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schneider valuation

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Maxime Dentroux

on 13 January 2013

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Transcript of schneider valuation

Did not the market understand at the time the real potential value of the merger ? Schneider’s annual report 2007 Questions
Schneider-APC What are the main motives for this merger?
What is the financial situation of APC before the merger?
What is your valuation of American Power Conversions?
What do you think of the premium paid by Schneider to acquire APC? Was the price too high? Can you understand the market reaction? Capital Structure Debt to equity: 0%
Financial leverage: 1,24
totally equity financed firm
low financial gearing: only short term debt Company Valuation Risk free rate (Rf) = 4%
Beta (B) = 1.9
Mkt Risk Premium ( Rmkt- Rf) = 5%

we could calculate the WACC recurring to the CAPM:

Ru = Rwacc = Rf+B*(Rm-Rf)
Rwacc= 0.135 Sales +16,45%

Lower cost efficiency

Significant impact of non operating activities on net profit ROA healthy but lower
operating profit
total assets lower

Stable ROCE in 2005
Higher working capital
Lower ROCE Profitability Gross profit: 36,33%
Net profit: 7,28%
ROA: 7,49%
ROCE: 11,75% Very low insolvency risk

current ratio > 2:1
quick ratio >1:1
cash position

short term liabilities can be faced w/o problems Liquidity and Efficiency Current ratio: 4,3
Quick ratio: 2,7
Receivable turnover: 5,64
Inventory turnover: 2,40 HIGH Profits in securities investments (119.41m)

Cash inflows increased

Cash and cash equivalents
increased

Good receivable and inventory turnover ratios showing higher efficiency in cash inflows and less inventories To sum it up, the APC shows a stable financial position. Consequently, it is an attractive target company to be acquired that may potentially fulfill Schneider’s strategic purposes. Analysis of the Premium Premium paid was 30% of the share price of the week before the announcement.

=> inaccurate forecasts about the future performance of the company??

Proceeding with a sensitive analysis:

+1% in sales => + 0,9% in the fair value per share


If sales growth remained constant at 9% , than the fair value per share would be $28.6 i.e.8% smaller than the bid price. Over the last 10 years, APC sales grew by 14% on average and over performing the market by 7%

Bid values APC were at 20-25 times estimated operating profit for 2007, compared with a multiple of 10 times for the buyer
=> markets at the time did not expect such huge growth in the future sales of APC (15%)

Period of negative growth: -4,5% in 2001 and -7,4% in 2002
Slightly less than zero average growth rate between 2000 and 2003 Is the forecast of 15% of sales growth too optimistic? In conclusion, there is too little evidence to predict a constant and sustained growth rate of 15% even though APC business is strongly linked to other expanding Industries, such as the IT and Web Advertising ones. Analysis of the effects of the merger on Schneider financial situation Acquisition cost
6.1 billions of dollars A loan of 5.7 billions dollars

Issue of new stocks 1.52 billions dollars

Cash reserves Financed by 3.2 billion euros of debt

Rating in the BBB category

Drop in the share price To conclude, the structure of the financing of the deal, the too optimistic forecasts of future performances and the perceived difficulties in realizing the synergies pushed the market to sell Schneider’s shares leading to a drop of the share price. APC acquisition gave a significant boost in the consolidated revenues (3 billions of dollar) and added about the 15.7% of new value to the main corporation.

Looking at the reduction of the R&D expenses for Critical Power and Cooling services Business.

Synergies, were really significant, but overall that they have been realized much quicker and easier than it was expected. Assuming a perpetuity growth g of 6%, we calculated the fair value of the firm

V=FCF/(Rwacc-g)

Deduced the share price => without the merger = $27.56
with the merger = $30.14 Analysis of the market reaction Premium paid by Schneider was roughly 3% ($31 - $30.14)/$30.14

On this basis, we should conclude that the merger represented a good deal for Schneider.

BUT extremely bad reaction of the market Schneider share price plummeted by 7.9% (the biggest drop in 4 years).

How can we explain this reaction?

Premium paid? Financing? Let's explore it! Introduction American Power Conversion (APC) has been fully acquired by Schneider Electric SA






For $6.91 billion or $31 per share at a premium of 30%

The biggest and most obvious impact of this acquisition would be on Schneider’s power protection business

This created the largest UPS business in the world with an enviable product and solution portfolio globally Motives of acquisition Gain global leadership in critical power and strengthen leadership in electrical distribution

Strengthen its position in a secured power-market that was expected to grow at 8% a year

Get a foothold in the European large segment market

Provide a platform to complement their businesses and grow as one single business unit

Be a leader in the European power protection market

6-7 points EBIT margin gain (about $220 m) Financial situation of APC before the Merger Company Valuation Motives of Acquisition Analysis of the market reaction Financial situation of APC before the Merger Results Results Financing Thank you!
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