Qui bono?

An important chart on the so-called fiscal irresponsibility of countries in Southern Europe. From Paul Krugman’s blog. 

Why are acquisition multiples a taboo subject in Portugal? (2)

In a previous post on the subject of transaction multiples, it was argued that lack of information and analysis in the Portuguese press acts as a barrier to innovation. If the media does not report adequately on the value of businesses and no one really understands what a company is worth, is there any incentive to develop a new product, break into a new market or even start your own business?

The latest instalment in this series is the EDP privatisation. We are now used to silly headlines however “Christmas sale: the German, Brazilian and Chinese all want EDP as a present” is hard to beat (source: Jornal I).

Here is a basic question on the privatisation: Are taxpayers getting a fair deal?

There are various ways to determine the value of a company. The media are obsessed about market values however, other methods such as discounted cash flow valuation are more reliable.

A simple way to answer the question without going into the detail of cash flow estimation is to use relative valuation. If you calculate EDP’s value in relative terms and compare it to similar quoted companies, you will gain a better understanding about the offers on the table.

The Enterprise Value (EV) is the sum of a company’s market value and its net debt. EV is a measure of value which can be compared to EBITDA (an approximation of the annual cash flow) and this provides a valuation multiple. So the question is: what is EDP’s EV/EBITDA multiple?

Bloomberg estimates that EDP’s Enterprise Value at current market prices is EUR 28.8 billion and its EV/EBITDA is equal to 7.9x. That should be a good enough approximation.

In the case of the privatisation, acquirers are not offering market prices for the stake being sold. Instead, a premium is being offered, relative to current market prices. The resulting EV/EBITDA taking into account reported offer values is around 8.3x.

How does that compare to EDP’s competitors? These trade at around 6.5x – 7.0x EV/EBITDA so from this perspective, it looks like Portuguese taxpayers are in fact getting a reasonable deal. As a taxpayer, I feel that I am entitled to know whether the company is being sold at a fair price, which appears to be the case.

All the other aspects of the transaction, such as the corporate governance and in particular whether the current CEO will keep his job are analysed with a great amount of detail in the press, but would it not make sense to answer basic questions first?