Forecast of the Balance Sheet

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going forward. Given that the historical level as percentage of sales has been rather volatile, being 1% of sales in 2012 at the launch of Route 2015 while accounting for 0.1% of sales in 2015, we will use the average level of 0.3% between 2011 and 2015 as a starting point for our forecast. Thereafter, we calculate with an annual increase averaging 0.05% in both forecast scenarios. (Rezidor, 2015a)

Loss on sale of shares and tangible fixed assets: Given the inconsistent pattern and low historical level of this item, we will assume it to be zero in both our forecast scenarios.

In exhibit 42 we display a summary of the base case forecast scenario.¹⁶ The table shows us all projections of revenues and costs, in turn generating EBITDA and EBIT. In the following section, these estimates of EBITDA and EBIT will come handy as we are going to use them for computing net debt at the time of exit.

Exhibit 42. Forecast of EBITDA and EBIT

Source: Own creation

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forecast of the balance sheet is heavily influenced by the level of free cash flows as well as the the debt composition and the pricing terms. A full estimation procedure will be addressed more in detail in section 9.2 to 9.4.

It is important to highlight that our plans for rebalancing Rezidor’s future business model will not impact Rezidor’s balance sheet more than the marginal effects associated with reductions in capex. The reason behind this is that Rezidor’s classifies its leased hotels as operating leases, which in contrast to financial leases do not appear on the balance sheet. (Rezidor, 2015) Instead, lease payments are recognised in the income statement in the form of rent and operating expenses (ibid, 2015).

Exhibit 43 shows that the individual items that have the largest impact on our balance sheet forecast for Rezidor are “Acquisition Goodwill”, “Equity” and the “Interest Bearing Debt”. These forecasted items, as well as the smaller items will be explained in further detail.

Goodwill will become a large item, as it will display the premium value that we pay for Rezidor in excess of the book value of equity that is recognised on Rezidor’s balance sheet prior to the acquisition. The acquisition goodwill is projected to remain constant during the holding period.

Further, non-current operating assets will be impacted by the difference between projected accumulated capex and depreciation during our holding period.

As we mentioned in section 7.2.3, we expect capex to decrease in future, as a result of the rebalancing of Rezidor’s business model and our strategy to maximise free cash flows for debt service. We believe that for our base case scenario, a feasible annual cut in capex as a share of sales would be 0.5% per year. At this rate, capex as a share of sales would decrease from 4.8%

in 2015 to 3.5% of sales in 2019 and 2020. As for our upside scenario, we are counting with a more aggressive reduction, lowering capex to 3.5% of sales already in 2016 and maintaining the same levels in the following years. In the earlier forecast of costs, we projected in both our scenarios that depreciation would keep the same percentage of sales in the following five years, namely 3.5%. Subtracting depreciation from capex will therefore in our base scenario yield a minor net increase in the item named “Accumulated Capex Net of Accumulated Depreciation.”

The same item will however remain constant, since we are calculating with the same levels of capex as a share of sales as with depreciation. Beyond the generation of the acquisition goodwill and the effect of accumulated capex net of accumulated depreciation, we expect remaining non-current assets to stay unchanged over the estimation period.

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Hence, our base case projects that the net effect of non-current operating assets will be a small increase until 2018, keeping the same level in the two years that follow. In contrast, our upside scenario assumes an annual capex to equal with annual depreciation yielding an unchanged non-current operating asset base throughout the holding period.

As for operating working capital, we earlier identified in section 6.3.3 the item to be stable and negative around -5.3% of sales in the last five years. We could also see that negative working capital ratios were not uncommon in the industry and that the peer companies managed to reduce their working capital even more, thanks to significant cuts in their inventory values.

From this, we drew the conclusion that Rezidor should have some room to reduce their current operating working capital. However, according to Damodaran (2005) it is uncommon to assume increasing levels of negative operating working capital in the context of valuations. We therefore assume an unchanged operating working capital to sales ratio of -5.3% for the years going forward for both forecast scenarios.

Considering Rezidor’s net debt, which we discussed in section 6.1.2, we intend to convert Rezidor’s financial assets into cash at the time of the acquisition. Such a conversion entails the assumption that “assets held for sale” are recognised at a fair value in Rezidor’s financial reporting. However, as Rezidor states in the 2015 annual report that asset held for sale “are recognised at fair value less the costs to sell”. (Rezidor, 2015a) Our plan is to use the cash proceeds from the asset held for sale to repay Rezidor’s current interest bearing liabilities, leaving us with a surplus of net cash amounting to EUR 56.4m. The cash balance on Rezidor’s balance sheet will thus correspond to the minimum cash level, which will be further described in section 9.2.3. The forthcoming projected cash balance is dependent on the free cash flows and debt repayment schedule, which we will address in section 9.3 and 9.4.

The debt raised on order to finance the acquisition will replace the short and long-term interest-bearing debt. The closing balance of debt in 2016 will thereby equal the total debt used in the funding of the acquisition, less the repayments made over the year. In the years that follow, the debt is projected to decrease over the holding period as we will amortize each year. Further, the opening balance of shareholder equity in 2016 equals our equity contribution in order to fund the transaction in addition to the retained earnings of the year, which we will address in section 9.2.3. In the absence of dividends, the equity is projected to increase over the holding period as the forecasted net income will appear on the balance sheet in the form of retained earnings. In this way, we will increase our ownership share of Rezidor by exclusively using free cash flows to pay off the debt.

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Remaining items on Rezidor’s balance sheet are expected to stay unchanged during our ownership of Rezidor. Correspondingly, we will not display each item as the closing balance of each item in 2015 can serve as a proxy for the future level in the holding period. Key selected items on Rezidor’s projected balance sheet is displayed below, exhibit 43.

Exhibit 43. Forecast of the Balance Sheet

Source: Own creation