Hi everybody.

Good morning or good afternoon or good evening depending on where you're joining from.

Thanks for joining today. My name is Maria Weber.

I'm one of the trainers at Financial Edge and I'm going to be going through M&A analysis for the next roundabout hour.

If you wanna follow along with me, you'll see there's three Excel spreadsheets in that.

On the webpage you've got a full empty model and I'm not gonna be using the empty model.

It's a massive model. We don't have time to go through the whole thing In the session we've got, we just gonna be focusing on the analysis and so I've prepared a part, complete version.

If you wanna work along with me as I'm doing some of the calculations, please use the part complete version.

If you'd rather just sit back and watch, that is also perfectly okay. You've got the full solution as well.

So I know these sessions can be a bit fast 'cause we've got limited time.

So if you're missing any of the calcs please, you've got the full solution and please do use the q and a pod.

So if you have any questions as we are going through, please ask those questions in the q and A pod.

Okay, welcome. I see a few more people have joined.

Just gonna repost the link to the materials in the chat.

Great. So today we are focusing on m and a, but specifically the analysis of m and a.

A few weeks ago I did a session on m and a fundamentals.

So if you feel after today's session, you just wanna go back to some of the basics, basic m and a principles.

We did a little bit of analysis there as well.

You can go back to that recording from a few weeks ago.

I used a much simpler model to do that session today.

I thought it would be fun to use a more complex model, but before we just launch into doing the calculations, I thought it would be nice to just have a look at a recent transaction and just see the kinds of things that shareholders care about because ultimately that is what we've gotta spend our time analyzing to see if this is a good deal or not.

So something that I was reading about in the press, it was actually a deal that was announced last year.

So I don't know if anyone is familiar with Tapestry.

So Tapestry is a US company and Tapestry, if you look at the business overview, they are a fashion company and they've got brands that you might be familiar with like Coach Kate Spade.

And they are buying a company called Capri Holdings, which is also a US fashion company.

And if we look at the business overview for Capri, we can see some of their brands that are recognizable.

Versace, Jimmy Chu, Michael Kors.

Now this was announced last year.

We'll look at the press release to see the kinds of metrics that people care about.

But the reason this is in the news interestingly enough, is the FTC in the us, the Federal Trade Commission is actually trying to block the deal.

They're trying to block it on the basis that it's going to unfairly reduce competition and it's gonna harm the customers.

And specifically from what I read, they focusing on the affordable luxury handbag market.

So it was actually in court I think in September.

So during fashion week.

So quite ironic, fashion week's going on and then this is playing out in the courts as well.

So I don't think a final decision has been made, but the deal, um, might be blocked.

Okay, in any case, let's have a look at the metrics people are interested in to put what we're doing today into context.

So I'm just gonna go for tapestry when they announced the deal last year, if I get their press release, so where was it? It was August. There we go.

So announces a definitive agreement to acquire Capri.

I'm not gonna go through the entire press release with you.

Let's just go to the parts that I've highlighted about what's important.

So first of all, strategic rationale.

Yes, we are gonna be looking at financial metrics, but there has to be some strategic justification for the deal, right? This isn't just about financial engineering and trying to get a high EPS, there's gotta be strategic rationale.

And we can see for this deal they're talking about diversification across consumer segments, across geographies, leveraging their consumer engagement platforms.

So they lay out the strategic rational.

We then get onto some financial metrics, one of which is synergies.

So synergies can come in different forms.

You'll see in our model we've got revenue synergies, cost synergies, even CapEx synergies here they're talking about 200 million in run rate costs synergies within three years.

For those of you that aren't familiar with the term run rate, that just means once the synergies are fully achieved, it doesn't mean just because there's gonna be synergies, they're gonna be achieved in the first year.

It takes a while to actually achieve them.

The run rate is the full rate of synergies.

Then we see they talk a little bit more about people and ESG, but they also mention cashflow and that's important.

You'll see why in a moment.

The next highlighted bit, they're talking about total shareholder returns.

They're saying they are ex, this deal is expected to deliver strong double digit EPS accretion and compelling ROIC or roic return on invested capital.

They also talk about them being committed to still paying a dividend.

So for some companies and some shareholders, dividends are important and if you're gonna be doing a big deal issuing a lot of shares, gonna have to pay more dividends, maybe using a lot of cash, people could be worried that you're gonna cut the dividend.

And here they're saying no, they're still gonna be paying their dividend per share.

If we then look at the deal itself, they are buying the shares for $57 per share and they paying cash for that.

So this is not a share for share exchange.

Now unless the acquirer tapestry has got a load of cash sitting on its balance sheet, they're gonna have to raise some financing and we can see here it's going to be financed with debt.

So they go on, I mean I'm focusing on the metrics, okay? I'm not looking so much at what's being paid, but you can see there an 8.5 billion deal, nine times adjusted EBITDA multiple.

