Corporate Valuation of the E.ON AG

Seminar Paper, 2008

55 Pages, Grade: 2,3












5.1 Overview
5.2 Separate Valuation Methods
5.2.1 Reproduction Value Method
5.2.2 Liquidation Value Method
5.3 Mixed/Relative Valuation Methods
5.3.1 Real Options Method
5.3.2 Market Multiplier Method
5.4 Global Valuation Method
5.4.1 Discounted Cash Flow Method Entity Approach Equity Approach
5.4.2 Adjusted Present Value Method
5.4.3 Earnings Value Method

6.1 Overview
6.2 Financials
6.2.1 Sales and revenues
6.2.2 Employment situation
6.2.3 Stock development
6.3 Sector analysis and competitors

7.1 Assumptions for the corporate valuation
7.2 DCF-Entity:
7.3 DCF-Equity:
7.4 Multiplier Method
7.4.1 Peer-group composition
7.4.2 Definition of multipliers
7.4.3 Multiplier aggregation over peer group
7.5 Summary of evaluation results





The main scope of this assignment is the valuation of the E.ON AG - a German based energy corporation, with about 88.000 employees and annual sales of about 69 billion Euros. It is one of the world’s largest investor-owned energy service firms. The core activities of E.ON are the generation, transmission and distribution of electricity as well as the transmission, storage and sale of natural gas.

For the corporate evaluation of E.ON, the editor based his calculation on the two most common global evaluation approaches - the discounted cash flow (DCF) and the multiplier method. The DCF method estimates the value of a company by discounting expected cash flows in the future or determined period of time, similar to the value of an investment. For the assessment of the company value, the entity and equity DCF method with an assumed constant growth rate between 1.5 and 3 percent, have been utilized.

For the validation of the calculated DCF corporate values the multiplier method was executed as second evaluation method based on Price-Earnings, Price-Book value and Price-Turnover ratios. For the necessary peer-group, the authors selected the other three big players RWE, EnBW and Vattenfall, which form an oligopoly market in Germany. Including E.ON they own more than 70 percent of German energy infrastructure and have a market share of about 95 percent.

The calculation of the different entity and equity based discounted cash flows and P/E, P/B and P/T ratios resulted in a wide range of corporate values between 73 billion and 146 billion Euros.

Finally, the average corporate value of the E.ON AG was determined at approximately 109 billion Euros.


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Figure 1: E.ON AG Chart

Figure 2: Overview of Corporate Valuation Methods

Figure 3: Present Corporate Evaluation Methods in the context of M&A

Figure 4: Calculation of the Net Asset Value (NAV)

Figure 5: Calculation of the Net Asset Value

Figure 6: Calculation of the Liquidation Value

Figure 7: Calculation of the Market Multiplier

Figure 8: Process of the Market Multiplier Method

Figure 9: Calculation of the Corporate Value

Figure 10: Different Cash Flows

Figure 11: DCF by using the Entity Approach

Figure 12: Calculation of WACC

Figure 13: Calculation of CAPM

Figure 14: DCF-Entity Formula

Figure 15: DCF by using the Equity Approach

Figure 16: DCF-Entity Formula

Figure 17: DCF by using the Adjusted Present Value Method

Figure 18: Calculation of Earnings Value

Figure 19: E.ON Group Structure

Figure 20: E.ON’s Stock Development 01.01-31.12.2007

Figure 21: RWE’s Market Position

Figure 22: EnBW’s Market Position

Figure 23: Vattenfall’s Market Position

Figure 24: Wrap-up of all Valuation Methods


Table 1: Sales

Table 2: Assets Situation

Table 3: Adjusted EBIT and Net Income

Table 4: Employment Situation

Table 5: Assumptions and Values for the Corporate Valuation

Table 7: DCF-Entity Value Calculation (growth rate 2 percent)

Table 6: DCF-Equity Value Calculation (growth rate 2 percent)

Table 8: Peer Group Multiplier Method

Table 10: Price-Book Value Ratio

Table 9: Price-Earnings Ratio

Table 11: Price-Turnover Ratio

Table 12: Results of the Multiplier Method


Corporate evaluation and stock analysis has a long history1. As far back as in 1602, with the foundation of the United East-Indian Company (UEC) and to finance its sea fleet, the first share certificates were initially offered. Dependent upon the current market situation, e. g. war or peace time, the share and thus the market value of the UEC was valued differently by investors and shareholders. Accordingly, in the course of time different dividend payments for capital investors could be generated2.

