The coronavirus outbreak in spring has rapidly evolved into a global pandemic with serious economic consequences all over the world. In order to slow down the spread of the virus, countries have taken specific measures.
In the middle of March, Belgium went into lockdown with a mandatory closure of all non-essential stores and national borders. Contacts and travelling were limited as much as possible. An exit strategy followed in May, and measures were tightened up again last month.
Over the past few months, Deminor has been regularly contacted by shareholders and directors of (family) companies with the question which impact the coronavirus has on the shareholder value of the company, especially in the case of an acquisition or family transfer.
It is difficult to give an unambiguous answer to this question since the impact is both sector specific and company specific.
Listed companies Kinepolis and AB Inbev are severely affected by the compulsory closure of cinemas and the hospitality industry. Supermarket chains (Colruyt, Ahold Delhaize) and telecom companies (Telenet, Proximus) are holding up. E-commerce related companies (Zalando, bpost, PostNL) are experiencing accelerated growth.
The impact is also company specific. Depending on the products and services, financial strength, infrastructure, etc., some companies in difficult sectors are able to adjust their business model temporarily or permanently. Just think of restaurants that focus on take-away and delivery in record time, or stores that set up a webshop in a matter of days.
The theoretical value of a company is calculated by various valuation methods, whereby a distinction can be made between an equity approach (value of all assets minus debts) and an income approach (EBITDA multiple method and Discounted Cash Flow method). This article studies the impact of the coronavirus on the application of the EBITDA multiple and Discounted Cash Flow method.
EBITDA multiple method
The EBITDA multiple method calculates the company value by multiplying the EBITDA (operating cash flow from the company’s activities, excluding interest, taxes, depreciation and amortization) by a certain multiple (calculated on the basis of the valuation of similar companies). Therefore there are 2 variables, EBITDA and Multiple, which determine the enterprise value.
For the calculation of the EBITDA, certain normalisations (e.g. elimination or adjustment of a non-compliant rent, non-operating costs or revenues, non-market fees) must be taken into account in order to obtain an objective image of the recurring operating cash flow realised by the company.
In concrete terms, therefore, the question needs to be asked as to how unique this situation (a pandemic resulting in such measures) is. On the sales side, it will be argued that this is an exceptional situation and the impact of corona in the financial figures will be eliminated. On the buy side they will be more cautious. In practice an average EBITDA is regularly used by weighting the last 3 financial years (2018, 2019 and 2020), which will partially eliminate the impact of the corona crisis.
Over the past few months however, the corona crisis has led to a noticeable change in the multiples. In corona resistant sectors, the multiples have persisted or are showing an increase.
Discounted Cash Flow-method
The Discounted Cash Flow method values the company on the basis of the (normalized) future free cash flows, using a discount rate. The basis for determining the future cash flows is a business plan for the next few years (average forecast period for SMEs is 3 to 5 years).
Consequently, if a company experiences little impact from the corona crisis and is capable of maintaining its budgeted financial figures for the coming years, there will be little impact on the value of the company. If there is a negative impact as a result of the corona crisis which is expected to continue in 2021 (and the following years) the enterprise value will decrease.
In both valuation methods there is a noticeable impact on the value of (family) companies as a result of the corona crisis and the known measures. The coming months (launch of vaccine) will bring more clarity to the temporary nature of this impact.