Upload
malmn
View
20
Download
2
Tags:
Embed Size (px)
Citation preview
A QUANTITATIVE AND QUALITATIVE ANALYSIS OF THE REPURCHASE OF STOCK
BETWEEN
AND
ALEX BOTTAUSCI • MARK LEMOINE • YOUSEF MADANI JOHN MOLSON SCHOOL OF BUSINESS CONCORDIA UNIVERSITY EMBA 681 CORPORATE FINANCE DR. HARJEET BHABRA DECEMBER 1ST, 2012
A Quantitative and Qualitative Analysis of the Repurchase of Stock Between Quebecor and CDP A. Bottausci – M. Lemoine – Y. Madani
EMBA 681 – Corporate Finance – Harjeet Bhabra John Molson School of Business – Concordia University
2
TABLE OF CONTENTS
INTRODUCTION 3 COMPANY PROFILES 3 Québecor Inc.
Caisse de dépôt et de placement du Québec Quebecor Media Inc.
THE CABLE, TELECOMMUNICATIONS & MEDIA INDUSTRIES 6
The Cable Industry The Telecommunications Industry The Media Industry
THE COMPARABLE COMPANIES 9 Bell Canada Enterprises Inc.
Rogers Communications Inc. Shaw Communications Inc. Cogeco Inc.
THE TRANSACTION 11
2000 2012 VALUATION OF QMI’S SHARES 13
Two Valuation Methods Statements and Assumptions
VALUATION 1: MARKET-‐BASED COMPARABLES COMPANIES APPROACH 15
Step 1: Equity Step 2: Debt Step 3: The Total Value of the Firm
VALUATION 2: THE DISCOUNTED CASH FLOW APPROACH 17 SCENARIO 1
Step 1: Free Cash Flow to the Firm (FCFF) Step 2: Cost of Capital (KD) Step 3: Cost of Debt (KE) Step 4: Weighted Average Cost of Capital (WACC) Step 5: Discount the FCFFs and Terminal Values
SCENARIO 2 THE FINAL ESTIMATED PRESENT VALUE OF QMI SHARES 20
ANALYSIS AND DISCUSSION 20 The Deal’s Impact of QBR and QMI The Deal’s Impact on CDP CONCLUSION 23 APPENDIX 1 24 APPENDIX 2 25 APPENDIX 3 26 REFERENCES 27
A Quantitative and Qualitative Analysis of the Repurchase of Stock Between Quebecor and CDP A. Bottausci – M. Lemoine – Y. Madani
EMBA 681 – Corporate Finance – Harjeet Bhabra John Molson School of Business – Concordia University
3
INTRODUCTION On October 3rd of this year, Québecor Inc. and the Caisse de dépôt et placement du Québec
(CDP) reached an agreement on the partial sale of the CDP’s interest in Quebecor Media Inc.
(QMI). Québecor will purchase a total of 30.5 million shares valued at $1.5 billion.
The purpose of this study is to analyze the quantitative and qualitative aspects of the CDP’s
reduction in ownership of QMI, including the motives and non-‐financial considerations
behind the deal. In addition, this paper will seek to determine if fair value was realized and
validate or disprove the National Post’s analysts’ claim that this “pegs the Value of QMI at
about $6-‐billion, representing a 20% premium”.1
COMPANY PROFILES
Québecor Inc.
Québecor Inc. (TSX: QBR) was founded by Pierre Péladeau in 1950, in Montréal, Québec
with a small neighbourhood newspaper. Mr. Péladeau went on to build a vast
communications empire offering cutting-‐edge technology and constantly evolving business
solutions. Today, Québecor has a fast-‐expanding national presence but remains profoundly
attached to its roots, hence one of the main motives behind the initial transaction. A new
generation of managers is drawing on the company's traditions to sustain and nourish its
growth into the future. For 2011, Québecor reported revenues of $4.3 Billions and a net
income of $374 Millions.
Pierre Karl Péladeau is the current President and Chief Executive Officer and is also the
firm’s majority shareholder, possessing 72.16% interest in the company (Appendix 1). 2
The Chief Financial Officer (CFO) is Jean-‐François Pruneau. The current members of
the board of directors of Québecor Inc. are;
• Françoise Bertrand, Chairwoman of the BOD
• Rt. Hon. Brian Mulroney Vice-‐Chairman of the BOD
• Pierre Karl Péladeau
• Jean La Couture • Sylvie Lalande • Pierre Laurin • Geneviève Marcon • Pierre Parent
A Quantitative and Qualitative Analysis of the Repurchase of Stock Between Quebecor and CDP A. Bottausci – M. Lemoine – Y. Madani
EMBA 681 – Corporate Finance – Harjeet Bhabra John Molson School of Business – Concordia University
4
In 2000, Québecor Inc. opened a new chapter in its development with the acquisition of the
Groupe Vidéotron Ltée., the largest cable operator in Québec. Along with Vidéotron,
Québecor picked up its subsidiaries Netgraphe, an important Web content developer and
operator of numerous Web properties, and TVA Group, owner of the TVA broadcasting
network and of magazine publisher TVA Publishing.
To carry out this major acquisition, Québecor formed a partnership with a major financial
backer, the Caisse de dépôt et placement du Québec, and together created a new subsidiary,
Quebecor Media Inc. Today, the bulk of Quebecor Media’s profit, and in turn Québecor’s
comes from Vidéotron.
Caisse de dépôt et de placement du Québec
The Caisse de dépôt et placement du Québec (CDP) was founded in 1965 by an act of the
National Assembly and it manages institutional funds, primarily from public and private
pension and insurance funds in Québec, including the Régie des rentes du Québec and the
Commission administrative des regimes de retraite et d’assurances, amongst dozen others.
