i 'm trying to solve this case (attached below) this is the 3rd time to revise the question!!! i'm not able to copy paste tables or images so and i keep getting the same response (as submitting tutor's work as my own jQuery224023311704971394787_1581402293550??)
revise the question!!! i'm not able to copy paste tables or images so and i keep getting the same response (as submitting tutor's work as my own jQuery224023311704971394787_1581402293550??)
its Please review the case below and advise what are the steps to follow in order to solve the case, i don't need a solution in number but i just would like to understand the steps to solve it then i can work on it?
It is November 2019 and Won Feng is worried about the task he was carrying out. He worked for an
outstanding Private Bank in China as advisor of CCG, one of the biggest Chinese construction companies. His
Client had been looking for a western medium size construction company for executing an acquisition that
allows CCG to grow in European and Latin-American markets, and, as second stage, enter in Anglo-Saxon
CCG tried to acquire a listed European or Canadian company in the past, but they couldn´t get clearance from
competency authorities. Hence, CCG thought that the bought of a medium size, non-listed company shouldn´t
be stopped by competency matters.
After a thorough search, they had found SCC, a Spanish Construction Company with a solid presence in
México, Spain and Poland and starting up in other markets such us Finland, Hungary, Check Republic, and
2019 - Revenues - EBITDA
Spain - 32.0% - 35.0%
México - 53.0% - 61.0%
Poland - 10.0% - 2.0%
Others - 5.0% - 2.0%
SCC debt was mainly formed by a long-term bond. This bond was issued in Europe, and therefore, its interests
were paid and deductible in Europe. On the other hand, the most of SCC´s earnings came from Mexico, and
tax shield from interests couldn´t be assigned to Mexican earnings.
CCG had tried to win public contracts in the countries where SCC was already working and they didn´t success,
probably because of the cultural differences, so they thought SCC could be a great opportunity.
The stand-alone scenario
Won had been working with the advisors of SCC, another important Private Bank, checking the financial
statements of SCC and he thought that a reasonable forecast of CF for the next years could be those shown in
His assumptions for SCC´s stand-alone scenario had been:
- 2019 seemed to be an especially bad year and the EBITDA margin had been very low (4% vs more
than 6% in past years). Nevertheless, he thought that the company would still have a low margin
during 2020, due to the slowdown of Mexican and Spanish economy (both with political periods of
uncertainty), with few public tenders, and high level of competency.
- Construction companies usually creates working capital when they increase their revenues. It is true
that it depends of the kind of contracts, i.e. contracts in Mexico have an advance payment of around
15-20%; on the other hand, other kind of contracts reduce working capital. Anyway, Won felt that a
value of 10% of revenues increase for calculating working capital changes wasn´t that aggressive.
Besides, he decided to start with more conservative percentages for the first few years.
- Main part of financial result were due interests of a long-term bond. Won assumed the bond would
be reissued, and the financial costs would not vary.
Won worked hardly with CCG to build a forecast of SCC as a subsidiary of CCG. As CCG wanted to close the
deal before the end if the year, they decide to delay the study of a better capital structure for SCC.
Furthermore, CCG wanted SCC to continue working as an independent company, so they only projected an
strong increase in revenues due to the jointly participation of SCC and CCG in public contracts. Those joint ventures or consortia would allow SCC to have a stake in bigger contracts (and increase its revenues), and CCG
to use SCC local management teams as salesforce. They also expected to make SCC to reach to a better margin.
There were few competitors for big construction projects, and therefore, they concur in the fact of projecting
an expected margin similar to the historic margin of SCC.
The acquisition scenario is shown in Exhibit 2.
Spanish listed construction companies were important players in world´s stage. They were present in many
markets including the ones where SCC were present, but they had also a strong presence in other markets
such us U.S., UK or other EU countries. Additionally, the Spanish companies were diversified in construction,
services, concessions and RE activities.
Wong also made an analysis of Mexican Peers, those peers were almost totally local, and therefore, their
entire revenues came of activities in México. Listed Mexican companies got a high percentage of their
revenues from infrastructure concessions and construction.
Additionally, Wong gathered information about Chinese construction groups. All the information about
construction players is shown in Exhibit 3. All the data are referenced to the local market of each company.
Won gathered the main data of Spanish, Polish, Mexican and Chinese markets and economies, including credit
rates, CDS, MRP, inflation rates and government bonds yields (Exhibit 4).
Country - Moodys - S&P - Fitch - 10-Yr-Bond Yield - Inflat. rate FC2019 - MRP - CDS 5yr1
Spain - Baa1 - A A- 0.38% 1.10% 8.0% 41.70
Poland - A2 A- A- 2.07% 1.80% 9.2% 75.52
Mexico A3 BBB+ BBB 6.92% 3.00% 9.7% 54.10
China A1 A+ A+ 3.19% 3.20% 8.8% 33.07
Additionally, all the analysts' projections for inflation rates concurred in a stable 1% inflation rate for Spain
and 3% for México within the next 5 years. The spot exchange rate at the end of November 2019 was 1 € =
Wong knew he had all the data necessary to find out the valuation of SCC. However, he saw that, depending
on the way he performed the valuation, the result could vary very much.
He wonder if it would be better to spilt CFs of SCC in two, one part for Mexico, and other for Spain, Poland
and the rest of the countries and make a separate valuation for each part, adding the net present value of
both parts. If so, Wong should calculate one discount rate for Mexican CF and other different discount rate
for the rest of the countries.
On the other hand, Wong wondered if discounting consolidated CFs using a discount rate based on Spanish
peers' data would be accurate enough.
In any case, Wong would had to perform an interactive process, assuming an initial E/V ratio, and, after making
the initial valuation, make the adjustments.
Objectives and questions
Main objective/question #1: Stand-alone valuation of SCC´s Enterprise Value in €.
Main objective/question #2: Enterprise value of SCC in € if it were acquired by CCG.
Main objective/question #3: Would you advise CCG to submit an initial offer close to stand-alone scenario
valuation or to the one with synergies? Why?
Main objective/question #4: What issues would you ask CCG advisors to check during the DD taking in account
the information of the case and the activity that SCC performs?
Main objective/question #5: Being CCG a Chinese company, Should CCG´s advisors make any additional
analysis once the get the values of questions #1 and #2?
Intermediate questions that should be answered to solve the case
1. Do you think is it necessary to split the CF projections between Mexico and the other Countries?
2. If you think so, please develop the CF for both parts of the company.
3. What discount rate would you use for discount the cash flows?
a. If you think that CF shouldn´t be split:
i. What initial assumption of E/V would you use and why?
ii. Calculate b and ERe, explaining what values for RF and MRP you used
iii. Calculate TV, making a reasonable assumption of the perpetual growth rate
b. If you think that It is needed to make a separate valuation of Mexican CF and CF of the rest
of the markets, please:
i. What initial assumption of E/V would you use and why?
ii. For Mexico, calculate b and ERe, explaining which values for RF and MRP you used
iii. For the rest of the markets, calculate b and ERe, explaining what values for RF and
MRP you used
iv. Calculate TV for both parts of SCC, making a reasonable assumption of the
perpetual growth rates.
4. What do you think about the results of stand-alone scenario in comparison with EV/EBITDA multiple
of peers and market?
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