This diagram illustrates the necessity to objectively assess the value of a company. The price which is paid for a company does not necessarily correlate with its worth. The price is influenced by market supply and demand. Conversely, the company value is determined as the total capital value expressed as the return of investment for all investors (both, equity and debt capital investors)3.

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Figure 1: E.ON AG Chart (cf. 2008, p. 1)

This paper presents an overview of the different methods of corporate evaluation. Thereafter, E.ON AG is introduced and evaluated by using the discounted cash flow and multipliers method.


There is no objective “enterprise value” in practice. Entrepreneurs, who want to sell their business, (in addition to the property) consider the work that has been invested in the company as adding value to the business. The buyer however, focuses on the future earnings of the company and how to finance the purchase price. Consequently, both have different opinions regarding the purchase price. Different future objectives and personal assets can lead to different, but individually correct, values4.

Furthermore, a legally binding approach for the company valuation does not exist. Science and practice utilize different methods to identify the value of a company depending on the reason and perspective of the evaluation. Thus the purchase of a company or an initial public offer (IPO), resulting in a change of property or a shareholder based management, can be motivating reasons for a corporate evaluation resulting in different analysis approaches5.


This assignment has two main goals. First, it provides an overview of the different and most commonly used corporate valuation methods in management practice. The E.ON AG and a short sector as well as competitor analysis of the power market, are presented.

The second objective is the valuation of the E.ON AG to assess its market value by applying both the discounted cash flow (DCF) and multiplier method.


This study consists of eight chapters. After the introduction, chapter two and three include the problem description and research objective of the present assignment. Research methodology is presented in chapter four.

Chapter five presents basic information on corporate evolution. Different theoretical evaluation approaches to measure the corporate value and their proliferation in practice are discussed. The reader’s attention is directed to the discounted cash flow and multiplier method.

Chapter six provides the company profile of E.ON AG, the world’s largest privately owned energy service provider. A sector and competitor analysis is presented later.

Based on the entity and equity discounted cash flow approach and multiplier method, the E.ON AG is evaluated and the results are visually presented in detail in chapter seven.

The conclusion in chapter eight summarizes all findings and concludes the assignment.


The theoretical part of this assignment addresses an understanding off the methods of corporate valuation. An overview of the regularly used methods is displayed in paragraph 5.1. In the following paragraphs, the mentioned methods will be articulated. Therefore formulas, tabulations und graphics will be supportively used.

5.1 Overview

As touched upon earlier the motivation for corporate evaluation is multiple and last but not least mainly dependent on legal regulations and the different types of enterprises to be evaluated. Three motivational reasons for the valuation can be broadly distinguished from each other. Firstly, the obligation to assess the company’s value by law, e.g. business squeezes out according to the “Aktiengesetz” or the increase of capital. Secondly, private liability reasons such as a part/full acquisitions or sale of the company, the exit of partners of the company, and also inheritance classifications. Besides that, a large number of other miscellaneous reasons such as the initial public offer or stock and credit ratings do exist.

Out of these motivational aspects a large number of different evaluation models have evolved and which are being applied by accountants and economists with regards to the evaluation aim and objective6.

In figure two, a detailed overview of the various methods for corporate valuation is shown.

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Figure 2: Overview of Corporate Valuation Methods (cf. Reuse 2007, p.10)

In general, three main groups can be differentiated. Firstly, the separate valuation methods group comprises the reproduction value method and the liquidation value method. Secondly, the group of global valuation methods is separated into the DCF methods and the earnings value method. Lastly, the mixed valuation methods are subdivided into the real option method and the market multiplies method7.

According to the above mentioned methods, the observed frequency of their usage in science and practice is displayed in figure three.

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Figure 3: Present Corporate Evaluation Methods in the context of M&A (cf. Fr è re 2008, p. 16)

The Discounted Cash Flow and the market multiples methods are, for example, the dominating and mostly used techniques for the corporate evaluation in the context of mergers and acquisitions (M&A)8. To provide the reader with basic knowledge on those two methods, as they are used for the evaluation of the E.ON AG, they will be elaborated in more detail together with a quick overview of the other methods in the following paragraphs

5.2 Separate Valuation Methods

The separate valuation methods calculate the company value in simple words as sum of assets and debt capital. In a first step, all individual value assets must be determined as isolated from each other. Thus all assets add up to the total company value. Consequently, the net asset value (NAV) can be calculated as displayed in Figure four9.