The CDP is headquartered in Québec City but has its major business office in Montréal.
The CDP has traditionally favoured Québec businesses. The CDP’s mandate, as defined by
legislation passed in 2003, is to “achieve an optimal return on the deposits of its clients, or
depositors, while contributing to Québec's economic development”3. This concept was
further pressed just weeks before the QBR and CDP transaction. After winning the
provincial elections in early September 2012, new Québec Premier Pauline Marois, who
fought off the recent U.S. takeover bid for Québécois home-‐improvement chain Rona Inc.,
said that the role of Quebec’s pension fund should be strengthened to keep corporate
headquarters in Québécois hands. 4 Nicolas Marceau, Québec’s Finance Minister, also
proposed additional revisions to the CDP’s mandate so that it would further promote
economic development and work to “keep the strategic decision-‐making centers here.”
The CDP’S large holdings make it a formidable player in investment markets. Today it is the
leading private equity investor in Canada and it is also one of the 10 largest real estate
asset managers in the world.5 It is the second largest pension fund in Canada, with the
A Quantitative and Qualitative Analysis of the Repurchase of Stock Between Quebecor and CDP A. Bottausci – M. Lemoine – Y. Madani
EMBA 681 – Corporate Finance – Harjeet Bhabra John Molson School of Business – Concordia University
5
Canada Pension Plan (CPP) in first place.6 In addition, the CDP’s financial soundness has
earned it the best credit ratings issued by the following credit rating agencies: Moody's
Investors Service, Standard and Poor's, and Dominion Bond Rating Service.7 As of February
2012, the CDP’s total assets under management amount to $159 billion.
The CDP’s President and CEO is Michael Sabia, the Vice-‐President and Chief Risk officer is
Claude Bergeron, and the CFO is Maarika Paul. The current Board of Directors of the CDP
are:
§ Robert Tessier Chair of the board
§ Michael Sabia § Elisabetta Bigsby § Luise Charette
§ Jocelyne Dagenias § Michèle
Desjardins § Pierre Fitzgibbon § Denys Jean
§ A. Michel Lavigne § Jean Pierre Ouellet § Réal Raymond § François R. Roy § Ouma Sananikone
Quebecor Media Inc.
Quebecor Media Inc., a fully integrated media and telecom company, was founded in 2000
and is headquartered in Montréal, Québec. It is a subsidiary of Québecor Inc. and it
operates mostly in the province of Québec but is also present in the rest of country. QMI
possesses several divisions and they include; Vidéotron, a cable, VoIP, and internet service
provider, Sun Media and Canoë, the largest newspaper publisher in Canada, TVA, the largest
French language broadcaster and publisher in North America, and Archambault, a music
and book retailer. QMI’s 2009 revenues totalled $3.7 billion, while its EBITDA stood at $1.2
billion.
Pierre Karl Péladeau is the President and CEO, and the CFO is Jean-‐François Trudeau.
Current members of the board of directors of Québecor Media Inc. are;
§ Serge Gouin Chairman of the BOD
§ Pierre Karl Péladeau § André Delisle
§ Jean La Couture § Rt. Hon. Brian Mulroney, § Samuel Minzberg § Normand Provost
A Quantitative and Qualitative Analysis of the Repurchase of Stock Between Quebecor and CDP A. Bottausci – M. Lemoine – Y. Madani
EMBA 681 – Corporate Finance – Harjeet Bhabra John Molson School of Business – Concordia University
6
THE CABLE, TELECOMMUNICATIONS & MEDIA INDUSTRIES
Canadian cable, telecommunications and media businesses operate in highly competitive
industries that are experiencing relentless rapid technological developments and in turn
necessitate large capital investments by the firms. The following provides the reader some
insight into these industries that are very much linked and dependent on each other.
The Cable Industry
Cable television has been available in Canada for more than 50 years and it is a well-‐
developed market. As 2010, there were approximately 8.3 million cable television
customers in Canada. The total industry revenue for 2012 was estimated to be over $10.1
billion. These revenues are expected to grow based on the fact that Canadian cable
operators have aggressively upgraded their networks and have begun launching and
deploying new products and services, such as cable Internet access, digital television
services and telephony services. The following table summarizes the most recent available
industry revenue statistics for the Canadian and American cable television industries and
the Compounded Annual Growth Rate.
CANADIAN & US CABLE INDUSTRIES 2010 2009 2008 2007 2006 CAGR
REVENUE (BILLIONS) $10.10 $9.20 $8.20 $7.10 $6.10 13.5%
The Telecommunications Industry
The details found in this segment description have been largely taken from Mergent’s North
American Telecommunications Sectors May 2012 industry review.
The Canadian telecoms industry is one of the most developed mobile markets in the world,
with Canadian consumers continuing to adopt wireless services at a healthy pace. This has
resulted in carriers offering coverage to more than 99% of Canadians. Overall, the wireless
communications sector plays an important role in the telecoms industry, generating a total
economic value of about $41 billion. The Canadian Wireless Telecommunications
Association (CWTA) estimates wireless phone customers in Canada numbered 25.1 million
A Quantitative and Qualitative Analysis of the Repurchase of Stock Between Quebecor and CDP A. Bottausci – M. Lemoine – Y. Madani
EMBA 681 – Corporate Finance – Harjeet Bhabra John Molson School of Business – Concordia University
7
at the end of June 2011, or about 75% of the population, with wireless service providers
reporting a net addition of 314,456 new subscribers.
