The European energy power markets continue to be one of the major topics of political, 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 well as the investments in a ‘cleaner’ energy due to ecological issues are necessary. For a utility company a powerful standing is essential to secure these supply issues for short and longterm supply. This is maybe one reason for the upcoming consolidation 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 well as to create an advanced financial value for the shareholders. Generally 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 willing to pay for their investment. Therefore, the authors outline the theoretical background of valuating companies and will 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”. On the other hand it is also important to keep in mind that: “A thing is worth whatever the buyer will pay for it”. 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 including their different approaches. First of all the Discounted Cash Flow (DCF) method will be applied. Herewith the authors will use the three different approaches: 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 billion 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 billion.
Table of Contents
1 Introduction
2 Problem Description
2.1 Objective
2.2 Methodology
3 Methods of Corporate Valuation
3.1 Background of Corporate Valuation
3.2 Valuation Methods
3.2.1 Net Asset Value Method
3.2.2 Liquidation Value Method
3.2.3 Real Options Method
3.2.4 Multiplier Method
3.2.5 Discounted Cash Flow Method
3.2.5.1 Parameters of the DCF Methods
3.2.5.2 Entity Approach
3.2.5.3 Equity Approach
3.2.5.4 Adjusted Present Value Approach
3.2.6 Earnings Value Method
4 Overview of Endesa
4.1 Company profile of Endesa
4.1.1 Business Activities of Endesa
4.1.2 The Financial View of Endesa
4.2 Deals and Developments in the Energy Market
4.3 The deal between E.ON and Endesa
5 Corporate Valuation of Endesa
5.1 Assumptions for the corporate valuation
5.2 Discounted Cash Flow Methods
5.2.1 Different Variables for the DCF Valuation
5.2.2 Entity Approach
5.2.3 Equity Approach
5.2.4 Adjusted Present Value
5.3 Multiplier Method
5.3.1 Peer-Group composition
5.3.2 Price-Earnings-Ratio
5.3.3 Price-Bookvalue-Ratio
5.3.4 Price-Cash-Flow-Ratio
5.4 Wrap-up of Corporate Valuations
6 Conclusion and Outlook
Research Objectives and Themes
The primary objective of this assignment is to conduct a literature-based overview of common corporate valuation methods and to apply these techniques to the Spanish utility company Endesa in the context of a potential acquisition by E.ON. The research examines how various valuation approaches yield different results based on the underlying assumptions and chosen parameters.
- Theoretical background and paradigms of corporate valuation.
- Comparative analysis of Discounted Cash Flow (DCF) and Multiplier methods.
- Financial profiling of Endesa and its market positioning in the energy sector.
- Practical application of valuation formulas to determine corporate value and share price.
- Evaluation of E.ON's takeover bids in relation to the calculated fair value.
Excerpt from the Book
3.2.1 Net Asset Value Method
The net asset value method belongs to the separate valuation methods. These kinds of techniques use balance-sheets data to determine the value of a company. By summarizing all net assets and deducting all debts the so called substance value of a company is determined.21
The net asset value is the needed value to re-establish the company with the same efficiency ‘in the open countryside’ at the same or comparable location, completely operative with fixed and current assets, goodwill and company know-how in the case of continuation the business (Going concern). In this context goodwill is meant as the difference between the price which is paid for the company and its book value. This value will appear on the acquiring company´s balance sheet so it will increase their book value.22
Calculating the net asset value is done by summing up the liquidation value of all non-operating capital and the reproduction value of the operating capital and deducting the value of debt capital. This formula can be seen in the shown figure above.
The advantage of this method is the easiness of understanding, in relation to the small calculation procedures. Furthermore, the values are very precise quantifiable and all data is listed in the balance-sheet so there is no extra value which has to be determined like in the other corporate valuation methods. So, this method serves as approximate value for the lower value limit. On the other hand this method has two mentionable disadvantages. First of all it is not useful for market price determinations because the whole method is related to the past. No future investments, turnovers or debts and no further growth rates are considered as well. Secondly it does not include intangible assets like research and development (R&D), intellectual capital, brands, licenses, patents, etc. furthermore, it is very difficult to value them all.24
Chapter Summary
1 Introduction: Provides an overview of the potential acquisition of Endesa by E.ON and discusses the evolution of the share price driven by takeover bids.
2 Problem Description: Defines the objective of the study, which is to apply various valuation methods to Endesa, and outlines the chosen research methodology.
3 Methods of Corporate Valuation: Discusses the theoretical background of valuation techniques, covering Net Asset Value, Liquidation Value, Real Options, Multipliers, DCF, and Earnings Value methods.
4 Overview of Endesa: Offers an in-depth profile of Endesa, its business activities, financial health, and the historical context of its consolidation attempts in the energy market.
5 Corporate Valuation of Endesa: Details the practical application of DCF and Multiplier methods to determine Endesa's value, including all necessary assumptions and comparative analysis against E.ON’s offers.
6 Conclusion and Outlook: Summarizes the valuation findings, contrasting the authors' results with broker fair values, and discusses future trends in corporate valuation.
Keywords
Corporate Valuation, Endesa, E.ON, Discounted Cash Flow, Multiplier Method, M&A, Equity Approach, Entity Approach, Share Price, Financial Management, Energy Market, Net Asset Value, Capital Asset Pricing Model, WACC, Takeover
Frequently Asked Questions
What is the core focus of this research?
The work primarily focuses on the corporate valuation of the Spanish energy company Endesa during the period of its potential acquisition by the German company E.ON.
What are the central topics addressed?
The central topics include the theoretical framework of corporate valuation, the market environment of the energy sector, and the financial implications of large-scale mergers and acquisitions.
What is the primary objective of this assignment?
The objective is to provide a literature-based overview of common valuation methods and to apply these methods to calculate a realistic corporate value for Endesa.
Which scientific methods are applied?
The author applies the Discounted Cash Flow (DCF) method, specifically the entity, equity, and APV approaches, as well as the Multiplier method using P/E, P/B, and P/CF ratios.
What does the main body cover?
The main body examines corporate valuation theory, provides a detailed business profile of Endesa, and presents a step-by-step valuation analysis based on various financial assumptions.
Which keywords best characterize this work?
Key terms include Corporate Valuation, E.ON, Endesa, DCF, Multiplier Method, M&A, and Share Price.
Why is the Entity Approach yielding different results?
The study notes that the Entity Approach results differ significantly from other methods, potentially due to the specific adjustment of assumptions applied by the authors.
How do the author’s valuations compare to actual market bids?
The author’s calculated average value (excluding the entity approach) is higher than E.ON’s final bid, suggesting that E.ON may be paying a price below the intrinsic value of the company.
- Quote paper
- Dipl. Kfm. (FH); Dipl. B.Inf. (FH) Stefan Kempka (Author), 2007, Corporate Valuation of Endesa, Munich, GRIN Verlag, https://www.grin.com/document/117697