How they're gonna pay for this, they're getting a bridging loan in the meantime.

So a temporary loan and that's gonna be replaced with permanent long-term finance and it's going to be funded by senior notes.

So debt term loans, debt and some excess cash that they've got.

They are also refinancing the targets debt.

Now one of the things we need to be conscious of is what's gonna happen potentially to the credit rating, if you are using a lot of debt, is your credit rating going to drop because your existing debt providers would not be very happy with that.

And so you can see here they're saying they have engaged with the rating agencies, they committed to a solid investment grade rating.

They have committed to de-leveraging, okay? So that's why the cashflow generation is important and they're actually giving a target to saying they wanna bring their debt to EBITDA ratio down to two and a half times within 24 months after the close of the deal.

Okay, so let's watch the space, let's see what happens.

It's still playing out in the courts as I said, but these are the kinds of metrics that shareholders care about and that is the topic of our session today, analysis of m and a.

So I've got the spreadsheet I'm gonna be using, okay, we've got a full model there and we are gonna be focusing on all those things we just said, accretion, dilution, credit metrics.

We're gonna look at synergies versus premium paid and return on invested capital.

For those that have just joined, I'm just gonna copy the link to the materials in the chat.

Again, please do ask questions in the Q&A pod if there is anything as we go along.

Okay, so I'm gonna be using the part complete spreadsheet.

So part complete model, you've got the full model.

If you just want to look at all the answers already, let's just familiarize ourselves with this model that we are looking at and what's going on before we actually do the analysis.

If we page down to our model intro, most important thing on this tab is this is where our circular switch is sitting.

So circular switch for interest, circularity, the switch is currently off, but that is where we're gonna go to turn the switch on.

If we then go to the next tab, the assumptions tab, this is where we've got really important information about the deal.

So this scenario that we've got here is the buyer Monsanto acquisition.

So the acquirer is buyer, a European company, we've got their share price, they're in Euros, we've got their number of shares, and then we've got the target, which is Monsanto, which is a US company.

We've got their share price, we've got the offer premium number of shares, et cetera.

This deal is more complex because of the fact that we have got different currencies involved, right? We've got a European company buying a US company.

So we've got an exchange rate that we're gonna have to use if we scroll down, we then see, okay, how are we gonna be paying for this? We've got a part being paid with equity, we've got fees, et cetera.

And then we've got the part being paid with debt.

All of this feeds in to our sources and uses of funds table.

And you can see initially we've got that information in dollars because we are buying a dollar based company.

So our uses of funds, we're gonna buy the equity, we refinancing the debt, we've got all of the fees, and then we put that into Euro.

We then saying, how are we financing this? We're gonna use a little bit of excess cash, we're gonna issue a convertible bond, we're gonna issue debt.

And then we've got a small equity issuance.

If we then carry on scrolling, okay, we have got, where's an important part I wanna highlight here we go in row 23, I'm gonna come back to this, but for now I just wanna highlight that secondary issue question mark.

We'll come back to the significance of that in a moment.

And then the rest of the sheet not gonna spend time on, we are gonna move on to the analysis.

But here you've gotta do things like calculate goodwill.

You've gotta do the step ups and step downs of your assets.

And so that's the rest of what is happening on this spreadsheet.

If we then go down to the acquirer tab, this is buyer, we've got an income statement, balance sheet, cashflow statement forecast.

This we can see up at the top, very important.

It is a European company and the year end is December.

So this is in Euros to December each year.

What adds complexity to our model, if we go to the next tab, the target local FX tab, this is Monsanto, which is the target.

We've already said US dollars is their currency.

So we've gotta convert also, they've got a different year end.

So if we wanna do consolidated financials, we're gonna have to have the same year end.

So they've got August year end and that is the purpose or the function of the calendar, target acquisition FX tab.

So that calendar target tab, you can see now I've taken the target Monsanto and I've converted all of the projections into Euro and I've also put them all to December.

So that's calendarization, okay? We do have videos and resources on that if you are interested in looking at the calendarization process, we've then got an opening balance sheet.

What are we starting with? And this is consolidation principles.

If you wanna learn more about this, I think the session, the Felix life session the week after next is dealing with consolidation.

So this is where we've gotta put the effects of the deal, the financing, repayment of debt, we've got to put goodwill, step up, step downs, et cetera.

So that is just getting us to a starting consolidated balance sheet for the two companies.

We've then got a calcs tab where we've got important information for us that we are gonna be using in our analysis.

We've got synergy assumptions and we can see we've got different types of synergy.

We are also giving a run rate of synergies.

And then we've got some more information about property plants and equipment, debt fees, taxes, et cetera.

We'll just pick out what we need from the sheet as we need it.

That brings us on to the new co tab.

By new co we just mean consolidated after the acquisition.

So this is your pro forma financials.