The majority of Canada’s telecom companies recorded increases in revenues over the first
half of 2012. Mobile advertising revenues are growing throughout Canada, with mobile
search advertising generating most of the revenue. The Interactive Advertising Bureau of
Canada announced in the spring of 2012 that mobile advertising revenue jumped from
C$22.8 million in 2009 to C$46.6 million in 2010. It has now been forecasted that revenues
will rise by nearly 110% in 2012, climbing to an estimated C$98 million. The share price
over the six months ended April 2012, overall Canadian telecom share prices rose by an
average 6.48%, up from the April to October 2011 period, when share prices declined by
6.59%.
The outlook for the telecommunications sector is relatively positive, but not strong, with
intense competition between both big and small players in the industry reflected in price
growth over the past six months. Over the past year, there were constant new product
launches including new smartphones and digital TV products, resulting in the higher use of
wireless services. As the rate of adoption for smartphones and tablets continues to climb,
spending on wireless data is expected to more than double in the next year.
The Media Industry
The details found in this segment description have largely been taken from Mergent’s North
American Media Sectors August 2012 industry review.
Despite being dwarfed by the American media industry, the Canadian media industry is
large by international standards. It plays a crucial role in Canada’s economy and in public
communication, covering an area of 9,984,670 square kilometers with a population of 34.3
million divided almost equally among rural, suburban and urban areas. Canadian media
content is popular globally in certain markets, although not on the same scale as US media
content. Many English and French-‐speaking countries around the world air and publish
Canadian media content regularly.
A Quantitative and Qualitative Analysis of the Repurchase of Stock Between Quebecor and CDP A. Bottausci – M. Lemoine – Y. Madani
EMBA 681 – Corporate Finance – Harjeet Bhabra John Molson School of Business – Concordia University
8
Modern Canadian broadcasting began in the 1930s with the formation of the Canadian
Broadcasting Corporation/Radio-‐Canada (CBC), which runs all public broadcasting. Private
broadcasting is diverse and also mature, with a concentrated market mostly shared by four
major television networks — CTV, Global, TVA and V. The CRTC lists slightly fewer than
commercial 2,000 radio stations across Canada. In addition, there were 95 English and
French language paid-‐for dailies in circulation at the end of 2011, and more than 1,100
community newspapers.
The (CRTC) reported that the estimated broadcasting segment revenues totalled C$15.713
billion and were up 8.94% in 2010, reflecting revenue improvement in all of the
broadcasting segments. While cable and direct-‐to-‐home/multipoint distribution service
plus IPTV revenue rose by 8.94%, television revenue grew by 10.59% and radio by 2.92%.
Television advertising spending is forecast to grow by 6.75% in 2012, while radio
advertising spending is forecast to pick up by 3.73%. Online advertising spending is likely
to rise by 23.32% in 2012, more than total advertising spending on print newspapers and
magazines, due to total US print advertising spending would drop by 6.11%.
Canadian television broadcasters’ 2011 advertising revenues were up 4.74%, representing
47.92% of the industry’s total operating revenues. The shares of leading Canadian
companies performed well over first half of 2012. The following table identifies the leading
Canadian media companies share price movements in the six months from December 2011,
to May 2012.
COMPANY TICKER STOCK EX. PRICE 01/12/11
PRICE 31/05/12 DIFFERENCE %
RISE/FALL THOMSON REUTERS TRI NYSE US$26.88 US$27.47 US$0.59 2.19
ROGERS RCI TSX C$37.81 C$35.32 (C$2.49) -‐6.59
SJR SJR NYSE US$20.61 US$19.08 (US$1.53) -‐7.42
QUÉBECOR QBR TSX C$32.55 C$37.75 C$5.20 15.98
TORSTAR TS.B TSX C$8.51 C$9.57 C$1.06 12.46
Avg. Rise/Fall % 3.32
A Quantitative and Qualitative Analysis of the Repurchase of Stock Between Quebecor and CDP A. Bottausci – M. Lemoine – Y. Madani
EMBA 681 – Corporate Finance – Harjeet Bhabra John Molson School of Business – Concordia University
9
This upbeat outlook for the media industry stands in contrast to Mr. Péladeau’s recent
comments in front of the CRTC, when he warned that the cable business was under threat
as he tried to convince the Canadian Radio-‐television and Telecommunications
Commission to reject a merger between BCE Inc. and Astral Media. Québecor’s CEO’s
motive must be taken with a grain of salt, considering that the deal would have made one
its main rival much stronger in the Québec market.
THE COMPARABLE COMPANIES
The following four companies, BCE, Rogers, Shaw and Cogeco, compete with Québecor and
Quebecor Media in the cable, telecommunications and media industries and share many
characteristics, including business models, with Québecor and QMI, and in turn provide the
most accurate comparable companies for the financial valuation process conducted in this
study. Brief summaries of selected financial data are found in Appendix 3.
Bell Canada Enterprises Inc.
Bell Canada Enterprises Inc. (TSX: BCE) is headquartered in Montréal, Québec and operates
predominantly in Canada, providing services to over 20,000,000 residential, business and
wholesale customers. The company was originally founded in 1880 but was incorporated
under federal charter in 1970 as Tele-‐Direct Ltd., and continued to operate under the
Canada Business Corporations Act of 1979. The company was renamed Bell Canada
Enterprises Inc. in 1983 and shortened it to BCE Inc. in 1998. BCE is a communications
company engaged in providing wireline voice and wireless communications services,
internet access, data services and video services to residential, business and wholesale
customers. The firm operates three divisions: 1) Bell Wireline, which provides local
telephone, long distance, Internet, data, video and other services and products; 2) Bell
Wireless, which provides wireless voice and data communication products and services;
and 3) Bell Aliant, which provides local telephone, long distance, Internet, data, video,
wireless and other information and communications technology services. For 2011, BCE
reported revenues of $19.49 billion and a net income of $2.34 billion.8
A Quantitative and Qualitative Analysis of the Repurchase of Stock Between Quebecor and CDP A. Bottausci – M. Lemoine – Y. Madani
EMBA 681 – Corporate Finance – Harjeet Bhabra John Molson School of Business – Concordia University
10
Rogers Communications Inc.
