FOM Fachhochschule für Oekonomie & Management

University of Applied Sciences

Essen

Master of Business Administration

Corporate Valuation

Endesa

Module: Financial Management

Author:

Stefan Kempka

Essen, February 5th, 2007

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Corporate Valuation - Endesa

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Executive Summary

The European energy power markets continue to be one of the major topics of politi-

cal, industrial and financial discussions and meetings. Prices of the energy products

are increasing due to declining reserves and the emerging countries like China and

India are fueling a constant growth in world-wide demand. The right energy mix for

the utility companies is becoming more and more important as wel as the invest-

ments in a `cleaner′ energy due to ecological issues are necessary.1

For a utility company a powerful standing is essential to secure these supply issues

for short and long-term supply. This is maybe one reason for the upcoming consoli-

dation in the energy market. E.ON is also trying to play this game. Its strategic and

financial goals through the merger with Endesa are to create the world′s leading

power and gas company and therefore, a stronger presence in the European and

American market as wel as to create an advanced financial value for the sharehold-

ers.2

General y for mergers it is important that both, investors in shares and managers of

companies seeking to make acquisitions, need to know how much a company is

worth and how much they are wil ing to pay for their investment. Therefore, the au-

thors outline the theoretical background of valuating companies and wil show how

different valuation techniques can be used in different contexts. As for every acquisi-

tion, on the one hand the possible buyer should always bear in mind that: "Price is

what you pay, value is what you get"3. On the other hand it is also important to keep

in mind that: "A thing is worth whatever the buyer wil pay for it".4 These are two

statements which are also important beside the valuated company values.

For that reason, the authors valuate Endesa with two different valuation methods in-

cluding their different approaches. First of al the Discounted Cash Flow (DCF)

method wil be applied. Herewith the authors wil use the three different approaches:

1 Cf. Capgemini 2006, p. 2.

2 Cf. E.ON presentation 2007, p. 5.

3 Ernst/Schneider/Thielen 2006, p. VI.

4 Publilius Syrus, cf. Forbes.com 2007.

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Corporate Valuation - Endesa

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entity, equity and the adjusted present value technique. Afterwards these results are

validated with three different multipliers by using the multiplier method.

The average result ­ without the result of the Discounted Cash Flow method / equity

approach ­ of these calculation is an estimated share price of 41,81 /share or a

corporate value of about 44,262 bil ion for Endesa. The last bid of E.ON was placed

on 02. February 2007 with a value of 38,75 /share this means a corporate value of

41,027 bil ion.5

5 Cf. Tagesschau.de 2007.

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Corporate Valuation - Endesa

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Table of Contents

Executive Summary II

List of Figures VI

List of Abbreviations VIII

1

Introduction 1

2

Problem Description 3

2.1 Objective 3

2.2 Methodology 3

3

Methods of Corporate Valuation 4

3.1 Background of Corporate Valuation 4

3.2 Valuation Methods 7

3.2.1 Net Asset Value Method 9

3.2.2 Liquidation Value Method 10

3.2.3 Real Options Method 11

3.2.4 Multiplier Method 12

3.2.5 Discounted Cash Flow Method 14

3.2.5.1 Parameters of the DCF Methods 16

3.2.5.2 Entity Approach 18

3.2.5.3 Equity Approach 19

3.2.5.4 Adjusted Present Value Approach 21

3.2.6 Earnings Value Method 22

4

Overview of Endesa 24

4.1 Company profile of Endesa 24

4.1.1 Business Activities of Endesa 24

4.1.2 The Financial View of Endesa 25

4.2 Deals and Developments in the Energy Market 26

4.3 The deal between E.ON and Endesa 27

5

Corporate Valuation of Endesa 31

5.1 Assumptions for the corporate valuation 31

5.2 Discounted Cash Flow Methods 34

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Corporate Valuation - Endesa

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5.2.1 Different Variables for the DCF Valuation 34