Okay, so in Euro to December, consolidated pro forma income statement, balance sheet, cash flow statement.

And we're gonna be focusing quite a lot on this for our analysis.

And that brings us to the analysis tab. Okay? Any questions as we go along, please use the q and a pod.

You can also ask questions afterwards.

I'm just gonna repost the link to the materials or one more time in the chat 'cause people joining late don't see the previous chats.

So if you've just joined, welcome.

Okay, and I'm in the part complete model.

Okay, so let's start off with doing the first of these three analysis, which is accretion or dilution analysis.

In the limited time we've got, I didn't wanna spend too much time picking up all the numbers.

I'd rather wanna spend a bit more time analyzing it and doing something that maybe you haven't seen before.

So EPS accretion or dilution I've already got completed for us.

Let's have a look at what we are doing with the EPS accretion or dilution.

What I wanna compare is I wanna compare the proforma new NewCo EPS.

I wanna compare that with the acquirer's standalone EPS.

And I wanna see, okay, well is it better or worse if we do the deal? That's the proforma, that's the NewCo EPS.

So to get to that new co EPS we take, and you can follow the links, here we are, go into the new co tab and we are picking up the normalized net income, right? Earnings per share, net income divided by number of shares.

So what's the consolidated net income? Now the next thing that we've got is we've picked up pp and e step up depreciation after tax.

Let's just pause and talk about that for a moment.

You can see here we've got cash net income.

That's a little misleading because it's not really pure cash net income, all that is is an adjusted net income figure to strip out the extra D&A.

Because of consolidation accounting, when we buy another companies shares, we have to reevaluate all of the assets and liabilities.

We are gonna step up the values or step down the values.

If we step up the value of property, plant and equipment, there's gonna be additional depreciation because of that.

Now, depending on how the deal is structured, if you are buying the shares in a company, the tax authorities don't actually update the tax value of that asset and this gives rise to a potential tax liability.

And so we also recognize deferred tax.

Now I don't wanna get too caught up in that, but that's the reason why here we are taking the D&A after tax because as the D&A comes through that deferred tax liability unwinds, we've got an unwinding of the deferred tax liability.

The point of us reversing the step up depreciation is just to say, look, that's unfairly reducing the net income of the combined entity.

That's purely a consolidation accounting entry.

Let's just strip that out and look at the net income without the extra depreciation.

So that's why we have added back the depreciation after tax.

So that gives me the new company's cash net income.

I've got the weighted average shares outstanding after the deal.

This is all coming from NewCo, you can see the link.

And so I get my EPS then compare that to the acquirers standalone EPS and we can see this looks, I almost wanna say, I am gonna say too good to be true.

71.2%, 83%. This is unbelievable.

The guys we are working with interest off and we should be when I'm editing a model, when I'm working in a model iterations off, interest off and then when we finished, we turn it on, we need to turn interest on to see the true position here because I'm looking at net income.

Net income is after interest.

This deal is being financed with a lot of debt.

So I need to go and turn that interest on and see what it looks like.

So we've gotta go all the way back to our model intro tab.

In the model intro tab, that's circular switch in C9 we're gonna turn on.

So we are turning the circular switch on to one.

So circular switch goes on and my iterations are actually on, which is bad, I should be working with iterations off if my switch is off.

But if you're getting an error message, just go to your file options, enable iterative calculations under formulas and then interest will flow through the model.

Now let's go have a look and see what is happening to that EPS accretion or dilution.

We can see we've got a reduction, we've got a dilution in the first year of 5.4%.

But then as the synergy start coming through as the targets earnings grow, we are seeing nice accretion.

So from this measure, this deal is looking pretty good, right? We are seeing an uplift in EPS.

Now, something you might wanna calculate and let's do this together, is the additional synergies you need to break even.

We can see dilution in the first year and guys, it's fine.

Normally we know synergies take a while to come through.

So seeing dilution for a few years is fine, but we might want to work out, okay, well what's the extra synergy we need to break even? So I'm gonna take the difference between my standalone EPS and the post deal EPS.

So I can see I'm 0.2 short.

I need to gross that up to get to a total figure, not just a per share figure.

So I'm gonna multiply by the number of shares outstanding.

Now EPS is after tax. I wanna get the synergies pre-tax.

What do I have to earn before tax? So I'm going to divide by 1 minus the tax rate.

And where we're gonna find the tax rate is on our assumptions tab.

If we go to our assumptions tab, okay, I've got the tax rate there of 30%.

So on the assumptions tab I'm in row 43, I'm gonna just lock onto that using F4 because we're gonna copy to the right and we obviously don't want that to move.

So I get a synergy amount that I need to break even 383, right? That's the extra synergy in order to achieve no dilution.

If you copy that to the right, you can see it's actually meaningless, right? I mean we got the negatives coming through here because we have achieved accretion.

