Sum of the Parts SOTP Break-Up Valuation

You are right in pointing out that growth rates have significant effect on projections and valuations. It is therefore important to present the client with the sensitivity analysis of how your valuation changes with different growth rates. (obviously your assumption may not echo your client’s assumption and they may want to evaluate other scenarios). You actually pointed out a very interesting debate on what growth rates to be taken. I have seen that each analyst in Investment Bank have their own understanding of growth rates and their own justification of taking such approach. My rule of thumb for growth rate is to take it as less than the GDP Growth rate of the company.

sum of the parts valuation

Like all valuations, you’ll use a combination of different methodologies, but these complexities make it a bit trickier to figure out “reasonable” multiples to use for a biopharma company. Enterprise ValueEnterprise value is the corporate valuation of a company, determined by using market capitalization and total debt. It is commonly used to value conglomerates, holdings, and companies active in multiple industries. These are borne by all divisions and should be taken into consideration as well!

Step 3: Build a DCF Model for Each Division

Due to the more complex nature of these molecules, it is harder to prove a large molecule is “biosimilar” to another large molecule. FDA only recently established a pathway for approval of “biosimilar” large molecules that are substitutable for pioneer large molecules, and this pathway is harder and more expensive than the pathway for small molecules. You need to look into the details of the particular drug you are forecasting. Each of these could yield significantly different valuations, and there isn’t really a “standard” methodology as far as I can tell. Your VP may end up asking you for 15 different permutations, all of which are semi-justifiable but none of which are that great.

From there, the sum of each of the segment-level EBITDAs will generally equal the EBITDA of the whole company . This equity valuation method requires familiarity with industry & other assets. The valuation provides a range of values for a company’s equity by aggregating the standalone value of each of its business units and arriving at a single total enterprise value . If Company ABC which is a large company with different divisions or business units is to undergo restructuring, the Sum-of-parts valuation can be used. All its parts will be valued separately before their sum is aggregated to determine the true value of the company. If for instance, the entire company is valued at $675, it is the sum of the value of its different divisions and units.

E.g., If Global Peers is used for valuing the FMCG segment, then the contribution to the share price is Rs110/share. However, if you used Global Peers (EV/EBITDA), the contribution would have been Rs105/share. Reason – If the E-commerce segment is unprofitable, applying a blanket PE multiple for valuing all segments will not make much sense. Likewise, banks are correctly valued using the Price to Book value approach than the other available multiples. Discounted cash flow is a valuation method used to estimate the attractiveness of an investment opportunity.

Sum-of-parts valuation is a method of determining the true value of a company through an aggregate of the value of its parts or divisions, it entails knowing the worth of a company by valuing the worths of its parts. This approach of conducting a valuation of individual lines of business and then adding these values to derive the corporate valuation is called the sum of the parts valuation approach. Like MOJO, one can use an equity valuation model to value each segment. Asset-based ValuationAsset-based valuation refers to one of the approaches used to calculate the value of a business.

Even if the basis of SOTP valuations seems fundamentally sound , the limited amount of publicly available segment-level data can be a major drawback. In a normal Sum of the Parts Valuation, this step would be a simple matter of dividing the Implied Equity Value by the company’s share count . You might skip this step for private companies because share prices are less meaningful there.

Biotech finance 102 for finance professionals

The last thing you need is a disorganized mess — you’ll hate your life and be way more likely to make mistakes. Now that we’ve covered types of businesses where an SOTP approach is helpful, we can now talk about a few practical applications. Note that SOTP is helpful and used frequently in standard M&A and capital raising transactions, but these specific scenarios are even more tailored to the approach. This dynamic is reflected by applying different multiples to each segment, say 8.0x EV / EBITDA for the physical printing and 15.0x EV / EBITDA for the eCommerce business. In a normal model this would drive the value of the business in a proportional manner. However, investors and the market are much more excited about the faster growing, higher margin, scalable eCommerce business.

sum of the parts valuation

This means that all the divisions or segments of the business are evaluated distinctly and then summed up to realize the value of the firm. SOTP is used to determine the equity of a company, it entails valuing all its business entities before a single total enterprise value is arrived at. SOTP provides an insight into the value of a firm if its units or divisions were to be taken over by another firm. Discounted Cash Flow ValuationDiscounted cash flow analysis is a method of analyzing the present value of a company, investment, or cash flow by adjusting future cash flows to the time value of money. This analysis assesses the present fair value of assets, projects, or companies by taking into account many factors such as inflation, risk, and cost of capital, as well as analyzing the company’s future performance.

There are no additional expenses to subtract because SunPower already has teams to handle functions such as accounting, IT, and HR. One problem with analyzing the divisions separately is that they often need services that the larger parent company provides. …but the installation and services segment could potentially trade at a much higher revenue multiple in the 4.0 – 5.0x range, in-line with comparable companies in that sector.

