Company Valuation (Interesting Case)

CFA Level I Corporate Finance
#1

Hi,

Let’s assume we have 2 companies, both are corrugated cardboard producers with the same financial results in terms of revenues and EBITDA.

Those companies however, are way different in terms of fixed assets ownership structure. What I mean by that:

  • Company A: Is the owner of the whole production facility (land + production hall);
  • Company B: Leases the land & key machines + rents the production hall (basically has no fixed assets)

My questions are:

a) in terms of lets say comparable valuation (EV/EBITDA multiple) which is very often used in m&a transactions - these two companies has roughly similar enterprise value and slightly different equity value (becuase of probably higher net debt of company B caused by interest liabilities). The key question is - should we adjust the equity value for the market value of assets (land + production hall) held by company A? How to distinguish the value beetween these two companies?

b) what is the situation when dcf valuation is used? Does FCFF takes those differences in fixed assets values into account?

Will appreciate any help with the above, thank you!
Michael

#2

EBITDA will be lower for Company B since they are incurring lease expenses in their operating income whereas Company A is not. EV/EBITDA should still be comparable because Company A is going to have debt on their balance sheet from financing the production facility even though they have higher EBITDA.

Assuming the cost of capital for the operating lease and debt are similar, the DCF valuation should result in similar valuations.