You could wrap that in a max function so that you only get a figure there if it is positive, okay? But for now I'm just going to delete that out. Okay? So by this metric we are looking pretty good.

Something that I wanted to go through briefly is this relative PE analysis.

This is a useful sense check.

This is looking at what is the transaction price to earnings ratio.

Let me calculate it for the first year, the transaction price to earnings ratio.

I've gotta go all the way back up to my assumptions tab.

On my assumptions tab.

I wanna look at the offer price I'm paying, I'm paying 128 off a price.

I wanna lock onto that 128 offer price.

I need to convert this into euro.

So I'm gonna multiply by the FX rate and you can see I don't need to lock that because that just says FX, it's a named sell that won't move. So I've got my FX rate, so that's the price I'm paying in Euro transaction price.

And I'm gonna divide that by the earnings per share of the target.

So price earnings of the target.

So I'm gonna go down to the, so target calendar, target tab and I'm gonna go find the EPS and that is coming through in row 36 and we are going to column G.

Okay? Because we are looking from 2017 onwards.

If you do that, you will see that we have got a 29.4 times multiple that we are buying these shares at right price to earnings multiple.

I'm gonna compare that to the acquirer's PE, the buyer's PE.

I'm gonna go back up to the assumptions tab.

Let me get the buyer's share price, don't need to convert, it's already in Euro.

I'm gonna divide that by the buyer's earnings per share.

So I go to the acquirer, I go to their earnings per share in the income statement and I can see that's in row 36.

And we are going to column G because we are looking at 2017.

And let me just fix, sorry, I made a mistake there.

I need to just fix that. Cell reference.

Okay? So I need to fix that cell reference and we get a 19.9 PE ratio.

Now the purpose of this, it's just a high level sense check in terms of whether the deal is expected to be accretive or dilutive.

If there were no synergy and if we were financing it purely with equity, if we were financing this deal purely with equity, it would be dilutive because the currency I'm paying with, which is my shares are valued lower than the transaction price I'm paying.

So it's as if I'm buying something with a weaker currency.

You can think of it that way.

And so if I were to finance this deal purely with equity, it would be dilutive, okay? And I mean you could copy this to the right and see that yes, the PE ratios drop over time. That's what we expect, right? As earnings grow, okay? But the 19.9 compared to the 24, I'm buying something that's higher valued with a currency that's less valuable, that's gonna cause dilution.

Now what about a debt pe? Debt pe, it's a bit of a weird concept to understand a debt PE.

First of all, let's get the after tax cost of debt first.

If I get the after tax cost of debt, I'm gonna go to the assumptions tab.

I'm gonna go to where the cost of debt is interest on acquisition debt that's in row 32.

I'm gonna lock onto that and I want it after tax.

So I'm gonna multiply by one minus the tax rate, And where do we find our tax rate? We have got our tax rate at the bottom here in row 43.

I'm just gonna lock onto that.

And if I just turn that into a percentage, so alt hp, I get three and half percent, that is my after tax cost of debt.

Now I can turn that into a debt PE all you're doing is you're just taking the inverse of that.

So I'm gonna take one divided by that after tax cost of debt, I'm just gonna lock onto that because I might wanna copy this to the right and I get a debt PE of 28.6 times if I copy that to the the right.

So that stays constant, right? The debt pe, it's the after tax cost of debt. It's the inverse of it.

I can see this deal in the short term if I financed it a hundred percent with debt, if there were no synergies, this deal would be dilutive in this first year because 28.6 versus 29.2.

But look in the subsequent years debt PE of 28.6, acquisition PE of 26.1 and you can see that that is gonna be accretive.

Last thing I wanna say on this point, which maybe makes it a bit more intuitive is guys, what if we convert these numbers here into yields, into percentage returns instead of PEs? That makes it a bit more intuitive.

If I wanna convert this into a percentage return, a earnings yield, it's the inverse of the PE.

So all I'm gonna do is I'm gonna take one divided by the PE and that'll give me E over P.

So if I do that and change it into a percentage and I copy that to the right and I copy that down, this analysis might be a bit more intuitive if I just focus on these first two, right? I am currently as the acquirer yielding 5%, 5.3, 5.5, 5.7, and I'm investing in a company where the yield's gonna be 3.4, 3.8, 4.2, and 4.4 based on the price I'm paying.

Can you see how that if I finance this deal purely with equity, that would be dilutive if I now, whoops, wrong here.

If I now remove that highlighting and compare that to if I finance the deal with debt, can you see how this would be accretive? The debt costs me 3.5% but I'm gonna be yielding 3.8. 4.2, 4.4, okay? So this is just a useful sense check for us.

If we look at what is happening, we are financing the majority of this deal with debt, right? If we look in our assumptions, I mean I'm financing this only with 14 of equity and the vast majority is debt.

So because we financing it with debt because of these relative PEs, even ignoring synergies, it makes sense that we are seeing this EPS accretion.

