Discuss about the Corporate Governance And Private Value Creation.
The report has been prepared to evaluate the financial position and the buying position of Wesfarmers. The report evaluates about the position and the purchase consideration of Wesfarmers and evaluates that whether it would be profitable for the company to acquire Wesfarmers or not. Private equity is a process in which private companies or investors buy the part of private or public company. It is composed of investors and funds which directly invest in the private or public companies (Asquith and Weiss, 2016). Institutional and retail investor offer the capital for private equity and the capital which could be utilized to make acquisition, fund new technology, enhance the working capital etc.
The report concentrates on the worth of the Wesfarmers, funds required for investing into the equity of the comapny, sources through which the funds could be raise etc. For the report, acquired and buying, Wesfarmers limited company has been evaluated and further, the study has been done on the buying comapny, its performance, stock position of the comapny, investor’s attractiveness, exit strategy etc has been evaluated.
Wesfarmers limited is an Australian comapny which is also operating its business into New Zealand. Headquarter of the comapny is at Perth in Australia. The main operations of the company are chemicals, fertilizers, retail, industrial and safety products and coal mining. In 2016, the comapny has been awarded as highest revenue generating comapny in Australia. Currently, 2,20,000 people are employed by the company. The total revenue of the comapny is AUD 65.98 according to last annual report of the comapny. The financial and non financial position of the comapny is quite strong in Australian market (Annual Report, 2018). The mission and vision of the company explains that the comapny wants to enhance the market share and grab more market opportunity to generate the profits (Faccio and HSU, 2017).
Firstly, for evaluating the investment opportunity in the company, annual report, financial analyst report, stock performance etc of the comapny has been analyzed and it has been found that whether it would be profitable for private equity to invest into the Wesfarmers limited or not. Though, the company is involving into the retailing business and managing its business effectively and efficiently. The financial statement of the comapny explains that the various positive changes have taken place into the performance of the company in last 2 years (Gompers, Ishii and Metrick, 2003).
The financial analyst report depicts that the strong market position is held by the comapny as well as sustainable growth is enjoying by the comapny from last few years. Following is the reasons due to which Wesfarmers should invest into the equity of bakers delight:
Firstly, it has been evaluated that the market position of Wesfarmers limited is quite strong. Currently, the company has diversified its business at international level which explains that the company has managed a good position in the market. The comapny has also entered into the Bangladesh, Ireland, New Zealand, UK. The study on strong market position explains that the investment into Wesfarmers would offer good revenue and return to the private equity (Bloom, Sadun and Van Reenen, 2015).
In addition, it has been analyzed that the competitive position of Wesfarmers limited is quite strong. This is one of the highest revenue generating companies in Australia, the market base of the comapny is also bigger and customers find it better due to its services and various outlets in the Australian market. The comapny has also entered into the international market; it enhances the competitive advantage of the company (Holmstrom and Kaplan, 2003). The study on competitive position explains that the investment into Wesfarmers would offer good revenue and return to the Private equity.
It is always significant for an organization to have a diverse and balanced growth strategy so that the success of a business could not only be based on a single factor. It has been evaluated that the Wesfarmers limited follows the diversification strategy and thus it introduces various new products and services in the market time to time. Increasing the number of locations, penetration of current customers, new customers, new locations etc are the part of the strategy of the company. The study on multiple avenues of growth position explains that the investment into Wesfarmers limited would offer good revenue and return to the private equity.
Companies which have low requirement of maintenance capital expenditure could be more flexible in relation with the allocation of the capital to run the business and its operations. Investment into the capital expenditure, bolt on acquisition, core operations increment etc are the part of the capital expenditure of a comapny. Wesfarmers’s operations and capital has been evaluated and it has been found that the performance and the position of the comapny is better as well as the requirement of capital expenditure of the company is also lesser (La Porta et al, 2010). The study on low capital expenditure position explains that the investment into Wesfarmers limited would offer good revenue and return to the Private equity investors.