Valuation methodologies for biopharma companies

For example, in India, the Diversification discount used for SOTP could be as high as 50%. FMCG (non-cigarettes) segment contributes 9% of Sales; however, this segment is unprofitable and results in an EBIT margin of -2%. In situations such as this one, larger companies have the ability to take advantage of synergies and economies of scale unavailable to smaller companies, enabling them to maximize a division’s profitability and unlock unrealized value. SOTP enables a company to establish a useful measure of its value which can be highly relevant in the case of a hostile takeover or a restructuring.

You only will and can do this analysis with a big ass company that does lots of different things. Well, if you are an asset manager and that’s all you do- you’re a pure-play AMC. In order to value the conglomerate like MOJO, one can use different valuation tools to value each segment. Valuing a company by determining what its divisions would be worth if it was broken up and spun off or acquired by another company. SOTP is the most common way of figuring out what the individual divisions of a company would be worth on the off chance that they were veered off or bought by an alternate company. The next major tax issue is understanding how various corporate structures and IP domiciles influence tax rate.

Take the total EV, which is the sum of the EVs for the different divisions, and divide it by consolidated Earnings before interest and taxes . The company consists of three segments that are each valued at different multiples and operate in different industries. INVESTMENT BANKING RESOURCESLearn the foundation of Investment banking, financial modeling, valuations and more. Below is the table that consolidates the valuation of all five segments. Please note that the various scenarios are used to evaluate the fundamental value of ITC.

Many pharma companies have historically domiciled much of their core IP in low-tax countries like Ireland, so profits from drugs using this IP is taxed at a very low rate. These laws are complex and rapidly changing, and when you need to get sharp on this, usually for a live deal, consult with lawyers. Deal-level cash-on-cash returns, proceeds from exits, check sizes, and more for thousands of public and private biotech investors covering hundreds of billions of dollars in deals.

  • So you could include a terminal value to account for the value of products the company has not invented / acquired yet, but is likely to invent / acquire in the future.
  • The objective of SOTP is to value each part of the company separately and then add all of the calculated values together.
  • In these cases, it’s likely that the market views the company as a prime takeout candidate.
  • With the EPS information of the segment, we can multiple this by 10.2 to find the fair price of that segment.
  • The operational logic is more difficult to justify because we don’t know the true benefits of spinning off the manufacturing division.

The existence of conglomerate discount is still a hotly debated topic. Some analysts argue that there is no discount as such and the company’s are plain and simple undervalued in the market. However, other analysts argue that it has to be quite a coincidence that almost all the conglomerate companies are more or less undervalued in the market.

How do you value a business segment?

Each of these will have totally different product offerings, revenue models, cost bases, and valuations. We’ll cover this in more detail later, but these segments are also helpful to piece together individual valuations. You can apply different multiples (such as EV / EBITDA or other) to the financials of each segment to arrive at an isolated value for that business line. When added together, the sum of the individual values will be your estimate of the value of the WholeCo business. Secondly, if marketing gurus Al Ries and Jack Trout are to be believed, focusing on different businesses can lead to dilution of brand equity. Of course, the result is lower sales over a longer time horizon and finally the company may have to take a huge markdown on its equity valuation.

Example of Sum Of The Parts (SOTP) Valuation

Get instant access to video lessons taught by experienced investment bankers. Learn financial statement modeling, DCF, M&A, LBO, Comps and Excel shortcuts. On the lower end of the valuation range, the implied equity value of our company is $860m, whereas, on the higher end of the range, the implied equity value is $1.24bn. Companies, including conglomerates, rarely provide sufficient information in their filings to build a complete model and value for each segment.

Many pharma companies accrue a lot of net operating losses when they are developing their drugs, and these losses can be valuable tax shields. This is an area where you’ll want to figure out how your group typically handles this accounting, and get feedback from lawyers and accountants on important deals. For the purposes of this post, I’ll just flag it as something to look out for.

2) We’ve assumed “dis-synergies” for Maxeon in the separate model, so its Operating Income is already lower as a result of having to pay for expenses that the parent previously covered. There’s no point backing into an Implied Share Price based on this comparable company analysis because we want the Implied Share Price for the entire company. Can you please also elaborate how to value a specific part of a business. For example, if a pharma company has generic and specialty products and within the specialty products, orthopedics is a sub-segment. As an example, if you look at Step 4, the average PE for Global Peers comes out to be 10.2x.

An SOTP financial model of the document printing business will require analysis of foot traffic, print volumes, pricing by document type, cost of paper, rent, store employees, etc. Conversely, the eCommerce model will require a view on number of printers sold, price of the printers, cost of goods for the printers, warehouse sum of the parts valuation space, online advertising expense, etc. The SOTP methodology is not limited to the largest multinational conglomerates . In reality it’s also hugely helpful for any business with disparate divisions or offerings. Sum-of-the-parts, or SOTP, is a modeling and valuation approach frequently used by bankers and investors.

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