Okay? So that's just to put this in context, do a little bit of a sense check.

So so far so good EPS is looking good, however, that is a bit narrow sighted as we saw in the press release.

It's not just about earnings per share.

Let's go have a look at the debt metrics.

We said we're using a lot of debt to finance this deal.

Let's go have a look at that Just before we get there, this is another interesting thing in the model for me.

Another thing you would look at is percentage ownership after the deal.

Now there's quite a complex looking formula in there, but I'll quickly explain it.

It's good to look at if you are paying with shares what the original acquirer's shareholders would own host deal, right? What percentage would they own of the company after the deal? If I'm issuing equity, now this looks a bit odd because we know we are issuing equity, but I can see Monsanto shareholders are actually getting nothing.

And that is because if we go back to the assumptions tab, this switch that I originally highlighted in row 23, this was done as a secondary issuance of equity.

What that means is buyer issued shares into the market for cash and then gave cash to the Monsanto shareholders.

So post deal Monsanto shareholders did not own any shares in the combined entity.

That is quite unusual.

Normally what we see is a share for share exchange where the acquirer doesn't issue shares for cash and then take the cash and buy the company.

They actually issue the shares directly to the target shareholders in exchange for the shares that they're buying.

So this switch, if you have a look here, if you were to change that from a 1 to a 0, right? And then go back to our analysis tab.

Now you can see the zero would be a share for share exchange after the deal, the acquirer shareholders would own 85%, the target shareholders would own 14%, 14.6.

And that's useful because you wanna see, I mean after the deal is do we maybe lose control or is it maybe that we losing a special resolution power? So if we hold less than 75% of the shares, we can't pass a special resolution.

So that is another bit of analysis you would do.

Okay, I'm just gonna undo what I did.

Turn that back to one just so it's in line with what you're looking at in your solutions if you are following along, okay, let's get going without debt analysis.

To speed things up a little bit, what I've done here with the credit analysis is I've put in the numbers already, proforma capitalization after the deal, what is the total debt? So you can see where that comes from. It's coming from the new company combined company's balance sheet.

We are taking the debt short term, long term we are taking NCI and we are taking book value of equity.

The sum of those three gives us the total capitalization at book value.

Bear in mind, we are looking at credit statistics.

When we are looking at credit, we generally work with book value because we are looking at worst case downside.

And if something goes wrong in the company, if the company worst case goes bankrupt, equity's not gonna be worth what the market value of equity is worth today, right? So we generally work with book values.

We've also got cash and cash equivalents if we wanna look at any net debt statistics.

So let's do a couple of ratios. We've got total debt to EBITDA.

So total debt, I'm taking my total debt figure and I'm dividing that by the EBITDA.

We are looking at the NewCo EBITDA.

So I've gotta come into the NewCo, find where EBITDA is gonna be for the NewCo that's in row 19.

I'm going to column G, I'm looking 2017.

They did put historic info in, but we are looking at a deal date at the beginning of, oh, end of 2016.

So there is my EBITDA for the first year debt to EBITDA.

Then let's do EBITDA to interest expense.

So interest coverage ratio, going back to NewCo post deal, I've got my EBITDA in G19, I wanna compare that to the interest expense.

And if we go down to the interest line, I've got that there in row 29.

Now this is net interest.

Ideally we would just want interest expense, right? We don't wanna include any interest income in there, okay? But this company doesn't have interest income initially anyway, so it doesn't really make a difference that comes through as a negative, which looks a bit weird.

I'm just gonna change that to a positive because my interest was negative.

So we've got coverage.

Their total debt to total capitalization, total debt I can see is 58,962 out of the total capital in this combined entity that is about 60%.

So north 0.6 60%.

And then finally another credit statistic is funds from operations to debt.

Now there's different definitions of this, okay? So also different rating agencies do things slightly differently.

The definition we've used here, it's like a cash net income figure.

So what we've done is we've taken, if we go to NewCo, I go to the cashflow statement and I take the net income for 2017 and I'm gonna add back the D&A.

So add back depreciation and amortization.

So that's gonna be my funds from operations, okay? And then I just need to wrap that in brackets. Whoops.

And this computer is now shouting at me by giving me error messages.

Okay? So I wrap that in brackets because I want funds from operations to debt and I get a ratio of 14.8%.

Okay? So obviously the higher the better for that ratio, more funds from operations to debt is good.

Now, in and of itself guys, I can straightaway look at this and say who 4.3 seems a lot, right? If you are an investment grade company and you wanna maintain an investment grade rating, yes, it depends on your industry, the stability of the cash flows, et cetera.

But 4.3 feels very high, okay? Probably more around two and a half, maybe three and a half if you're doing an acquisition.

But you would, if you're gonna have high leverage, you've gotta convince the rating agencies that you are gonna be de-leveraging and paying that down.

