Tican’s enterprise value is calculated through the discounted cash flow model below. The two-stage model is based on a five year explicit forecasting period and a terminal period cap-turing the going-concern value (Sørensen, 2012, p. 32). The FCFF is calculated using the formula provided by Plenborg (Petersen & Plenborg, 2012, p. 179):

FCFF = NOPAT + Depreciation ± ∆NWC ± ∆CAPEX

The enterprise value is derived through discounting of the FCFF in the forecasting period and the terminal period using a steady-state assumption and Gordon’s growth model with an as-sumed terminal growth of 2%. This rate is consistent with the average terminal growth of Danish Crown’s affiliates (Danish Crown, 2014a) and the theoretical prospect of 2% from Sørensen (Sørensen, 2012). The WACC of Danish Crown of 6.40% is applied in the two-stage DCF listed below:

Enterprise value = ∑ FCFF_{t}

(1 + WACC)^{t}+ FCFF_{n+1}
WACC − g

n

t=1

∗ 1

(1 + WACC)^{n}

Page 66 of 131
*Table 9-6: DCF stand-alone Tican (DC perspective), Own creation *

Terminal growth rate 2.00% WACC 6.40%

Tican (DKK mio) 2014/15 2015/16 2016/17 2017/18 2018/19 2020 (T)

FCFF 134.6 89.4 89.0 99.4 92.0 101.1

Discount Factor 0.94 0.88 0.83 0.78 0.73

Present value of FCFF 126.5 79.0 73.9 77.6 67.5 1,684.6

**Estimated market value of enterprise 2,109.0 **

Net interest bearing debt (NIBD) 662.1

**Estimated market value of equity ** **1,446.9 **

Cooperative members of Tican 277

**Market value per member ** **5.2 **

Thus, the estimated the enterprise value of Tican, assuming the perspective of Danish Crown, is estimated at 2,109 mDKK. The market value of equity is then derived by subtracting the net-interest-bearing debt of 662.1 mDKK from the enterprise value resulting in a market value of equity of 1,446.9 mDKK. (Petersen & Plenborg, 2012, p. 216). The estimated market value is not to be confused with a fair market value of Tican, as this was derived using the WACC of Danish Crown which is significantly lower than Tican’s WACC.

Tican’s cooperative society has a total of 277 cooperative members, which are assumed to hold 1 share each in the company based on the Articles of Association of Tican stating that 1 member has 1 right to deliver pork, and thus receive dividends based on the size of the deliv-ery. The average member has a delivery of 6,863 pigs and thus 1 share in Tican equals either 6,863 pigs or 1 cooperative member (Tican, 2014a). Based on this assumption the authors can estimate the average market value of the cooperative’s delivery rights at 5.2 mDKK, although this may vary from member to member depending on his actual patronage.

The conclusion above is biased as it bases the market value per cooperative member in Tican, but the WACC on Danish Crown. Applying the WACC of Tican estimated at 9.38% the en-terprise value equals 1,268.6 mDKK with a corresponding market value of equity of 606.5 mDKK equivalent to a market-to-book ratio of 1.04. The more conservative (and precise) estimate on market value per member in Tican is found to be only 2.2 mDKK. The exact im-pact on each cooperative member is argued in detail in section 11.

Page 67 of 131
**9.4 ** **Relative valuation of Tican using multiples **

The valuation chapter also include a relative valuation based on peers to check to the value estimated through the DCF above. The peer group is introduced in section 7.1 and may differ substantially from Tican in terms of size. The peer group was chosen due to available public data that allows easy extraction of market based multiples and did not require the authors to reformulate five years of annual reports for five different companies.

An issue with the multiple analysis is that Tican, being a cooperative, does not have an under-lying share price and is thus unable to be benchmarked with the price multiples such as Price/Earnings, Price/Book, Earnings per share etc. (Petersen & Plenborg, 2012, p. 210). This limits the multiple analysis to the use of enterprise multiples.

The following table shows that the enterprise value of Tican, applying the 6.40% WACC of Danish Crown, is consistent with the fair market value indication of the peer group with a deviation of only -0.53%. In contrast, the enterprise value with the 9.38% WACC of Tican of 1,269 mDKK is a 40% undervaluation compared to the market indication. Tican is especially undervalued in terms of gross profit and revenue multiples, which indicates that Tican is like-ly facing lower margins and more operational costs relative to its peers which is supported by the peer group analysis in the financial section of this thesis. Furthermore, the table portrays that Tican, assuming the WACC of 9.38%, is actually overvalued in terms of net income and EBITDA indicating that Tican is performing well on their top-line, but are unable to generate significant value during their value chain.