Rogers Communications Inc. (TSX: RCI) was originally incorporated in 1925, in Toronto,
under the name of Rogers Vacuum Tube Company. Although the head offices have always
been based in Toronto, the company went through various name changes until 1986 when
it was finally changed to Rogers Communications Inc. Rogers provides wireless voice and
data communication services, and like BCE, it also has three divisions; 1) Rogers Wireless;
cable television services, high-‐speed internet access, and telephony services, 2) Rogers
Cable; retailing of communications and home entertainment products and services, and 3)
Rogers Media; radio and television broadcasting, televised shopping, magazines and trade
publications, and sports entertainment. Rogers recorded revenues of $12.42 billion and a
net income of $1.56 billion in 2011. 9
Shaw Communications Inc.
Shaw Communications Inc. (TSX: SIR) was incorporated in 1966 as Capital Cable TV Ltd.
and became Shaw in 1993. Shaw is headquartered in Calgary, Alberta and it provides
services for mostly British Columbia, Alberta, with smaller systems in Saskatchewan,
Manitoba and Northwestern Ontario. The company offers broadband cable television, high-‐
speed Internet, digital phone, telecommunications services, satellite direct-‐to-‐home and
distribution services and television broadcasting. The firm is thus divided into three
businesses; Shaw Business, Shaw Direct and Shaw Media, that serve four main business
segments: 1) the Cable segment, which is comprised of cable television, internet, digital
phone and internet infrastructure service businesses; 2) the Satellite segment, which
comprised of direct-‐to-‐home and satellite services; 3) the Wireless Segment, which is in the
development and construction stage; and 4) the Media segment, which includes television
broadcasting. In 2012, Shaw reported revenues of $4.99 billion and a net income of $728
million.10
Cogeco Inc.
The Compagnie Général de Communication, otherwise known as Cogeco Inc. (TSX: CGO),
was founded in Trois-‐Rivières in 1957, and today it is based in Montréal, Québec. It
provides cable television, high-‐speed internet, telephony, managed information technology
A Quantitative and Qualitative Analysis of the Repurchase of Stock Between Quebecor and CDP A. Bottausci – M. Lemoine – Y. Madani
EMBA 681 – Corporate Finance – Harjeet Bhabra John Molson School of Business – Concordia University
11
and infrastructure, and other telecommunications services to residential and commercial
customers in the provinces of Québec and Ontario, and it conducts international operations
in Portugal. Through its affiliate Cogeco Cable Inc., the company provides audio, analogue
and digital television, high-‐speed Internet (HSI) and telephony services to residential
customers in Ontario and Quebec. Cogeco Cable also provides its business customers with
data networking, e-‐business applications, video conferencing, hosting services, Ethernet,
private line, Voice over Internet Protocol (VoIP), HSI access, data storage, data security, co-‐
location services, managed IT services, cloud services and other advanced communications
services. Furthermore, Cogeco runs thirteen French-‐language radio stations throughout
Québec, Cogeco News, a news agency feeding close to 24 affiliate and community radio
stations across the province, and it also operates Métromedia CMR Plus Inc., an advertising
representation agency specializing in the public transport sector. Just this year Cogeco
made a $1.3-‐billion purchase of U.S.-‐based Atlantic Broadband, the fifteenth largest cable
provider in the U.S.A., and it has been criticized because analysts believe it paid too high a
price on assets they feel is in decline. Cogeco shares fell sharply when the deal was
announced.11 2012 revenues stood at $1.41 billion but it terms of net income the company
registered a $77 million gain.
THE TRANSACTION
2000
Before outlining the transaction’s motives and details, it’s important to understand why the
two firms entered a partnership in the first place. As mentioned earlier, the CDP’s
traditional role has been to favour and invest into Québec businesses. Québecor is a profit-‐
seeking firm where financial growth is always one of the primary objectives. With this in
mind, in the year 2000, the Toronto based Rogers Communications Inc., one Canada’s
largest communications companies, began a friendly takeover process with Le Groupe
Vidéotron Ltée., an important Québécois cable and media company. In reaction, the
Québecor and the Caisse de dépôt et placement du Québec formed a partnership and
launched a hostile takeover bid and bought out the provincial cable provider and preserved
an important ‘national’ media outlet in Québécois hands. On Oct. 23, 2000, the company
A Quantitative and Qualitative Analysis of the Repurchase of Stock Between Quebecor and CDP A. Bottausci – M. Lemoine – Y. Madani
EMBA 681 – Corporate Finance – Harjeet Bhabra John Molson School of Business – Concordia University
12
and the CDP, jointly acquired Vidéotron for $45 per share, in a deal valued at $5.4 billion.
The transaction followed a decision by Rogers to terminate its merger agreement with
Vidéotron. When the dust settled Québecor had 54.7% and the CDP had 45.3% of Vidéotron.
2012
Today, Mr. Péladeau explains the latest deal as the following; “The time frame of the
holding of the Caisse (CDP) was longer than usual … (and) we saw there were some
opportunities in the debt markets.”12 He further added; “the transaction won’t impair the
financial flexibility Québecor needs to grow the capital the capital intensive telecom
business.” He added that other objectives of this transaction are to include the preservation
of operational and financial flexibility and to achieve an optimal capital structure and
maturity profile at QMI.
