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Sum-of-the-Parts Analysis

Sum-of-the-parts ("SOTP") or "break-up" analysis provides a range of values for a company's equity by summing the value of its individual business segments to arrive at the total enterprise value (EV). Equity value is then calculated by deducting net debt and other non-operating adjustments.

For a company with different business segments, each segment is valued using ranges of trading and transaction multiples appropriate for that particular segment. Relevant multiples used for valuation, depending on the individual segment's growth and profitability, may include revenue, EBITDA, EBIT, and net income. A DCF analysis for certain segments may also be a useful tool when forecasted segment results are available or estimable.

SOTP

Applications

SOTP analysis is used to value a company with business segments in different industries that have different valuation characteristics. Below are two situations in which a SOTP analysis would be useful:

  • Defending a company that is trading at a discount to the sum of its parts from a hostile takeover
  • Restructuring a company to unlock the value of a business segment that is not getting credit for its value through a spin-off, split-off, tracking stock, or equity (IPO) carve-out

This analysis is a useful methodology to gain a quick overview of a company by providing a detailed breakdown of each business segment's contribution to earnings, cash flow, and value. many companies can be viewed as a candidate for break-up valuation. The table below provides a number of examples:

Exhibit 5.19 – Candidates for SOTP Analysis

Company   Operating Divisions
 
Cablevision   Cable TV, retail electronics, theaters, sports team, cable network
Disney   Theme parks, broadcast network, film studio, retail stores
United Technologies   HVAC systems, elevators, aerospace, fire and security, energy
Fortune Brands   Home/hardware, golf equipment, office products, spirits and wines
Tyco   Telecom, electronics, fire and security, healthcare
Sara Lee   Food, beverages, household products, intimates and underwear

Methodology

(1) Gather segment-level data from any of the following sources:

  • Investor presentations
  • Corporate web sites
  • Research reports
  • Latest annual report, 10-K, or 10-Q
  • Moody's company profiles, S&P tearsheets

(2) Spread LTM and, to the extent possible, projected financial data for each business segment

  • Typical financial metrics used include EBITDA, EBIT, and net income
  • The SOTP financial information should equal the consolidated financial information for the entire company
  • As necessary, an "other" category may be used, but care should be taken to determine the nature of this category in order to assess multiples, value, etc.
  • Allocate corporate overhead to divisions based on percent of revenues, EBIT, or industry norms for each segment. It is also acceptable to value overhead as a standalone item
  • If depreciation and amortization are not provided by segment, allocate to divisions using methodologies that may include percent of assets, revenues, EBIT, or industry norms for each segment
  • Use your judgment to the extent necessary

(3) Determine an appropriate range of multiples for each business segment by applying metrics and multiples which are most relevant for each business segment

  • Use either trading or transaction comps, as appropriate, for each industry to determine the appropriate range
  • Use a range of multiples, not point estimates
  • To the extent overhead was not allocated, apply blended multiples to determine the "negative value" of overhead. Since this may create misleading values for the individual segments, allocating overhead is preferable, assuming there is sufficient data
  • DCF valuations may be useful for certain business segments

(4) Sum the values of each business segment, offset by corporate overhead, if appropriate. The result is an aggregate EV range for the consolidated company.

(5) Deduct net debt and add/subtract other non-operating/financial items from the EV range to determine a range of equity values.

(6) Divide by the sum of diluted shares outstanding to arrive at a range of equity values per diluted share. Be sure to include any in-the-money options and convertible securities.

(7) Other considerations:

  • Minority interest could be attributable to a single segment or may have components from all segments. If attributable to a single segment, be sure to make note of it in the valuation analysis
  • Similarly, certain liabilities may be attributable to one or more segments, or may be entirely separate

Interpreting the Analysis

Compare the range of results to current trading levels and ask: "At the current share price, is the company being undervalued or overvalued compared to the SOTP equity value per share?" Also, compare results to any of the following metrics and look for consistency with the calculated range:

  • 52-week high and low
  • Comparable companies analysis
  • Wall Street research

It is also important to "sanity check" the results. To do so, ask yourself what the key value drivers are and whether or not one segment is driving/distorting the overall company value.

Exhibit 5.20 – SOTP Analysis

The following spreadsheet demonstrates how to set up the sum-of-the-parts analysis for a publicly traded company. Note that the analysis will typically calculate the premium/discount to the current share price to suggest whether or not the public company is worth more or less when separated into its individual businesses.

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