*Table 9-7: Multiples analysis on Tican based on (Bloomberg Terminal, 2016) *

Multiple summary Peer average multiple Tican implied EV

EV/Cash flow 9.3 1,404

EV/Net income 22.4 1,113

EV/Gross profit 4.9 3,038

EV/EBITDA 6.0 1,035

EV/Revenue 0.8 4,011

**Average peer implied EV ** *Deviation * **2,120 **

Tican EV at 9.38% WACC *-40.17% * 1,269

Tican EV at 6.40% WACC *-0.53% * 2,109

Page 68 of 131
**9.5 ** **Sensitivity analysis, Tican **

The estimation of the stand-alone value of Tican above is based on a number of assumptions through various sources as well as subjective estimations based on comprehensive analysis. In order to obtain a more nuanced estimate and account for the uncertainty in key assumptions, a sensitivity analysis is carried out to determine the robustness of results towards variations in critical input. While there are a lot of assumptions that should warrant caution, the WACC and terminal growth are chosen to be most impactful. In the following section analysis on the business case, the criticisms on the chosen inputs are expanded and will be combined with a scenario analysis.

The sensitivity on WACC is analysed given that the applied WACC of 6.40% has not been directly calculated, but rather extracted from the annual report of Danish Crown 2013/14 and given the large impact of the WACC on the enterprise value. Furthermore, the WACC of 9.38% has been included in the analysis. Another critical assumption is the steady-state ter-minal growth rate, assumed to be 2% in the section above. Terter-minal growth has a large im-pact in the DCF model, when discounting the terminal period using the Gordon’s growth for-mula and a going-concern assumption. The table below shows enterprise value of Tican with different combinations of WACC and terminal growth.

*Table 9-8: Sensitivity analysis - WACC on terminal growth, Tican *

The shaded values highlight the most likely outcomes, with WACC in the range of 6% to 6.8% and a terminal growth of 1.75% to 2.25%. This provides an enterprise value in the range of 1,861 mDKK to 2,443 mDKK corresponding to -12% and 16% from the base case, respec-tively. The results are quite stable but confirm that WACC and terminal growth have a large impact.

Page 69 of 131 One of the major differences between Danish Crown and Tican is their current margins, espe-cially in terms of EBITDA. The difference is driven largely by the current level of production cost where Tican’s current level of 88.0% of revenue is significantly higher than Danish Crown’s 85.1%. The stand-alone valuation assumed that Tican was able to reduce their pro-duction cost to their historical level of 87.20%. The following analysis will determine the im-pact on the enterprise value if the production cost does not converge towards the historical average. The sensitivity below assumes percentage changes above and below the 87.20% that production cost is assumed to converge against.

*Table 9-9: Sensitivity analysis - WACC on production cost, Tican *

Table 9-9 above shows that a change of +/− 0.50% in production costs as % of revenue per year, without adjusting the underlying WACC assumption, results in enterprise values ranging from 1,614 mDKK to 2,604 mDKK, corresponding to a change of +/− 23.47%. Less ex-treme results are highlighted with grey, albeit also portraying significant variations in enter-prise value. If Tican does not manage to decrease their current level of production cost from 88% to the assumed 87.2% (i.e. a percentage change of 0.8%), the value would decrease by 38% to 1,318 mDKK.

The estimated enterprise value of Tican is thus estimated at 2,109 mDKK in the base case, however, is highly sensitive towards variations in terminal growth and the discount factor, with an expected deviation of enterprise in the range of 1,861 mDKK to 2,443 mDKK. More-over, the results are highly sensitive towards changes in the operational margins as reflected in a range of 1,711 mDKK to 2,592 mDKK. As such, the estimation of the proposed merger is highly dependent on the underlying assumptions regarding the outlook of Tican’s operating margins during, and after the merger.

Page 70 of 131

**10 Danish Crown stand-alone valuation **

The estimation of Danish Crown’s enterprise value and underlying market value of equity follow the same procedure as the valuation of Tican above. The authors are indirectly inter-ested in the enterprise value of Danish Crown as it allow the authors to determine the value of the synergies between Danish crown and Tican as the residual between the analysed business case and the sum of the stand-alone entities.

**10.1 Forecasting the free cash flows **