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Case study: Kohler Co.

Case study: Kohler Co. Private Company Valuation HBS Case. Methodology. Case summary Ratio Analysis Valuation: Income approach (DCF) Valuation: Market approach (Multiples) Discount for lack of control and marketability Valuation summary (intrinsic value per share). 2. Income approach.

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Case study: Kohler Co.

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  1. Case study: Kohler Co. Private Company Valuation HBS Case

  2. Methodology • Case summary • Ratio Analysis • Valuation: Income approach (DCF) • Valuation: Market approach (Multiples) • Discount for lack of control and marketability • Valuation summary (intrinsic value per share)

  3. 2. Income approach • Apply the corporate value model • Find the market value (MV) of the firm (assets), by finding the PV of the firm’s future Free Cash Flows (FCFs). • Don’t forget the terminal value (use constant growth model) • Subtract MV of firm’s total liabilities to get MV of common stock. • Divide MV of common stock by the number of shares outstanding to get intrinsic stock price (value). • Free Cash Flow to the firm: EBITx(1-T) + Depreciation - Change in Operating Working Capital – Capital expenditures • Free Cash Flow to the firm (this case): (Operating income after depr.)x(1-T) + Depreciation and amortization (tangible and intangible) - Change in Operating Working Capital – Purchase of Property, Plant and Equipment

  4. Cost of capital (WACC) • WACC = wdkd(1-T) + wc ks • ks is the cost of common equity; kd is cost of debt • Cost of Debt: • In this case, k can be estimated by dividing the annual interest expense by the company’s total debt ( long term debt + current maturities of LTD) • Cost of equity: • CAPM: ks = kRF + (kM – kRF) β or • DCF: ks = D1 / P0 + g

  5. 3. Market (multiples approach) • Use the financial information in Exhibit 7b to compute the following three trading multiples for comparable companies: 1. Sales multiple= Total Enterprise value/ Sales Notes: Total Enterprise (firm) value = market value of equity+ total debt Enterprise value= Total enterprise value- cash

  6. 2. EBITDA multiple= Total Enterprise value/ EBITDA For exhibit 6b, EBITDA (this case)= (Operating income after Depreciation) + Depreciation and Amortization (both Tangibles and Intangibles) 3. EBIAT multiple= Total Enterprise value/ EBIAT For exhibit 6b, EBIAT (this case) = (Operating income after depreciation)x(1- tax rate)

  7. 4. Discount for lack of control and marketability • Class discussion • This part is important to private companies and will be a critical component of your report • What do the minority shareholders want? Why are they bothering Herbert Kohler? • Discuss in your report the benefits and costs of keeping a company like Kohler under private ownership

  8. Control Premiums and Minority discounts • Is it one share worth the same price to Herbert Kohler compared to any minority investors? Why? • DCF approach yields a value per share on a control basis • Multiples approach yields a value per share on a minority basis • What discount to use for lack of control? • Acquisition premium: 30% to 50% • Voting premium: 5% to 15%

  9. Discounts for lack of marketability (or liquidity) • Why liquidity is important? • The discounts range from 15% to 35%

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