In terms of high competition and the reliance on high leverage, private equity firm should evaluate companies with recurring and stable cash flows in relation to have sufficient cash flows to serve and manage all the debt requirement of the comapny. The evaluation on Wesfarmers explains about the better position and recurring cash flows of the company. The study on cash flows position explains that the investment into Wesfarmers limited would offer good revenue and return to the Private equity.
In addition, it is required for the investing company to evaluate the private equity in terms of industry and market share. Through the evaluation, it has been found that this is one of the biggest retail stores in Australia, the market base of the comapny is also bigger and customers find it better due to its various outlets in the Australian market (Acharya et al, 2012). The comapny has also entered into the new markets; it enhances the competitive advantage of the company. The study on industry trends explains that the investment into Wesfarmers limited would offer good revenue and return to the private equity.
A strong management team is always a crucial element for a business. Management team offers the strategic guidelines to the company about the changes and the performance of the company. The evaluation on Wesfarmers limited explains that the position of the company is quite better in terms of management and the operation process of the company. A lesser strong management team directly impacts on the performance of the company. The study on management position explains that the investment into Wesfarmers limited would offer good revenue and return to the private equity.
Further, a good LBO should focus on the multiple areas which could enhance the additional value of the comapny. Good technology, operational plan, strategy, market position, financial plan etc are the part of a comapny which creates the additional value for the comapny (Caselli and Negri, 2018). The evaluation on Wesfarmers limited explains that the position of the company is quite better in terms of management and the ways through which additional value could be created. The study on multiple areas explains that the investment into Wesfarmers limited would offer good revenue and return to the investors.
The above reasoning explains that financial position and performance of the company is quite better in terms of LBO. It also explains that if the private equity investors would invest into the comapny than the huge return would be received by them.
Financial gain is the total increment is the assets of a company which is not related to sales. Gains could be classified as unearned or earned gains. In terms of private equity, financial gain is the position where the buying comapny offers great profit to the comapny or more profit to the comapny against the cost of the comapny. Through the evaluation on total sources through which the fund could be raised by private equity for Wesfarmers limited, it has been found that the best source for the comapny is equity and dividend the current cost of capital of the company.
Firstly, purchase consideration has been evaluated to identify the total amount which would be spent by private equity to buy the Wesfarmers limited. Purchase consideration is the agreed amount that private equity pays to the transferor company in exchange of the stock and the ownership of the firm (Korteweg and Sorensen, 2017). Purchase consideration could be in form of cash as well as shares. Following is the calculation of Purchase consideration of the company:
|
Dividend Growth Model |
|
|
Dividend expected |
1.470 |
|
Growth rate |
3.50% |
|
Discount rate |
0.00% |
|
Intrinsic Value |
42.00 |
|
PE Multiple Model |
|
|
Industry PE ratio |
16.18 |
|
EPS |
2.55 |
|
Intrinsic Value |
41.26 |
(Morningstar, 2018)
|
Present value of terminal cash flows |
|||
|
Terminal cash flows |
1,903.30 |
47,049.21 |
|
|
Total value of Firm ($M) |
64,763.45 |
||
|
Less: Value of Debt |
5,413.00 |
||
|
Total value of Equity |
59,350.45 |
||
|
No of Shares Outstanding |
1,128.00 |
||
|
Per share value of value of equity |
52.62 |
(Light, 2015)
|
Calculation of Purchase consideration |
|
|
($ in millions) |
|
|
Stock price |
$ 45.29 |
|
Total stock of the company |
1128 |
|
Purchase consideration |
$ 51,088.87 |
(Yahoo Finance, 2018)
It explains that the purchase consideration of the Wesfarmers would be $ 51,088.87 million.