It was announced on October 3rd, 2012 that Québecor, Quebecor Media and the Caisse de
dépôt et placement du Québec entered an agreement providing the reduction of CDP’s
interest in QMI from 45.28% to 24.64%13. Québecor purchased 20,351,307 shares from the
CDP for $1 billion in cash, and will immediately cancel them. In addition, Québecor also
purchased an additional 10,175,653 shares for $500 million in consideration that the CDP
will receive in return unsecured debentures convertible, bearing an interest if 4.125% and
maturing around October 11, 2018, into Québecor Class B Subordinate shares14 (Appendix
2). This could allow the CDP to either force QMI to become a public company by 2019, or
sell the remaining stake to a third-‐party. Québecor says it intends to take advantage of the
low interest rates to access financial markets to pay for the shares.15 In the end, the deal
was closed on October 2012 and Québecor’s control in QMI increased to 75.36%.
The agreement also allows the CDP to exit rights in 2019, through either an IPO or sale to a
financial third party, and Québecor and QMI are under no obligation to purchase the CDP’s
remaining interest.
According to the National Post, this deal pegs the value of Quebecor Media at $6 billion,
which would suggest a 20% premium.16 The Market Value transaction that took place
between Québecor and the CDP is valued at $ 7.246 billion. This is based on $1.5 billion
A Quantitative and Qualitative Analysis of the Repurchase of Stock Between Quebecor and CDP A. Bottausci – M. Lemoine – Y. Madani
EMBA 681 – Corporate Finance – Harjeet Bhabra John Molson School of Business – Concordia University
13
paid for 20.70% shares at $49.14 per share. The following table clarifies the transaction’s
details:
AMOUNT PAID TYPE # OF SHARES
SHARE PRICE
TOTAL VALUE OF SHARES
$ 1,000,000,000 Cash 20,351,307 16.5750% $ 500,000,000 Debt 10,175,653 4.1250% $ 1,500,000,000 30,526,960 20.70% $49.14 $ 7,246,377,048.97
VALUATION OF QMI’S SHARES
Two Valuations Methods
The objectives of this paper is to valuate the shares of QMI and determine if the transaction
was of fair value and validate or disprove National Post’s analysts claim. Two valuation
approaches, methods used to estimate the attractiveness of an investment opportunity, will
be applied: the Market-‐Based/Comparables Companies Approach and the Discounted Cash
Flow Approach.
Valuation 1 -‐ Market-‐Based Comparable Company Approach: To use the Market-‐
Based/Comparable Company Approach one must first look to the public markets for firms
which most closely resemble the target firm and then use indicators of financial position
such as EBITDA, Revenue or Net Income to make comparisons. By consolidating the data it
is possible to make an educated estimate of the value of an equity position in the private
firm, and by adding the firm’s debt value, if any, it is then possible to estimate the firm’s
total value.17 The comparable companies described above, BCE, Rogers, Shaw, and Cogeco
and their financial data, are for the valuation process of this study. These companies share
many characteristics with Québecor and QMI, and in turn it is believed that they offer the
most accurate comparables for the valuation process.
Valuation 2 -‐ Discounted Cash Flows approach: A Discounted Cash Flow (DCF)
analysis uses future free cash flow projections and discounts them (most often using the
Weighted Average Cost of Capital) to arrive at a present value, which is used to evaluate the
potential for investment. The premise of the discounted cash flow method is that the
A Quantitative and Qualitative Analysis of the Repurchase of Stock Between Quebecor and CDP A. Bottausci – M. Lemoine – Y. Madani
EMBA 681 – Corporate Finance – Harjeet Bhabra John Molson School of Business – Concordia University
14
current value of a company is simply the present value of its future cash flows that are
attributable to shareholders.18
Statements and Assumptions
• All QMI financial figures are based on QMI’s 2011 Official Financial Statements and
are in millions of dollars. In addition, all financial values are in Canadian (CAD) dollars,
unless otherwise noted.
• The Corporate Tax Rate (TC ) used is 28.4%. This figure was taken from QMI’s 2011
financial statements19.
• Growth Rate (g): The Growth Rate that was considered in the valuation of the QMI
was based on the analyst prospects for long term and future growth in the industry
for parent company. An industry analysis was conducted and the Free Cash Flow to
the Firm (FCFF) is expected grow over the next five years by 9.47%20. Afterward it is
expected and assumed to grow on stable rate of 5%.
• Return on Market Portfolio (Rm): 11.10% is the historical annual average return (1957
to 2006) on Canadian common stocks.21
• The Risk-‐Free Rate (Rf): The Risk-‐Free Rate of 3.70% used in this valuation is based on
the Government of Canada’s Marketable Bonds 10 year historical average.22
Date Rf Low 2012-‐07-‐23 1.58
Average 2002-‐11-‐29 — 2012-‐11-‐28 3.70
High 2003-‐03-‐21 5.22
• Beta (β): Since QMI is a private company there is little public information available,
including its Beta. To overcome this obstacle, two alternatives were determined
suitable:
A Quantitative and Qualitative Analysis of the Repurchase of Stock Between Quebecor and CDP A. Bottausci – M. Lemoine – Y. Madani
EMBA 681 – Corporate Finance – Harjeet Bhabra John Molson School of Business – Concordia University
15
1) Use the Québecor’s, the parents company’s, Beta
2) Use the average Beta of the four comparable companies.
Considering that QMI is Québecor’s main operation, and that 86% of the parent
company’s revenues originate from it’s subsidiary, using QBR’s Beta at 0.8423 was
selected as the best number to use.
• Preferred shares will be ignore in the calculation for WACC considering QMI doesn’t
have any preferred shares outstanding.