5.2.2 Entity Approach 37

5.2.3 Equity Approach 39

5.2.4 Adjusted Present Value 40

5.3 Multiplier Method 41

5.3.1 Peer-Group composition 41

5.3.2 Price-Earnings-Ratio 43

5.3.3 Price-Bookvalue-Ratio 44

5.3.4 Price-Cash-Flow-Ratio 44

5.4 Wrap-up of Corporate Valuations 46

6

Conclusion and Outlook 50

Appendixes VII

Bibliography X

Internet Sources XIV

ITM-Checklist: 360-degree analysis XVI

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Corporate Valuation - Endesa

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List of Figures

Figure 1 - Share price of Endesa from September 2005 up to January 2007

Figure 2 - The Eight Paradigm of Corporate Valuation according to T. S. Kuhn

Figure 3 - Evaluation Causes

Figure 4 - Overview of Corporate Valuation Methods

Figure 5 - Current Corporate Valuation Methods in the Context of international M&As

Figure 6 - Calculation of the Net Asset Value

Figure 7 - Calculation of the Liquidation Value

Figure 8 - Flowchart for the Multiplier Method

Figure 9 - Formation of a Multiplier

Figure 10 - DCF Valuation Steps

Figure 11 - Different Cash Flows

Figure 12 - CAPM Formula

Figure 13 - WACC Formula

Figure 14 - DCF ­ Entity Approach

Figure 15 - DCF ­ Equity Approach

Figure 16 - DCF ­ Adjusted Present Value Approach

Figure 17 - World Primary Energy Demand

Figure 18 - Global scale of Endesa and E.ON

Figure 19 - Free cash flow projections

Figure 20 - WACC assumptions

Figure 21 - Market rate

Figure 22 - Betas and Capital Quotes

Figure 23 - WACC result of Endesa and of the market comparison

Figure 24 - DCF Entity Value Calculation ­ Assumptions

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Corporate Valuation - Endesa

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Figure 25 - DCF Entity Value Calculation ­ Terminal Value

Figure 26 - DCF Entity Value Calculation ­ Entity Value

Figure 27 - DCF Equity Value Calculation ­ Assumptions

Figure 28 - DCF Equity Value Calculation ­ Terminal Value

Figure 29 - DCF Equity Value Calculation ­ Equity Value

Figure 30 - DCF Adjusted Present Value Calculation ­ Assumptions

Figure 31 - DCF Adjusted Present Value Calculation ­ Terminal Value

Figure 32 - Peer Group for Endesa

Figure 33 - P/E-Ratio

Figure 34 - P/B-Ratio

Figure 35 - P/CF-Ratio

Figure 36 - Results of the Different Valuation Methods

Figure 37 - Offer/Demands for Endesa

Figure 38 - Self evaluated values in relation to E.ON´s last bid

Figure 39 - Brokers′ fair values to E.ON´s last bid

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Corporate Valuation - Endesa

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List of Abbreviations

APV

-

Adjusted Present Value

CAPM

-

Capital Asset Pricing Model

CEO

-

Chief Executive Officer

Cf.

-

Confer

CNE

-

National Energy Commission

CNMV

-

Comisión Nacional del Mercado de Valores

COGS

-

Costs of Goods Sold

DCF

-

Discounted Cash Flow

DJ

-

Dow Jones

DrKW

-

Dresdner Kleinwort

e

-

estimated

e.g.

-

exempli gratia; for example

EBIT

-

Earnings before interest and taxes

EBITDA

-

Earnings before interest, taxes, depreciation and amortization

EBT

-

Earnings before taxes

Ed.

-

Editor

EdF

-

Electricté de France

Et seq.

-

And the fol owing

etc.

-

et cetera

FCF

-

Free Cash Flow

GAAP

-

General y Accepted Accounting Principles

GdF

-

Gaz de France

IEA

-

International Energy Agency

IFRS

-

International Financial Reporting Standards

IPO

-

Initial Public Offering

M&A

-

Merger and Acquisitions

MBO

-

Management Buy Out

Mgt.

-

Management

MRP

-

Market Risk Premium

MW

-

Mega-watt

MWh

-

Mega-watt-hour

NCF

-

Net Cash Flow

P/B

-

Price-Bookvalue

P/CF

-

Price-Cash-Flow

P/E

-

Price-Earnings

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