And that's what we saw in that tapestry announcement, right? So if I copy this to the right, let's see how this evolves.

It's getting better, right? So that debt to EBITDA, it's improving, it's coming down EBITDA to interest expense, the coverage is okay and probably not as important as the debt to EBITDA.

I can see total debt to total capitalization.

That's pretty high, right? If more than half of my funding on a book value basis is coming from debt, that's a lot.

And then I can see, yes, everything is improving.

But to me this would make I think bond holders be uncomfortable.

And especially to put it into context, I've already pre-populated this data for you to save some time.

You've gotta look at what the acquirer's position was before the acquisition because if there's a super big jump, that's where we are gonna be a bit more worried.

So I mean total debt to EBITDA was one and a half times we're going all the way up to 4.3 times, okay? So it's not just about making your shareholders happy.

Oh we've got great EPS secretion.

This seems a bit highly leveraged.

So what we would have to do if we just play around a little bit, if we go back to the assumptions tab, we would say, okay, well equity financing of 19, the debt portion in row 30 we can see is the balancing figure, right? Effectively. So if I take that equity and I change that equity to say, I don't know, 40, let's just see what that does, we can see the debt is coming down.

So the debt portion of the financing is coming down.

Let's go back to our analysis.

I can see from a credit perspective those ratios are looking a lot better, right? 2.8 times leverage, okay? So that does come at the expense though of some EPS secretion.

If we go back up to our EPS secretion, we can see compared to previously, we now dilutive in years one and two and more dilutive and the accretion is slightly less.

But you can't just focus on EPS accretion making shareholders happy because you cannot make your debt providers unhappy.

Okay? So there is this push and pull between not just looking at one metric, evaluating things from a holistic perspective, okay? I'm just gonna undo that change just to put things back to how the solution is if you are following on in along in the solution.

Okay, so summing up on this analysis page, EPS accretion looking good.

We can see here you could do a little bit more analysis even I don't have time for this in the session, but if you go to the side by side analysis tab, what also helps put the EPS accretion dilution into context is to look at the quality of the two companies earnings.

So we can see buyers got lower growth than Monsanto, they've also got lower margins than Monsanto.

That will help explain why maybe Monsanto's at a higher multiple.

Okay? So you could have a look at that side by side analysis as well.

So to sum up here, EPS accretion looking good, okay? But the debt ratios look a bit high. Okay? Any questions? Please put them in the chat.

Well not the chats, I don't think you have access to the chat.

Okay? But the Q&A pod, definitely the questions can come through there.

Okay, let's have a look now.

Next tab, synergy analysis.

So we've talked about accretion, dilution, we've talked about credit metrics.

Let's have a look at synergy analysis to speed things up. Again, I have already copied a bunch of information in here.

So on the calcs tab we worked out what the revenue synergies we're expected to be.

And you can see here it's pulling through from the calcs tab.

What cost synergies are expected to be CapEx synergies.

That is where if there's overlap in your processes, you potentially don't need to spend as much on CapEx because I can use existing machinery that I've got, I've maybe got some excess capacity.

So we've got some CapEx savings.

If we are spending less on CapEx, we also gonna have less depreciation.

So that's why we've got CapEx synergies and reduction in depreciation.

I don't get synergies just by magic.

I have to undergo things like restructurings. It's gonna cost me a bit of money to do that.

So we've got restructuring costs coming in and then we have got our total synergies, we've then got the tax impact of the synergies.

And you can see we've just excluded CapEx because CapEx is not an income statement item, right item. So CapEx we've taken out to work out the tax impact.

Now this is just to get our synergies and you can see it takes us a few years to build up to the full run rate, which is realistic. We don't just achieve 100% synergies in year one.

And you can also see once those synergies are achieved, we don't have the restructuring costs anymore in year four.

So what we need to do is we need to actually do a net present value of this.

So to work out the free cash flow impact, I'm gonna discount the future cash flows.

I just gotta go pull the numbers from above.

So I've got my revenue synergies, revenue synergies, I'm gonna go pick up the cost synergies as well.

I'm gonna pick up the CapEx synergies.

Now this is a little bit of a tricky one to get your head around.

So to think of these depreciation, okay? Or to think of the depreciation.

I've said to you here, this is a good thing from a profit perspective because we're gonna have less depreciation, right? If I've got less CapEx, less depreciation, my profit is gonna look better.

But think of how you do your cashflow statement.

You start your cashflow statement by adding back D&A, if I have less D&A, that means I'm gonna be adding back less D&A, which is not good for cashflow.

So I'm just reversing out that 15 reduction in depreciation, okay? So that if you think of how your cashflow statement would be, instead of adding back a hundred of depreciation, I'm now only adding back 85 of depreciation.

So that's why that comes through as a negative.

We've then got our restructuring costs and we've got the tax impact of all of that.

So just pulling from above, we've then got the delta in cash flow.