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Figure 4: Calculation of the Net Asset Value (NAV) (cf. Ernst et al. 2003, p.3)

The net asset value of a company can be determined based on the assumption of the reproduction or liquidation of the company.

5.2.1 Reproduction Value Method

The reproduction value method is based on the “going concern” principle. This theory assumes a continuation of the company and supposes that the company will reproduce or re-estimated asset-identically10. The emerging costs for this will be used as the valuation rate. The reproduction value complies with the current replacement value. The net asset value can be calculated by summing up the liquidation value of the non operational assets and the reproduction value of operational assets and subtracting the value of debt11.

The set phrase for this approach is shown in figure five.

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Figure 5: Calculation of the Net Asset Value (cf. Ernst et al. 2003, p. 3)

5.2.2 Liquidation Value Method

The liquidation value method does not use the “going concern” principle, unlike the reproduction value method. It uses rather the idea that the company value can be measured by redistribution/sales of assets. The income of the corporate sale minus the liquidation costs, such as expenses for a redundancy program, and minus the value of debt capital, results in the liquidation value12.

Figure six displays the simplified calculation of the liquidation value.

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Figure 6: Calculation of the Liquidation Value (cf. Wiehle et al. 2005, p.33)

5.3 Mixed/Relative Valuation Methods

5.3.1 Real Options Method

The real options method is not used only for corporate valuation. It is also applied in investments and management concepts. The management evaluates prospective investments and disinvestments, which are based on information and events in the future, so that they can react during a running process and influence the cash flow13.

5.3.2 Market Multiplier Method

In comparison to the DCF method the multiplier approach is very simple but gives a quick first evaluation of a company. The multiplier method evaluates the market value of a company by deriving its value from existing market values of comparable companies with similar operating and financial characteristics14. The multiplier approach is based on the assumption that companies, which are comparable to the company being evaluated, can be valued in the same way15.

The different multipliers are determined by putting the value of a company in relation to a scale base, as displayed in figure seven. In practice, different multipliers are possible and can be applied within the valuation process. These ratios might be the profit, the earnings before interest and taxes (EBIT) or the turnover.

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Figure 7: Calculation of the Market Multiplier (cf. Ernst et al. 2003, p. 145)

In the following figure the valuating process based on the multiplier method as it is used for the valuation of the E.ON AG in chapter seven is outlined.

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Figure 8: Process of the Market Multiplier Method (cf. Ernst et al. 2003, p. 144.)

To start off, all comparable companies must be identified. The chosen ones are called the peer group. Following this, important information will be collected and interpreted. In the third step, the derivative multipliers for the companies will be added and afterwards aggregated to one multiplier by using the mean value or median. By multiplying these aggregated multipliers with the respective scale base of the company to be evaluated, the corporate value can be determined16.

Figure nine shows the calculation of the corporate value.

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Figure 9: Calculation of the Corporate Value (cf. Ernst et al. 2003, p. 145)


1 Cf. Born 2003, pp. 33.

2 Cf. Seppelfricke 2007, p. 1.

3 Cf. ebd., p. 2.

4 Cf. Handelskammer Hamburg 2008, w. p.

5 Cf. Reuse 2007, p. 5.

6 Cf. Drukarczyk and Schüler, 2007, p. 95.

7 Cf. Ernst et al. 2003, p. 2.

8 Cf. Frère 2008, p. 16.

9 Cf. Ernst et al. 2003, pp. 2.

10 Cf. Kuhner and Maltry 2006, p. 43.

11 Cf. Ernst 2003, pp. 3.

12 Cf. Ballwieser 2004, p. 181

13 Cf. Reuse 2007, p. 28.

14 Cf. Palepu et al. 1996, p. 7-9.

15 Cf. Wiehle et al. 2008, p. 242.

16 Cf. Ernst et al. 2003, p. 144.

Excerpt out of 55 pages


Corporate Valuation of the E.ON AG
University of Applied Sciences Essen
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ISBN (Book)
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FOM, MBA, Financial Management, E.ON, Corporate Valuation, DCF, Discounted Cash Flow, ITM-Checklist, Executive Summary
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Dennis Ducke (Author)Gabor Ivanyi (Author)Mark Kan (Author), 2008, Corporate Valuation of the E.ON AG, Munich, GRIN Verlag,


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