The above stated amount would be generated and managed by the company through raising the debt amount and issuing the equity in the market. According to LBO, 100% amount has been generated by the company through loan from bank and through issuing the equity in the market (Davis et al, 2014). Following is the details of the amount and the cost of the company:
|
Capital structure of Private equity |
||||
|
Price |
Cost |
Weight |
WACC |
|
|
Debt |
45,980 |
5.60% |
0.9 |
0.0504 |
|
Equity |
5,109 |
4.69% |
0.1 |
0.004688 |
|
51,089 |
Kd |
5.51% |
||
|
Calculation of cost of debt |
||||
|
Outstanding debt |
45,980 |
|||
|
interest rate |
8.00% |
|||
|
Tax rate |
30.0% |
|||
|
Kd |
5.60% |
|||
|
Calculation of cost of equity (CAPM) |
||||
|
RF |
2.40% |
|||
|
RM |
5.00% |
|||
|
Beta |
0.88 |
|||
|
Required rate of return |
4.69% |
(Bloomberg, 2018)
It explains that the private equity would generate $ 45,980 million amount from loan and $ 5109 million amount would be raised by the company through equity. The loan amount would be got by the company on 8% interest rate and thus the cost of private equity would be 5.6%. On the other hand, stock would be issued by the company on par value. The total generate amount through equity would be $ 5109 million and the cost of equity of the company would be 4.69% (Fang, Ivashina and Lerner, 2015). It explains that if the company would generate the purchase consideration amount through debt and equity than the total capital expenditure of the company would be 5.51%.
Further, it explains that the total amount would be paid back by the company after 10 years in lump-sum. The total evaluation and analysis on the financial and non financial data of the company explains that this investment would offer high revenue and return to the private equity. It has been evaluated that the current stock of the company is overvalued which explains that if the company would sold out the stock again than the return could be generated to the private equity firm (Sorensen and Jagannathan, 2015).
|
Calculation of investor’s return |
|
|
Market stock price |
49.82 |
|
Total stock of the company |
1128 |
|
Total return |
56196.96 |
|
Purchase consideration |
$ 51,088.87 |
|
Profit |
$ 5,108.09 |
The evaluation and the analysis on Wesfarmers, private equity, investors and other related factors explains that the main target of PE should be on buying the 100% stock of the company so that the huge profit could be made by the investors of the company. According to the evaluation on all the related factors, it has been found that the cash flow position of the company would be much better in near future as well as the operations of the company would be more flexible (Gompers, Kaplan and Mukharlyamov, 2016). Thus, the analysis and the study explain that the PE should invest into the Wesfarmers limited and should generate the funds through debt and equity.
Through the evaluation and the study, it has been found that it would be easier for the company to leverage buy out Wesfarmers limited. The purchase consideration of the company would be $ 51,088.87 million. And the amount of purchase consideration would be generated by private firm through $ 45,980 million amount from loan and $ 5109 million amount would be raised by the company through equity (Bernstein et al, 2016).
Though, it has been evaluated further that what would be the exit strategy of the company. Exit strategies are central to the private equity procedure. The most common exit strategies for private equity are: trade sale, secondary buyout, initial public offering and leveraged recapitalization (Mauer, 2017). In case of Wesfarmers, the private equity is recommended to adopt the dual track process. In this process, company could fill a prospectus for IPO as well as a trade sale could be pursued at the same time. This process makes it easier for the investors to evaluate both the ways and choose the best one (Harris, Jenkinson and Kaplan, 2014). Though, it has also been found that the cost of dual track process could be higher than any other strategies.
Conclusion:
To conclude, the financial position and the buying position of Wesfarmers limited are quite strong. The report and the analysis explain that the position of the PE must be strong and the purchase consideration of Wesfarmers is $ 51,088.87 million. Private equity is a process in which private companies or investors buy the part of private or public company. It explains that in case of Wesfarmers limited, purchase consideration would be generated by private firm through $ 45,980 million amount from loan and $ 5109 million amount would be raised by the company through equity.