• Net Capital Expenditure: The values for 2010 and 2011 are $689M and $780.7M,
respectively.24 Considering that, in order to stay competitive, QMI must continue to
make capital expenditures, a conservative increase is anticipated. A value of $800M
will be used in this study.
VALUATION 1 – THE MARKET-‐BASED COMPARABLES COMPANIES APPROACH
The Total Value of the Firm (Vf) is the sum of firm’s Debt (D) and Equity (E) and can be
calculated using the Market-‐Based Method Comparables Companies approach.
Step 1: Equity
The following four indicators of financial position for our comparable companies were
selected: Revenue, Net Income, EBITDA and Total Assets. The following table illustrates the
market data for the four comparable companies:
Comparable Companies Beta (β)
QBR BCE RCI SIR CGO
0.84 0.35 0.48 0.29 0.72
A Quantitative and Qualitative Analysis of the Repurchase of Stock Between Quebecor and CDP A. Bottausci – M. Lemoine – Y. Madani
EMBA 681 – Corporate Finance – Harjeet Bhabra John Molson School of Business – Concordia University
16
INDICATOR VARIABLE BCE RCI SIR CGO
# SHARES OUTSTANDING 774,557,247 402,785,156 421,715,646 14,989,338
SHARE PRICES $41.99 $42.57 $21.38 $33.50
MARKET VALUE OF
COMPARABLES (MVC) $32,523,658,802 $17,146,564,091 $9,016,280,512 $502,142,823
1-‐ REVENUE (IC) $19,497,000,000 $12,428,000,000 $4,998,000,000 $1,406,000,000
2-‐ NET INCOME (IC) $2,340,000,000 $ 1,563,000,000 $728,000,000 $77,000,000
3-‐ EBITDA (IC) $7,220,000,000 $ 9,269,000,000 $1,204,000,000 $607,000,000
4-‐ TOTAL ASSETS (IC) $39,426,000,000 $18,362,000,000 $12,722,000,000 $3,104,000,000
The next table estimates QMI’s Market Value of Equity. Listed are the calculated Market
Value Multiples for the comparable companies and their average ratios. These ratios are
multiplied by QMI’s projections to calculate the equity. QMI’s Market Value of Equity is
$5.10 billion.
INDICATOR
(MVC/IC)
BCE RCI SIR CGO RATIO
AVG. QMI VALUE
(IC)
QMI MARKET VALUE
(MVt)
1-‐ MVC/Rev 1.67 1.38 1.80 0.36 1.30 $4,207,000,000 $ 5,478,491,222.35
2-‐ MVC/NI 13.90 10.97 12.39 6.52 10.94 $374,000,000 $4,093,021,038.41
3-‐ MVc/EBITDA 4.50 1.85 7.49 0.83 3.67 $1,341,200,000 $4,918,986,199.69
4-‐ MVc/TA 0.82 0.93 0.71 0.16 0.66 $8,998,700,000 $5,914,901,008.17
Avg. Est. Value: $5,101,349,867.15
Step 2: Debt
The value of the Long-‐Term Debt reported in QMI’s financial statement was is valued at
$3,617,600,000 or $3.62B25.
Step 3: The Total Value of the Firm
Total Value of the Firm (Vf) = Debt (D) + Equity (E) = $5.1B + $3.62B = $8,718,949,867
Total Value of the Firm (Vf) Market-‐Based Comparables Companies Approach = $8.72B
A Quantitative and Qualitative Analysis of the Repurchase of Stock Between Quebecor and CDP A. Bottausci – M. Lemoine – Y. Madani
EMBA 681 – Corporate Finance – Harjeet Bhabra John Molson School of Business – Concordia University
17
Having computed Equity, and the Total Value of the Firm, it is now possible to calculate the
Debt Ratio (D/V) and Equity Ratio (E/V) as well as the Weighted Average Cost of Capital
(WACC) for QMI. These computations will be performed in the following section.
VALUATION 2 – THE DISCOUNTED CASH FLOW METHOD
Using the discounted Free Cash Flow to the Firm (FCFF), the Growth Rate (g), Corporate Tax
Rate (TC), WACC, the value of QMI can be found using the Discounted Cash Flow Approach
(DCF). Two scenarios, Scenario 1 and Scenario 2, each using two different short-‐term and
perpetual growth rates (g), are calculated in this section.
