Many perceive the DCF analysis as the best approach when valuing firms, projects, divisions etc. (Koller, Goedhart,
& Wessels, Valuation, Measuring and managing the value of companies, 2010, p. 303). The model is solely dependent on its inputs. This makes it highly flexible and allows for great accuracy, but it also may lead to subjective bias, one of its main points of critique. The model discounts a firm’s free cash flow to either estimate enterprise- or equity- value. This paper applies an enterprise value approach. The free cash flows to the firm (FCFF) are discounted by the WACC and the sum of all present value FCFF give an estimate for enterprise value. The valuation of the terminal period has however been valued using both an EV/EBITDA multiple and a Gordons growth approach. The rationale is that forecasting likely becomes prone to more error in the long term, and the risk of your forecast could increasingly deviate from market fundamentals, using a multiple in the terminal period may adjust for such bias. The DCF analysis has been complemented with an economic value added model (EVA), which can be seen in appendix 29. This model primarily operates as a sanity check as it should yield identical results as the DCF analysis, if performed correctly.
Eq. 16. 𝑬𝒏𝒕𝒆𝒓𝒑𝒓𝒊𝒔𝒆 𝒗𝒂𝒍𝒖𝒆𝟎= ∑ 𝑭𝑪𝑭𝑭𝒕
(𝟏+𝑾𝑨𝑪𝑪)𝒕+ 𝑭𝑪𝑭𝑭𝒏+𝟏
𝑾𝑨𝑨𝑪𝑪−𝒈∗ 𝟏
(𝟏+𝑾𝑨𝑪𝑪)𝒏 𝒏𝒕=𝟏
Eq. 17. 𝑬𝒏𝒕𝒆𝒓𝒑𝒓𝒊𝒔𝒆 𝒗𝒂𝒍𝒖𝒆𝟎= ∑ (𝟏+𝑾𝑨𝑪𝑪)𝑭𝑪𝑭𝑭𝒕 𝒕+ ( 𝑬𝑽
𝑬𝑩𝑰𝑻𝑫𝑨𝒎𝒖𝒍𝒕𝒊𝒑𝒍𝒆) ∗ 𝑬𝑩𝑰𝑻𝑫𝑨𝒏+𝟏∗(𝟏+𝑾𝑨𝑪𝑪)𝟏 𝒏
𝒏𝒕=𝟏
The result of the above formulas yields an estimate for enterprise value, which deducted for net interest bearing debt (NIBD), yields the estimate for market value of equity. The authors find the multiple-approach more appropriate in the case of Campbell because setting a terminal forecast is extremely difficult. It would represent a strong majority of the valuation, but also be prone to the most uncertainty. The terminal period puts almost all inputs into question as you are basically trying to set an average for infinity regarding Campbell’s performance. It is for example, extremely difficult to assess whether Campbell will be able to operate with its current cost margins in perpetuity. Using an EV/EBITDA approach is perceived as more tangible because it makes use of a market valuation and performance relationship, the relationship is not without uncertainty but you can rely on empirical findings from both Campbell’s historical range as well as that of comparable firms, something that reduces the risk of large deviations in the valuation of the terminal period.
The FCFF is expected to increase as a consequence of sales growth, which is also expected to grow at a faster pace than costs. The change in net working capital is also expected to have a positive effect as the authors expect Campbell to return to previous levels of negative net working capital, this is due to the expectations of a recovering economy and Campbell’s strong bargaining power with its suppliers.
