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Maximizing the Value of an Exit Strategy. March 1, 2001. Agenda. Learning Objectives Overview and opportunities for Probil The Turkish market for an IPO Cost of Capital Managing Uncertainties and Real Options Recommendations. Learning Objectives. Learning Objectives.
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Maximizing the Value of an Exit Strategy March 1, 2001
Agenda • Learning Objectives • Overview and opportunities for Probil • The Turkish market for an IPO • Cost of Capital • Managing Uncertainties and Real Options • Recommendations
Learning Objectives Learning Objectives • Evaluating country risks and mitigating factors • Challenges of doing an IPO in Turkey • Probil’s Cost of Capital • Impact of Uncertainties • Identifying and Modeling Real Options
Overview and opportunities for Probil Probil Overview • Founded in 1989 • Provides IT solutions • Networks, computer hardware, basic software • Design and implementation services • Support and maintenance services (unique) • Multi-vendor, independent of holding groups • Good reputation: banking, telco, ISPs, manufacturing • Positioned to help build the internet and perhaps provide e-business software
Overview and opportunities for Probil The new Investors • EMEA Technology Investment co-managed by • Kagan Ceran • EFG Hermes (over $2B) • Summer 2000 Invested $21 million to • Merge Probil Group companies and Bordata • Infuse $10 M cash • Take advantage of size and reputation to grow more rapidly • Expand into e-business applications • Exit required by 2005
Overview and opportunities for Probil The Business Opportunities • Acquire a local distributor • Improve delivery efficiency, lower price multiples • Acquire US Internet professional services firm • Access to US market with remote, less expensive Turkey labor • Improve image in Turkey • Source of US$ revenue • Use an IPO to raise cash for acquisitions • When? • How much? 25% of the Company • Consider equity investment?
The Turkish market for an IPO Turkey Overview • Military governments an historic stabilization factor • Contract with suppliers to share currency risks
The Turkish market for an IPO Turkey’s Stock Market • One of the most active Emerging Markets’ Stock Exchanges • High volatility • Volumes ($150m-$1.5bn) • Prices
The Turkish market for an IPO Doing an IPO in Turkey • Small IPO market • 35 new issues in 2000 up from 27 in 1997($157m) • Turkey’s IPOs are among the most undervalued • Pre-IPO condition of the market most important factor • Investment bankers do IPOs on a “best effort” basis • Investors use Adjusted EV/EBITDA ratio • P/E introduces debt and tax structures which may differ • Simple EV/EBITDA assumes same growth rate
Cost of Capital The Cost of Capital • Goldman-Integrated Model • US Risk-free rate: 5.5% • Market risk premium: 5.0% • Beta of comparable: 1.45 • Country premium1: 4.5% • Cost of Capital 17.25% • Cost of debt in US$ in Turkey: 20%-25% • Somewhat inflated because of banking system crisis 1Source: Moody’s
Cost of Capital The Cost of Capital • Adjusted ICCRC model • Average country cost of capital 23% • Beta Adjusted 30% • Mitigation factors -3% • Cost of Capital 27%
Managing Uncertainties Impact of key uncertainties • Revenue Growth rate • Normal distribution (25%, 15%) • Expected EV/EBITDA ratio • Lognormal • Actual EV/EBITDA ratio • Lognormal, 0.75 correlation with expected
Managing Uncertainties Base Case NPV
Real Options Real Options • Timing of IPO – “Wait for best moment” • Alternative Funding – Use VC Funds • International Expansion
Real Options Real Option I: Timing of the IPO • If Expected EV/EBITDA < Strike EV/EBITDA • Don’t do the IPO • IPO could be done in any of the next 5 years • Depends on pre-IPO market situation • Drawback • Delays growth boost • Open door for competitor’s IPO
Real Options Real Option II: Alternative Funding • VC interested in equity investment • EV/EBITDA of 10 for 10% of the company • If Expected EV/EBITDA < Strike Price < 10 • Accept the new equity investment offer • Alternative to IPO if we delay it • Allows the company to boost some growth • Reduce exposure to the IPO proceeds volatility
Real Options Real Option III: Expansion/Flexibility • Option to acquire internet consulting company in the US • Improves image of the company • Adds e-business implementation know-how skill set • Reduces overall cash flow volatility (“0.2” correlation) • Provides flexibility • Reduces cost of capital • ICCRC weighted average for US and Turkey (needs to be calculated) • Requires a $5 million investment (company has this money)
Real Options Real Options Model International Expansion Strike Price IPO Forecast IPO/VC Finance Domestic Expansion Revenue Growth Yes No - Wait next year Excess Cash Cash Flows Company Value 2005 Value to Investor
Real Options Real Options Results
Conclusions Recommendations • Probil should wait for a suitable moment to do its IPO • If the market is unfavorable, Probil should consider raising money through VC • They should pursue the international expansion • Decrease growth volatility • Improve image of the company
Real Options Timing of IPO Results
Real Options Alternative Funding Results
Real Options International Expansion Results 2001 2002
END OF PRESENTATION The following slides were removed from the presentation
Managing Uncertainties Comparables for EV/EBITDA ratios
Base Case Valuation Base Case NPV: IPO in 2001