SCENARIO 1: The following is a step-‐by-‐step calculation of QMI’s value using the DCF approach:
Step 1: Free Cash Flow to the Firm (FCFF)
FCFF = EBIT (1 – TC) + Depreciation – Δ Net Working Capital – Net Capital Expenditures
i) EBIT(1 – TC) + Depreciation:
EBIT = ($533.2+$311.5) = $ 844.7M (1-‐TC) = 71.60% EBIT(1 – TC) + Dep. = 604.8052 + 509.3 = $1,114.11M
ii) Δ Net Working Capital (2011 – 2010):
A/R = 602.6 -‐ 587.3 = 15.3 INVENTORY = 283.6 -‐ 245.2 = 38.4 A/P = 764.9 -‐ 723.9 = 41 Δ Net Working Capital = $12.7M
iii) Net Capital Expenditure:
Net Capital Expenditure = $800 M
FCFF0 = $301.41M
A Quantitative and Qualitative Analysis of the Repurchase of Stock Between Quebecor and CDP A. Bottausci – M. Lemoine – Y. Madani
EMBA 681 – Corporate Finance – Harjeet Bhabra John Molson School of Business – Concordia University
18
Step 2: Cost of Capital (KE):
KE = Rf + β * (Rm-‐ Rf):
Beta (β) = 0.84 Rf = 3.70% Rm = 11.10% (Rm-‐Rf) = 7.40%
KE = 9.92%
Step 3: Cost of Debt (KD):
Cost of Debt (Kd) = Long term Interest/Long term Debt
(KD) = $303.2M/$3617.6M
(KD) = 8.38%
Step 4: Weighted Average Cost of Capital (WACC):
WACC = (E/V)KE + (D/V))KD(1-‐TC )
Total Long Term Debt (D) = $3,617,600,000
Market Value for Equity (E) = $5,101,349,867.15
Total Firm Value (V) = $8,718,949,867.15
D/V = 41.49%
E/V = 58.51%
D/E = 70.91%
Tax rate (Tc) = 28.40%
WACC = 8.29%
A Quantitative and Qualitative Analysis of the Repurchase of Stock Between Quebecor and CDP A. Bottausci – M. Lemoine – Y. Madani
EMBA 681 – Corporate Finance – Harjeet Bhabra John Molson School of Business – Concordia University
19
Step 5: Discount the FCFFs and Terminal Values:
PV QMI =
I. PV1-‐5 = $329.95 + $361.20 + $395.41 + $ 432.85 + $473.84 = $1,556,967,296.40
II. PV of TV = $10,149,405,047.60
Value of Firm QMI (PV0) =$ 1,556,967,296.40 + $10,149,405,047.60=
$11,706,372,343.99
2011 2012 2013 2014 2015 2016 2017
M$ millions FCF0 FCF1 FCF2 FCF3 FCF4 FCF5 FCFTV FCFt(1+g)t 301.41 329.95 361.20 395.41 432.85 473.84 497.53
Discounted CF 304.69 308.01 311.36 314.75 318.17 10,149,405,048
PV QMI = $11,706,372,344
Scenario 1 PV QMI = $ 11.706 Billion
SCENARIO 2:
Scenario 2 uses the same calculation process that is utilized in the first, but this time a
different growth rate is used. Rather than use a growth rate specific to the Québecor family,
an industry average growth rate of 7.5% for the first 5 years is used and then an arbitrary
3% in perpetuity. To arrive at the industry average growth rate, the growth rate for the
comparable companies were used:
COMPANY EXPECTED GROWTH RATE (g) BCE 2.2 RCI 7.94 SJR 5.1 CGO 15
AVERAGE OF THE 4 7.5
A Quantitative and Qualitative Analysis of the Repurchase of Stock Between Quebecor and CDP A. Bottausci – M. Lemoine – Y. Madani
EMBA 681 – Corporate Finance – Harjeet Bhabra John Molson School of Business – Concordia University
20
Scenario 2 PV Value of QMI = $7.13 Billion
THE FINAL ESTIMATED PRESENT VALUE OF QMI SHARES
Three different firm values for QMI, based on different approaches and two scenarios, were
calculated. Due to the uncertainty in the future growth of the company and based on the
assumptions, Scenario 1 seems to be very optimistic and will give us the higher range of the
price; Scenario 2 will give the lower range of the price. The comparable approach is falling
between these two ranges. With this in mind, some averages were calculated to get to the
final valuation figure.
The average of the three figures is the Final Estimated Present Value of Quebecor Media Inc.
I. Market-‐Based/Comparables Companies Value of QMI = $8.719B
II. Scenario 1 DCF Approach Value of QMI = $11.706B
III. Scenario 2 DCF Approach Value of QMI = $7.130B
The average of I & III = $7.925B
The average of I, II & III = $9.185B
The Final Estimated Present Value of Quebecor Media Inc. = $9.185 Billion
2 2011 2012 2013 2014 2015 2016 2017
M$ millions FCF0 FCF1 FCF2 FCF3 FCF4 FCF5 FCFTV
FCFt(1+g)t 301.41 324.02 348.32 374.44 402.52 432.71 445.69
Discounted CF 299.21 297.02 294.85 292.69 290.55 5,655,560,253
PV QMI = $7,129,881,201
A Quantitative and Qualitative Analysis of the Repurchase of Stock Between Quebecor and CDP A. Bottausci – M. Lemoine – Y. Madani
EMBA 681 – Corporate Finance – Harjeet Bhabra John Molson School of Business – Concordia University
21
ANALYSIS AND DISCUSSION
Now that The Final Estimated Present Value of Quebecor Media Inc. has been established,
the paper will look at the significance of the deal, the valuation difference, and the impact it
will have for the two companies involved.
The Deal’s Impact on QBR and QMI
Industry analysts are uneasy about Quebecor’s move. Competition for cable subscribers
has intensified sharply as BCE’s Bell Media rolls out new services in Québec and alternative
services such as Netflix make it easier than ever for consumers to cut their cable.26 In
addition, the transaction comes in the wake of other cable deals, such as Cogeco’s, that have
been criticized for placing too high a price on assets many feel is in decline, and in response
Cogeco’s shares fell sharply when the deal was announced. As well, Maher Yaghi, an analyst
at Desjardins Securities stated; “Historically the market hasn’t been willing to pay a premium
to Quebecor for its stake in Quebecor Media, but this is making a bet that the market is going
to someday appreciate and be ready to pay for its value.”27
With this deal, Quebecor now finds itself in a position to amass a greater share of any
profits generated. For Québecor CEO P. K. Péladeau, this amounts to a gamble that there is
room to increase profits at the company’s cable and mobile phone operations amid
uncertain prospects for its newspaper and television assets. Essentially the firm doubled-‐
down on its cable and media business, and made a $1.5-‐billion bet that Quebecor Media is
undervalued and can generate out higher profits in coming years despite growing
competitive pressure.