93 Table 7. Forecasted Cash Flow Statement
2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E NOPAT (+) 884 940 1.035 1.098 1.169 1.241 1.314 1.389 1.465 1.503
D&A (+) 323 336 347 360 369 377 385 392 398 409
NWC (-) - 71 - 50 - 96 - 104 - 16 - 15 - 15 - 15 - 13 - 14
CAPEX (-) 512 537 474 514 531 520 516 518 504 598
FCFF 766 789 1.004 1.048 1.024 1.113 1.197 1.278 1.372 1.327
NIBD (+) 307 121 25 40 117 102 93 89 74 141
Net Financial Expenses (-) 142 146 147 148 151 154 157 160 162 166
Tax Shield (+) 43 44 44 44 45 46 47 48 49 50
FCFE 974 808 926 985 1.034 1.107 1.181 1.255 1.333 1.351 Dividends - 974 - 808 - 926 - 985 - 1.034 - 1.107 - 1.181 - 1.255 - 1.333 - 1.351
Cash Surplus - - - -
Source: Authors own compilation
Using the WACC of 4.6% as found in section 8.1.6., and a terminal EV/EBITDA value of 10x the authors find that the base case scenario implies an enterprise value of around $25.5 billion, deducting the NIBD of $4.7 billion shows a market value of equity around $20.7 billion, this is around 3% above the current market pricing. However, the terminal multiple is set conservatively, and using the current multiple would yield an estimate that is ~35%
higher. Comparatively, utilizing the Gordons growth approach to the terminal value yields an even higher valuation, the implied EV/EBITDA is around 19x, which is close to the current level, but expecting such a high multiple in perpetuity is deemed unrealistic as it represents the upper quartile of the historical range.
8.2.1 EV/EBITDA multiples
The food industry currently holds an EV/EBITDA multiple of 14.93x (Damodaran, New York University, 2016). Since 2001 Campbell has experienced being valued between 8x and 15x, a large spread with the average being just short of 10x. Their closing share price from the 10th of May implies an equity value of $20.2 billion, with the projected NIBD and EBITDA for 2016, which accounting year ends in august, the implied EV/EBITDA close to 15.8x. This is somewhat higher than the industry average found by Damodaran. It is also in the high end when comparing to the last 15-years. The implication is simply that Campbell on multiples appears to be priced at par or slightly above compared to the industry mean. A valuation above
Source: Authors own compilation
Figure 35. EV/EBITDA Multiples
Latest 15Y average
0x 5x 10x 15x 20x 25x
Kellogg General
Mills ConAgra Smuckers Peer
Average Campbell
5Y average
94 average could be explained by the strong historic performance in cost management and its recent success in further improving margins, which are among the best in this industry. An EV/EBITDA multiple must be seen in regards to a firm’s performance, a very high multiple may just be temporary as the multiple is linked to both share price- and EBITDA volatility. The industry top firms in regards to EV/EBITDA are Kellogg and ConAgra, these firms have seen reduced EBITDA. ConAgra for example had their EBITDA reduced by more than 60% last year, investors are likely expecting the company to rebound and therefore the multiple is still very high. The point is that the multiple is biased to short term fluctuations, and that is something one needs to bear in mind. The authors apply an EV/EBITDA multiple of 10x to the terminal period, which is perceived as a conservative estimate, but which also corresponds well with the historical level for Campbell and its peer group.
8.2.2 Results
The results of the DCF valuation show that Campbell is valued fairly in today’s current equity market. As of the 10th of May, Campbell’s equity was valued at $20.2 billion, the authors found a value of $20.7 billion. A significant portion of the value is however set in the terminal period, which represents around three quarters of the valuation, and the effect is that the valuation is very sensitive to the forecasted terminal period. The results from the DCF indicate that Campbell may not be such a likely takeover candidate. Taking a company private almost always require a bid above current market price in order to gain control. This would mean paying above the estimated fundamental value, which makes it more difficult for the investment to return a decent return. As will be discussed in section 9.3. a takeover will however also give the acquiring party control to initiate new strategies where they see fit, the value may therefore, for an acquiring party be more when compared to a marginal investor. Furthermore, a negative development in Campbell’s financial performance could lead the company to be priced at a higher multiple because a convergence is more likely, as has been seen in both Kellogg and ConAgra. The most important two factors are therefore the WACC and the EV/EBITDA multiple. One should note that the WACC is dependent on the risk free rate, which is expected to increase in the future from its current historical low levels. A higher risk free rate in the future would most certainly lead to an increased WACC, which ultimately would reduce the fundamental value.
Nonetheless, the sensitivity analysis indicates more potential upside than downside.
Source: Authors own compilation Figure 36. Sensitivity Analysis
Unlikely Likely Most likely
Weighted Average Cost of Capital Terminal Growth Rate
EV/EBITDA
Share price as of May 10th 2016 was $65.4
95 premium needed in order to gain control of Campbell for then to analyze the potential sourcing of capital, strategic implications of active ownership and a return analysis.