Chartered Financial Analyst Level 2
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38 A company is comprised of two operating segments, Segment A and Segment B. The company trades at an EV of €785 million, with an implied conglomerate discount of €100 million based on peer valuations. Financial information on the two segments is provided below:
- Peer median EV/EBITDA multiple for Segment A: 5.0
- Segment A EBITDA: €50 million
- Segment B EBITDA: €80 million
The company receives a bid for Segment B, valuing it at an EV/EBITDA of 5.4. The bid:
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A
undervalues Segment B.
B
fairly values Segment B.
C
overvalues Segment B.
Explanation:
Explanation
To determine whether the bid undervalues, fairly values, or overvalues Segment B, we need to calculate the implied value of Segment B from the company's current valuation.
Step 1: Calculate the sum-of-the-parts value without conglomerate discount
- Segment A value = Segment A EBITDA × Peer median EV/EBITDA multiple = €50 million × 5.0 = €250 million
- The company's current EV = €785 million
- Implied conglomerate discount = €100 million
- Sum-of-the-parts value = Current EV + Conglomerate discount = €785 million + €100 million = €885 million
Step 2: Calculate Segment B's implied value
- Segment B implied value = Sum-of-the-parts value - Segment A value = €885 million - €250 million = €635 million
Step 3: Calculate Segment B's implied EV/EBITDA multiple
- Segment B implied EV/EBITDA = Segment B implied value ÷ Segment B EBITDA = €635 million ÷ €80 million = 7.94
Step 4: Compare with the bid multiple
- Bid EV/EBITDA multiple = 5.4
- Implied EV/EBITDA multiple = 7.94
- Since 5.4 < 7.94, the bid undervalues Segment B.
Therefore, the correct answer is A: undervalues Segment B.
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