So delta fancy word for saying change in cashflow.

So this is my change in cashflow as a result of the synergies.

And from here on it's just our discounted cashflow calculation to get a present value.

So I'm gonna copy all of that to the right and then being a little bit, I don't wanna say lazy, okay, but being a bit not discounting each year individually, which is normally we like to see each year individually discounted.

We are just gonna do one NPV calc before we get there. We've gotta do our terminal value.

So we've got a discount rate for these synergies.

We've got a long-term growth rate.

Let's do our terminal value calculation.

So terminal value cashflow times one plus the growth rate divided by the WACC minus the growth rate, that is the terminal value of those synergies into the future.

And now we've gotta do our discounting.

So to get this back to the present value, this is where I'm being a little bit cheeky just doing an equals NPV taking my discount rate, taking those future cash flows and I get the NPV of those cash flows.

So it's just those cash flows over there.

And then I also need to include the synergistic or the terminal value of the synergies.

I've gotta discount that I'm gonna divide by one plus my discount rate to the power of four because that's four years into the future.

So the total value of my synergies is 15,207.8.

Now by itself, that doesn't mean very much.

What I need to do now is I need to compare this to the control premium.

I pay a premium above the share price to acquire control of the target.

And part of me doing that is so I can extract the synergies. If I've got control, I can extract the synergies.

So let me see what that control premium is that I've paid.

So if I work that out, I'm gonna go, I'm working in Euro, right? So let me go back to my assumptions page and in my assumptions page I'm gonna take the difference in share price of the target.

The offer price is 128, the share price before the deal is 89.

So that's the premium per share.

Let me multiply that by the number of shares we are buying and then I'm gonna put that into euro.

There's my exchange rate.

So it's the difference in share price.

So the premium per share times the number of shares times that FX rate and that is the premium I am paying.

And this does not look good because I am paying 16,485 and the synergistic benefits I expect to realize are only valued and I should do the other way round 'cause it should be a negative at 15,207.

So I have destroyed value of 1,277.

So by this metric not looking great.

However, what happens if the value of the target was too low to begin with? If I go back to look at that share price of 89, what happens happens if that share price of 89 was actually very undervalued, this is a strong company, strong growth, good profit margins, et cetera.

So if you could justify and say, look, yes we are paying a high premium, but actually that share price was very low.

So that's why we are paying such a high premium.

It's a very good company and it was undervalued that then might explain this, okay? But generally speaking it's not great to see the premium you pay be more than the expected value of the synergistic benefits.

Okay? So that is another element to our analysis.

Okay? I am conscious of the time, we've got just under 10 or over 10 minutes left.

Let's see if we can do this calculation.

I've already got some numbers here for roic.

Our last metric.

So for roic return on invested capital, I've got just a slide very quickly showing um, the heroic formula here to remind those of you that are maybe not that familiar with roic.

If we look on the left hand side first generic definition of ROIC is the net operating profit after tax.

So operating profit relative to the capital that's generating that operating profit.

So that's your invested capital, right? So that's your debt plus equity minus any cash or financial investments that's not actually employed in generating that operating profit.

So that is normal roic.

We can calculate ROIC in an M&A context by looking at what the nopaT of the target is plus synergies and we've gotta work after tax, so synergies after tax and then we compare that to the trans action invested capital.

So transaction invested capital, I'm not taking the book value of the equity plus the debt et cetera of the target I'm taking, what I actually pay for the target plus the debt et cetera.

Okay? And you also normally include transaction costs in that as well.

And then you compare that return you're generating or expect it to generate with the WACC of the target.

And we would like to see heroic in excess of that wack because remember a WACC is a required rate of return.

So let's use this definition, nopat of the target plus synergies over transaction invested capital.

I've already got some completed for us in the interest of time.

So targets EBIT, okay? So that is coming through, you can see from the targets euro calendarized page.

Then I'm including synergies excluding CapEx because CapEx synergies don't affect my income statement directly.

Then I have got Monsanto, proforma EBIT.

So the targets EBIT plus the synergies.

I then work out tax on both of those things.

I've got tax on the EBIT, tax on the synergies and I now get noad for the target, right? So that is my numerator nopat.

I've then gotta do the last part of this calculation, which is invested capital, invested capital we said is the transaction invested capital.

So market value of equity I'm paying plus debt plus NCI, et cetera, et cetera minus cash and the fees.

Now I'm gonna take a bit of a shortcut here because if you go to the assumptions page, on the assumptions page, we have got here under our uses of funds, we've effectively got what we are investing, right? I've got the equity at market value, I've got the target debt that's being refinanced, I've got all of the fees in here.

What I do just need to add on is there is some NCI sitting there.

So I would go to the targets page and just add on the targets NCI.

So if I find where's the targets NCI, so targets NCII would add on and that would give me invested capital Of 61,377.8.

So that is transaction invested capital.

