BCE Inc.: Facing the Future Harvard Case Solution & Analysis

Analysis of given Assumptions:

The assumption taken for the calculation are feasible as the purpose is to reduce the non-core assets of the company and focus on the core business operations that results in reduced equity while acquiring the company. That reduction in equity portion also reduces the acquiring premium price.

Furthermore the assumptions of revenue for the future growth incorporating the growth in EBITDA margins, Depreciation based on sales, tax deduction rate, investment in fixed assets known as capital expenditure and changes in working capital; all of these assumptions taken are reasonable as company has the potential to grow in the future and generate incremental cash flows. All of these assumptions are aligned with the past performances of the ratios and margins. On the other hand, some changes are also made such asin the calculation tax losses are incurred and these losses areexpected to be carried forward in upcoming years resulting in reduction of tax rateup to 15%that isconsidered to reduce to 25%.

For the calculation of weighted average cost of capital which is assumed asdiscount rate as well, debt to equity ratio is reasonably taken as 40:60 ratio. Risks free rate, market premium and beta values are also reasonable as these values are up to the market terms. The leverage multiples, and exit multiples are also reasonable as it is based on previous comparable transaction in Leverage Buyout and Precedent acquisition transactions respectively.

Please refer the assumption sheet, WACC sheet and DCF calculation sheet in Excel as well as in Appendices end of the report.

Benefits of LBO Transaction for BCE

BCE could be benefited through LBO approach as it increases the BCE’s leverage that would reduce the cost of equity and through this the cost of capital would also reduce.

Increased leverage also increases the total worth of BCE as it increases the investors’ trust, and also it reduces the debt when debt is paid back,which also incorporates in terms of increasing the enterprise value of the BCE.

Through potential LBO, it would bring the expertise into the company with the flexible approach to run the company that would be beneficial for BCE. The flexibility could also be attained in financial perspective throughusing the different mode of financing such as financing through issuing the long term bonds, and acquiring revolving credit facility from investment banks.

The flexibility also incorporates in terms of gaining experienced management that would maintain the discipline in the business structure that would also result in developing the investors’ trust. The investors would then invest into BCE and that would generate positive cash flows in future.

From LBO transaction, BCE would also get the benefit of separating itself from non-core business to its core business that would result in increase in the BCE’s efficiency.

Return from Invested Capital

The internal rate of return on unlevered cash flows is around 2% on the investment made in BCE. In this cash flow, the return is calculated while leverage isexcluded from it. This rate is representing the returns on investment that does not incorporate its capital structure BCE had adopted. The return of equity investment is around 39% and for that the total investment on equity required is $7315 million and the investment would grow with respect to the debt repayments.

Private equity investors would exit from the investment,at the end of 5th year they hold their investment and at that time the EBITDA multiple would be around 7;which is higher than the previous EBITDA multiple. At the time when private equity investors would exit from this investment, the equity value would be around $22.283 billion and return on this equity investment would be around 39%.

Please refer the multiplevaluation in Excel file and Multiple Valuation in Appendices section given below.

RECOMMENDATION:

In is recommended that, BCE’s management should go for selling the company, considering the fact that investors would also get maximum returns on their investment. To maximize the equity investors, BCE should consider the stock only transaction under the Leverage Buyoutas it is more attractive than the cash option deal for the common stockholders of the BCE.

For any of the consortium that would be bid higher rewarded the deal, and for these companies,per share price should be proposed $40 or above. This price would be proposed by considering the fact that this price also included the value of 20% premium in the $34 price per share that is calculated in discounted cash flow...............................

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