Firm Valuation

Lecture 7

Trading and Operating Comparables

• Aggregate Value• Market Value• Revenue• EBITDA• EBIT• Net Income• Total Debt• Book Value/Share• EPS• LTM Revenue, Net Income, EBITDA growth rates• P/E• TSR

Profile of Home Depot & Lowe’s

HD Lowe’sMarket Cap $78.6B $46.6BEnterprise Value 84.7B 49.1B1 yr TSR (9.5)% 4.3%3 yr TSR 8.4% (6.3)%2007 AV/EBITDA 7.0X 7.0X2007E P/E Ratio 11.9 13.92008E P/E Ratio 10.7 12.2Credit Rating Aa3/AA A1/A+

ROIC and P/E Multiples

Aggregate Value Analysis

Purchase price per share $12

%Premium to Current price 20%

Fully Diluted Shares Outstanding 100M

Implied Equity Value $1.2B

Plus Net Debt 0.4B

Implied Aggregate Value $1.6B

Current EBITDA $150M

Implied AV/EBITDA 10.6X

Financial Outlook Analysis

Characteristics of Top Performing Firms

• Capital Efficiency

• Working Capital Efficiency

• Increasing Return on Invested Capital

• Rising Incremental Relative P/E values

• BottomlineLimited Capital Requirements and High NOPAT

margins generate strong ROIC

Sale Process Alternatives

• One Party- Negotiated Sale Contact One Party

• Controlled Limited Auction

• Open Broad Auction

• Publicly Announce Pursuing Strategic Alternatives

Factors in the Decision

• Shareholder

• Marketing

• Senior Management

• Employees

• Contract

• Community

Factors in the Decision

• Marketing– Confidentiality– Number of potential Bidders– Timing – Information Flow

Factors in the Decision

• Senior Management– Willingness to stay on– Depth of the team– Contracts/Severance– Incentive-Stay Pay Agreements

Factors in the Decision

• Employees– Future Opportunity– Benefits– Job Security– Culture

Factors in the Decision

• Structure of the Deal– Representations and Warranties– Indemnifications– Closing Conditions