I then have to recognize that over time more capital needs to be invested in the business, right? I mean if your business is growing you are going to have to invest in PP&E.

You're going to have to invest in working capital for example.

So we then need to make some adjustments to that beginning invested capital.

And so let's have a look what capital expenditure I would put into the business.

This is extra investment in the business.

So if I go I need to, you'll see that note says don't forget about the CapEx synergies.

So here we are gonna go to the calendar targets page.

I'm gonna go all the way down where I've got some cash flow information and my CapEx is there in row 98, I'm looking to 2017.

So I need to be in column G.

So I'm gonna go pick up that CapEx that I would spend, but I've gotta adjust it or the CapEx synergy.

I am not going to be be spending 150 of that because of synergies 150 is not going to be spent.

So that gives me 761.7.

D&A though is a reduction of capital invested, right? Because that's now assets that have been used. Okay? So DNA reduces the capital invested.

And so I'm gonna go pick up the D&A, okay from the calendar target and I always get my signs a little bit mixed up here.

So let's just go have a look. I've got my calendar target D&A, if I go to the calendar version, where's my D&A? That's gonna come from the income statement 2017.

So depreciation and amortization, depreciation and amortization.

And then don't forget about that D&A that you are going to be saving because you're not having so much CapEx anymore.

So I've gotta come back to my value creation sheet and I'm just gonna subtract off that 15 D&A that I'm not going to be spending anymore.

And that gives me 717.6.

Finally, what about my change in working capital and other operating assets and liabilities? And I feel like guys, no wonder I this has been a long no it's right.

I thought I'm in my eyes are going weird, I thought I'm in the wrong row.

Okay, four minutes to go, things are all falling apart.

Okay? But let's keep focused.

Change in working capital, other long-term assets, other long-term liabilities.

This requires investment and this comes from the target.

So the target, I'm gonna come and look at the cash flow information at the bottom and I'm gonna take the sum of, there we go, the change in inventory column G, I'm looking 2017, inventory accounts, receivables provisions, et cetera.

I'm not gonna look at deferred taxes or pensions, okay? I'm thinking what I would need to invest in this business so that I'm gonna just pick up the other long-term liabilities as well.

And that is gonna get me to 57.7.

Now I need to change the sign of that because even though that's a cash outflow from the business's perspective, that is more money being invested, right? Working capital goes up, more money being invested in the business.

And so to finish this off, I've got my ending invested capital of 61 or 79.6.

I can copy that all to the right. Okay.

And now we can finally do our ROIC calculation and come to a conclusion.

So just to sum up this little bit guys, that is the transaction invested capital, but then that doesn't just remain static as the business grows, I'm gonna have to reinvest in the business in CapEx minus depreciation.

The net is the net reinvestment and then any growth in my operating working capital and operating assets and liabilities, that increases the investment.

That's stuff that's generating noad, right? So that's why we did this calculation.

Now I can do the actual ROIC calculation, which is taking the nopat divided by the assets that are generating that nopat.

And here we've used ending balances.

But you could also use average balance of nopat of of invested capital or opening balance of invested capital as long as you are consistent, right? That's the key. We've used ending balances and if we copy that to the right, we can see we go from 3.5%, it improves up to 6%.

But guys, that's still not good because if I look 3.5 compared to the seven required rate of return, that is not looking very good, right? So even though it improves, we are not quite there by the end of the year.

So we would need to look at things like could we potentially pay less for this company? Could we potentially extract more synergies? We would have to reevaluate.

So to sum up, we started the session by looking at a real announcement, the stuff that was mentioned, EPS, accretion, dilution, looking at Reddit statistics, looking at synergies or talking about synergies and then also talking about roic.

If we come back to this deal that we've been looking at from an EPS accretion dilution perspective looking good, but you can't just focus on EPS accretion or dilution.

We need to go have a look at what is happening from the credit perspective here.

Credit stats look a bit high if you wanna maintain an investment grade rating.

So we would need to look at the structuring of this deal and bring down the debt that we are using.

If we then look at the value creation tab, we can also see from a synergy perspective the present value of the expected synergies is less than the premium we are paying unless the target was really undervalued.

That's gonna be hard to convince shareholders on, right? That we just destroying this value.

And then finally return on invested capital also not looking great.

Okay? So we've got low ROIC than our required rate of return.

So going back, looking at maybe trying to find more synergies, structuring of the deal and looking at the price that you are paying.

Okay? So hopefully you have found that useful. Thank you very much for joining.

I will stick around now for a few minutes if anyone does have any questions.

Otherwise please do get in touch after the fact. If you do have questions, you know on Felix, you've got your ask your instructor.

Okay? So please do get in touch and also join us next week.

It's not me, but it is a very exciting session.

I couldn't deliver that session because it's on AI. So AI.

So please do join us for that.

Thanks very much and enjoy the rest of your day and your weekends.