day operations of the business and take off the net assets held for sale.

Because they are not gonna be part of the business on an ongoing basis.

So 222,733 and then our valuation multiple is that enterprise value divided by our ebit.

And if we jump up right to the top, our EBIT was given to us 15,699.

Okay? So we've got our valuation multiple here, enterprise value to EBIT of 14.2, that's all fair enough.

But that's only using numbers on the balance sheet, on the face of the balance sheet and on the face of the income statement.

And we've got two things that we might need to deal with here, which is what workout two is asking us.

And just in the interest of time for us in this webinar, we've given you the answers.

The first thing we've got think about is that EBIT number on the face of the income statement, does it include any profit that was made from the operation of this business unit or subsidiary that's gonna be disposed of in the near future if we're excluding this assets held for sale from the enterprise value? Well, we also wanna make sure they're excluded not only from the numerator of the formula, but also the denominator of the formula as well.

And the second issue, we spotted some assets held for sale, net assets held for sale on the balance sheet.

Or are they stated that their fair value is their fair value higher than the market value? In which case we want to restate them in this equity to enterprise value bridge.

So work out three does these two things for us.

The first thing we can do is calculate the adjusted EBITDA because the data point that we're given here is the EBIT of the discontinued operations.

Okay? So EBIT from the discontinued operations, let's go through them before we dive in.

Digging through the financials of Premiere, you find the following information, the discontinued operations relates to the sale of a subsidiary called MDL.

And that subsidiary had made a profit last year that was incorporated into the group's EBIT 3,477.

So if we wanna calculate the adjusted EBIT, excluding any revenue made from this one business unit we're gonna get rid of, we need to take the total number, which is the 16,000, 15,699 and deduct from that, the 3,477 made from this bit of the business that we're gonna be getting rid of in the near future.

Okay? So this is, is what our EBIT would be if we didn't have this discontinued operation, this disposed operation in the business, what it would've been last year.

I also wanna know what the market value of the assets are to make sure that the book value is a fair reflection of the market value.

And here we're also now told on the 7th of July, so halfway through the year the, we've got the 31st December year end on the 7th of July in the prey year, the group sold 24.8% of MDL, one of our subsidiaries to ABP.

Now that's where the nont controlling interest comes from and the fact that somebody owns some shares in the subsidiary, our group that's for 10.4 billion bucks that created the non-control, the interest.

They also had an agreement to buy the remaining shares of MDL at a price of $181 per share.

And they did this on the 4th of January where they bought the remaining 183.5 million shares.

Okay? So we own this subsidiary on the balance sheet date, but then it was disposed of four days later and we are picking up the share price from where we're standing now, some point after that balance sheet date, remember in out one we said that the share price is as at date after the pub publication of the financial statements.

So that must be after the disposal of this subsidiary.

So as a result, we definitely don't want to include them.

And what's the value of this? Of the business that was disposed of? Well, we had $181 per share that was paid to us for the 183.5 million shares.

So $33.213 billion is what we've received when this bit of the business was disposed of.

Okay? Now this does get a bit of a bit of a problem for us, but let's go over the bridge again.

So equity value, this doesn't change.

This is based on our share price and the number of shares where we're standing some point after the financial stems been published.

Net debt, we're gonna assume that hasn't changed as well.

But non-controlling interest where we are standing, let's say mid-February of the following year.

Well, the non controlling interest doesn't exist anymore because we've sold the subsidiary.

So there's now no one that owns a small bit of a subsidiary of our group because we don't own that company at all anymore.

So that non-controlling interest is gonna go to zero.

Our non-operating assets, that's our financial investments that's gonna stay the same.

And then we've got, well, this subsidiary that we owned on the balance sheet date, but now we've sold, so it's not part of our group on the date when we got the share price.

Don't forget the share price is the starting point for the equity value.

So we wanna be reflecting things as things stand on that particular date.

Now we don't own that subsidiary anymore, we sold it on the 4th of January.

But when we sold that subsidiary, we did receive some cash for that.

And maybe it's not easy for us to say what happened to that cash explicitly, but we could just treat it like cash in the group.

As we treat cash, we're deducted from net debt.

So let's just pull that through and assume that this value isn't the value of our discontinued operations, but it's the cash that we got from selling them off.

That cash is still part of our group and still benefits our shareholders, benefits our investors as an impact on our share price today.

So a bit of an assumption there.

But therefore if we calculate our enterprise value today, we take the equity value add on the net debt, add on the no control interest, take off the financial investments, non-operating assets and take off the value of the disposal, which might just be sitting as cash in our group.

Okay? It's not part of our day-to-day operations. If it is just there as cash, we can now get valuation multiple being the enterprise value, the 193 divided by the adjusted ebit, the 3477 to give us not the 3477, excuse me.

The adjusted EBIT is the 12222 here, particular as a valuation multiple of 14.8.

Now previously we had a valuation multiple of 14.2.

Now you might look at, might have looked at that and say, well, that looks a little bit low, that looks great to us.

But actually that is impacted by the fact that part of the business has been disposed of when we've adjusted for it, we actually have a more reflective, more comparable multiple based on what's gone on the business compared to other companies in the sector of 15.8.

Okay, that pretty much covers what we are looking to have a look at.

One final point just to pick up just from back in the slides financing, we didn't have a chance unfortunately for a look at. There's no time we, there is a workout to have a look at the financing side if we're gonna go through that and the full version of the files have all the solution there.

But we've talked through some of these points without being explicit on it.

In terms of saying that, where do you get the information from? Well, you get the information from financial statements 10 Ks, 10 Qs from a US perspective, looking at the footnotes for any subsequent events, things that have happened after the financial statements. That's what we got for the NDL disposal.

Don't forget to look at news feeds for any information about transactions taking place, but also any breakdown of divisional activities that Kate Spade one that was useful for us there.

And also fact set and CAPIQ running data points.

So hope it's been useful to show you why it's really important to adjust for any growth format adjustments if acquisitions have taken place.

Otherwise, hope have a great rest of your day, whether you're at lunchtime or towards the end of your day and maybe see again another one of these later on. Thanks very much.