Unilever to buy Sara Lee Unit

Escrito el 25 Septiembre 2009 por Antonio Rivela Rodríguez en Uncategorized

How to calculate a exit value? or how to do an easy valuation of the equity of a firm?

If you value all the cash flows of a company, but as a shareholder you assume that you sell your equity after 5 years (that cash coming from that sale is the so called “terminal value”).

The easiest way to calculate an exit value (terminal value) is to use a ratio to produce a quick calculation.

Depending on the industry, ratios do differ.

This example will be appreciated by all of you that want to pursue a career in marketing (P&G, Unilever, L’Oreal, etc).

Once you master the discounted cash flows techniques is always good to remember that the most used procedures are much more simple -> Comparable Firm Ratios.

For example… Companies like Unilever, Loreal, P&G tend to use the ratio: Firm Value to Sales, not to be confused by Price to Earnings (PER).

Firm Value = Debt + Equity, but these type of companies do not have much debt, so the ratio is often confused with Equity to Sales.
This blog refers to the acquisition of the Soap´s unit of Sara Lee Corp by Unilever.

If you read this article (Source: Bloomberg) you will realize that… Unilever’s offer price values Sara Lee’s body-care operations at 1.7 times annual revenue. In 2006, L’Oreal SA bought Body Shop International Plc for 1.5 times its sales.

So you see… that the ratio “equity price to sales” is the most used in that industry because its a “revenue-driven” industry.

So if you want to value a firm like Loreal, just multiply their revenues by a ratio (1.5x – 2x) and you will obtain a pretty accurate “back of the envelope” calculation of the value of the shares (= equity value = Market Capitalisation).

As I said if that company has financial debt, you need to subtract that debt to achieve the value of the equity. Because the ratio should be Firm Value / Sales.
See below for the article:

Unilever, the maker of Dove soap, agreed to buy Sara Lee Corp.’s personal-care and European detergent unit for 1.28 billion euros ($1.88 billion), gaining Sanex shower gel in its biggest purchase in nine years.

Unilever, based in London and Rotterdam, will pay cash for the business, which makes Duschdas and Radox soap and had sales of more than 750 million euros for the year ending June 2009, according to a statement today. Sara Lee, which has been shedding units to focus on coffee and food, said the proceeds would help it buy back up to $1 billion in stock.

The purchase is the largest by Chief Executive Officer Paul Polman since he took the reins at Unilever at the start of the year. He focused the company on winning back cash-strapped shoppers and boosting sales volumes by cutting prices, and was rewarded as the company unexpectedly posted volume growth in western Europe in the second quarter.

“We’re not convinced that this is the greatest collection of assets, but another acquisition shows Unilever is still moving from the back foot — cost cutting, disposals — to the front foot — volume growth, acquisitions,” Credit Suisse analysts said in an e-mailed note.

The deal is Unilever’s biggest acquisition since buying SlimFast Foods Co. and Ben & Jerry’s Homemade Inc. for a combined $2.6 billion in April 2000. Unilever’s brands besides food include Vaseline and Axe deodorants.

Comparable Valuations

“This transaction builds on our portfolio in Western Europe and also in Asia,” Polman said in the statement. “The Sara Lee brands enjoy strong consumer recognition, offer significant growth potential and are an excellent fit with Unilever’s existing business.”

Unilever dropped 10 cents to 19.19 euros in Amsterdam trading at 11 a.m. local time. The shares have added 11 percent this year. Sara Lee, based in Downers Grove, Illinois, rose 40 cents, or 3.7 percent, to $10.94 in German trading.

Unilever’s offer price values Sara Lee’s body-care operations, which also include Zwitsal baby shampoo and Zendium toothpaste, at 1.7 times annual revenue. In 2006, L’Oreal SA bought Body Shop International Plc for 1.5 times its sales.

The transaction needs regulatory approval and the companies will consult with European employee works councils, Unilever said today.

To entice cash-strapped European consumers, Polman has also increased ad spending, boosted promotions and accelerated new product introductions since he took over as CEO.

Unilever is taking “quicker actions where we’re feeling that our brands are out-positioned or at a disadvantage, where we’re losing share,” Polman said in May. He said he’s fighting an “inherited assumption that the company will not grow.”

“This is a show of confidence” by Polman, said Julian Hardwick, a Royal Bank of Scotland analyst in London who recommends investors hold Unilever stock. “It fits very well with their personal-care categories.”

Sara Lee Chief Executive Officer Brenda Barnes, a former PepsiCo Inc. executive who took over as CEO in 2005, has sold off clothing lines in the U.S. and Europe, as well as a U.S. coffee unit.


Pier Verlato 26 Septiembre 2009 - 16:12

Very clear and useful article. It would be interesting to know – for every industry – what ratios investment bankers use to calculate the equity value of the companies. Knowing this, after a quick calculation and a comparison of the result with the other companies in the same industry, it would be possible to have a first idea of the valuation of the firm. If under-valuated, the company should be considered for investment purposes, as Warren Buffet and the value investing school teach.

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I am wondering why P/S is preferred to P/E for valuing companies in the industry. Is it that operating costs, which ultimately determine the bottom line are not of much importance in valuing shares of such companies?

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