Valuing a Cross-Border LBO: Bidding on the Yell Group Harvard Case Solution & Analysis

Do the management projections in Exhibits 6 and 7 make sense to you? In other words, if you were part of the Apax / Hicks Muse team, would you trust them?

The management projections are always a cause for concern for the valuers because they are based on the management’s estimates. Further, today’s environment is very complex and is susceptible to continuous change where an adverse changes in market situations can undermine the credibility of assumptions, hence detrioting the overall results.

Further, earnings management is a strategy, which is sometimes adopted by management to deliberately manipulate the results of the company, so as to achieve their desired target. In order to facilitate better results, the organization can consider the reasonableness of the cash flows based on the past results. It can be performed by adopting an analytical review where the projected results are compared with the past performance of the company, considering the factors of projected growth and inflation. Further, the organization shall also consider the reasonableness of the assumptions and any unreasonable assumptions will be highlighted and reasonable justifications will be obtained from the management.

The impact of government regulations on the projected cash flows of the company are also considered because adverse changes in regulations can significantly undermine the results.  The valuers may face difficulty in valuing the segment in UK and USA. In UK, the Office of Fair Trading (OFT) indicates that the government agency will recommend an acceptable rate of growth in prices of inflation less an even larger adjustment and it is estimated that the Office of Fair Trading (OFT) will cap the advertising price growth rates at 6% below the inflation rate. In other words, the average advertisement price is expected to decline since projections for inflation are 2.4% in 2002, 2.3% in 2003, and 2.0% thereafter, so the firms shall review the reasonableness of the assumption.

4.    What is the effect of high leverage on those projections? Please consider the capital cash flows (CCF) method in building your analytical model. How much is Yell worth? How much would you bid?

Projections include the unlevered cash flow items and such items will increase if there is high leverage because the high leverage will require high interest cost and provides an opportunity for the company to save tax on such finance cost. Further, it has some drawbacks as well; high leverage will require a high outflow of resources, so the organization shall manage the tax benefits with the finance cost incurred in obtaining such tax benefits.

Capital Cash Flows (CCF) is well known valuation model, which has been widely used in order to value the business aerations, however, this technique uses the future estimated cash flows of operations over the foreseeable life of the business operations and discounts them by using the organization’s cost of equity and eliminats the cost of debt, which represents the risk associated with the business operations. Furthermore, the discounted cash flows are all netted-off in order to arrive at the value of business operations.

Our analysis in Appendices 1 using Capital Cash Flow (CCF) method shows that the company will have an equity value of £1300.497 million. It has been calculated by eliminating the debt value of £1,450 million from the enterprise value of £2,750.497. The cash flows of the company are discounted to the cost of equity of the firm. The cash flows of the company comprises of both the UK and USA segments. Further, the forecasted cash flows and tax savings from UK segments are discounted back to the cost of equity of UK and the cash flows of the USA segments are initially discounted back to the USA cost of equity. Later on, the results of USA are converted to pound sterling so as to eliminate the impact of cross border operations.

Valuing a Cross Border LBO Bidding For Yell Group Case Solution Case Study Solution

The price of the advertisements has been revised by considering the impact of cap rate imposed by the government. Numbers of assumptions have been considered while performing calculations, which are listed below.................................

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