The report concentrates on the worth of the Wesfarmers, funds required for investing into the equity of the comapny, sources through which the funds could be raise etc. according to the report, the investment into the Wesfarmers limited would offer better return to the investors. Further, it also explains that the capital expenditure of the fir would be lesser than the return of the firm.
References:
Acharya, V.V., Gottschalg, O.F., Hahn, M. and Kehoe, C., 2012. Corporate governance and value creation: Evidence from private equity. The Review of Financial Studies, 26(2), pp.368-402.
Annual Report. 2017. Wesfarmers Limited. [Online]. Available at: https://www.wesfarmers.com.au/docs/default-source/default-document-library/2017-annual-report.pdf?sfvrsn=0[Accessed as on 21st Mar 2018].
Asquith, P. and Weiss, L.A., 2016. Leveraged Buyouts and Private Equity Financing (Congoleum). Lessons in Corporate Finance: A Case Studies Approach to Financial Tools, Financial Policies, and Valuation, pp.363-392.
Bloomberg. 2017. Wesfarmers Limited. [Online]. Available at: https://www.bloomberg.com/quote/WESCD:AU [Accessed as on 21st Mar 2018].
Bernstein, S., Lerner, J., Sorensen, M. and Strömberg, P., 2016. Private equity and industry performance. Management Science, 63(4), pp.1198-1213.
Bloom, N., Sadun, R. and Van Reenen, J., 2015. Do private equity owned firms have better management practices?. American Economic Review, 105(5), pp.442-46.
Caselli, S. and Negri, G., 2018. Private equity and venture capital in Europe: markets, techniques, and deals. Academic Press.
Davis, S.J., Haltiwanger, J., Handley, K., Jarmin, R., Lerner, J. and Miranda, J., 2014. Private equity, jobs, and productivity. American Economic Review, 104(12), pp.3956-90.
Faccio, M. and HSU, H.C., 2017. Politically connected private equity and employment. The Journal of Finance, 72(2), pp.539-574.
Fang, L., Ivashina, V. and Lerner, J., 2015. The disintermediation of financial markets: Direct investing in private equity. Journal of Financial Economics, 116(1), pp.160-178.
Gompers, P., Ishii, J. and Metrick, A., 2003. Corporate governance and equity prices. The quarterly journal of economics, 118(1), pp.107-156.
Gompers, P., Kaplan, S.N. and Mukharlyamov, V., 2016. What do private equity firms say they do?. Journal of Financial Economics, 121(3), pp.449-476.
Harris, R.S., Jenkinson, T. and Kaplan, S.N., 2014. Private equity performance: What do we know?. The Journal of Finance, 69(5), pp.1851-1882.
Holmstrom, B. and Kaplan, S.N., 2003. The state of US corporate governance: what’s right and what’s wrong?. Journal of Applied Corporate Finance, 15(3), pp.8-20.
Korteweg, A. and Sorensen, M., 2017. Skill and luck in private equity performance. Journal of Financial Economics, 124(3), pp.535-562.
La Porta, R., Lopez-de-Silanes, F., Shleifer, A. and Vishny, R., 2000. Investor protection and corporate governance. Journal of financial economics, 58(1), pp.3-27.
Light, R.S. 2015. Structuring venture capital, private equity and entrepreneurial transactions. Wolters Kluwer Law & Business.
Mauer, R., 2017. European Private Equity-Fund for Entrepreneurs and the Impact on Market Growth within the Boundaries of the European Union.
Morningstar. 2018. Wesfarmers Limited. [Online]. Available at: https://financials.morningstar.com/cash-flow/cf.html?t=WES®ion=aus&culture=en-US [Accessed as on 21st Mar 2018].
Sorensen, M. and Jagannathan, R., 2015. The public market equivalent and private equity performance. Financial Analysts Journal, 71(4), pp.43-50.
Yahoo finance. 2017. Wesfarmers Limited. [Online]. Available at: https://au.finance.yahoo.com/quote/WES.AX/ [Accessed as on 21st Mar 2018].
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