At the transaction’s press conference, the CEO explained that he wanted to take advantage
of favourable debt markets and increase his stake in Quebecor Media rather than allow the
Caisse stake to be sold to someone else. “We have a partner here,” he said. “Based upon our
long-‐term plan, we think the best way to approach higher returns for our shareholders long
term is to go the way we just selected. Sure, there would have been another opportunity
and an alternative to buy our own stock, but we don’t think that would have been the best
A Quantitative and Qualitative Analysis of the Repurchase of Stock Between Quebecor and CDP A. Bottausci – M. Lemoine – Y. Madani
EMBA 681 – Corporate Finance – Harjeet Bhabra John Molson School of Business – Concordia University
22
result.”28 In addition, the company’s CFO, Jean-‐François Pruneau, said that QBR is paying a
good price for solid assets. “Considering the expected financial performance of Québecor
we believe that the price paid is fair.”
The deal is more than fair for Québecor and as it can be considered a bargain. Yes, there is
some risk, but it’s a good one. First off, as discussed earlier, the transaction was
undervalued. The following table shows that when one compares our valuation of the deal
to the actual transaction, Québecor made a $401 million gain:
While the analyst’s outlook of the deal may not be favourable, the 3 industries the QMI
competes in will continue to grow, and the firm will certainly follow and take advantage of
this. As well, the increase controlling will allow Québecor and Québecor Media to have
more decisional power in its day-‐to-‐day operations and will give it more flexibility in its
ability to manipulated its capital structure, and in turn be more competitive.
The Deal’s Impact on the CDP
Quebec’s big pension plan manager is bailing on a chunk of one of its most contentious and
politically driven deals of the past few decades, which is a reminder that it puts provincial
social and economic development before profits. The transaction will see the CDP sharply
reduce its stake after more than a decade of weak returns. “The total value is $1.5-‐billion,
and for the Caisse, the return is unimpressive” said one analyst.29
So far the partnership has given the CDP an annual return of 0.74%. This ROI cannot be
considered satisfactory. The CDP could have invested in low or risk-‐free investments and
that would have made for a better investment. At this time, the convertible debentures
VALUE OF THE FIRM VALUE OF QMI DEAL
VALUATION FIGURE $9,185,067,804 $1,901,295,000
ACTUAL DEAL $7,246, 376,811 $1,500,000,000
DIFFERENCE +/-‐ : +$401,309,035
A Quantitative and Qualitative Analysis of the Repurchase of Stock Between Quebecor and CDP A. Bottausci – M. Lemoine – Y. Madani
EMBA 681 – Corporate Finance – Harjeet Bhabra John Molson School of Business – Concordia University
23
received in the current deal, with a 4.125% return rate, is a better investment option for
the CDP.
Moreover, the unsecured convertible debentures it received that will mature in 2018 into
Québecor Class B Subordinate shares and will make for an interesting future. Six years
from now the company will come at a crossroad may force QMI go public. Only time, and its
return on investment, will tell if the CDP will want to fully detach itself from this
partnership.
In the end, while the deal may not have been a huge financial success, it can be said that the
CDP fulfilled its main as it helped keep a large and influential Québécois company in
Québec and in Québécois hands.
CONCLUSION
At this point, it is cleat that the transaction is fair for both parties, but from our valuation it
was undervalued. Québecor got a ‘deal’ and will allow it to be more autonomous regarding
business strategies, investments, and capital structure. The competition may be tightening
up within Québecor Media’s three industries may, but they and their revenues are still
growing and will certainly continue to rise. In other words, this is a great deal for the long-‐
term growth. In addition, Pierre Karl Péladeau, the majority owner and CEO, has the
opportunity make significant gains in the future.
On the other hand, the CDP CDP has successfully fulfilled its political and social mandate
and has reduced it stake in am investment that that was not producing a suitable enough
ROI, and now has a better investment with the unsecured convertible debentures.
A Quantitative and Qualitative Analysis of the Repurchase of Stock Between Quebecor and CDP A. Bottausci – M. Lemoine – Y. Madani
EMBA 681 – Corporate Finance – Harjeet Bhabra John Molson School of Business – Concordia University
24
APPENDIX 1
Québecor Inc. & Quebecor Media Inc. CEO, President and Majority Shareholder
Pierre Karl Péladeau
A Quantitative and Qualitative Analysis of the Repurchase of Stock Between Quebecor and CDP A. Bottausci – M. Lemoine – Y. Madani
EMBA 681 – Corporate Finance – Harjeet Bhabra John Molson School of Business – Concordia University
25
APPENDIX 2
A Quantitative and Qualitative Analysis of the Repurchase of Stock Between Quebecor and CDP A. Bottausci – M. Lemoine – Y. Madani
EMBA 681 – Corporate Finance – Harjeet Bhabra John Molson School of Business – Concordia University
26
APPENDIX 3
Comparable Companies’ Selected Financial Data
Balance SheetTotal Assets 39,426,000,000.00 18,362,000,000.00 12,722,000,000.00 3,104,000,000.00 Total Liabilities 24,667,000,000.00 14,790,000,000.00 8,687,000,000.00 3,104,000,000.00 Total Equity 14,759,000,000.00 3,572,000,000.00 4,035,000,000.00 Long Term Debt gross 13,556,000,000.00 10,034,000,000.00 5,263,000,000.00 1,144,814,000.00 Common Equity (Outstanding) 774,557,247.00 402,785,156.00 421,715,646.00 14,989,338.00
Income StatementRevenue 19,497,000,000.00 12,428,000,000.00 4,998,000,000.00 1,406,000,000.00 Net Income to equity Holders 2,340,000,000.00 1,563,000,000.00 728,000,000.00 77,000,000.00 EPS -‐ Net Income -‐ Diluted 2.88 2.86 1.61 4.61 EBITD 7,220,000,000.00 9,269,000,000.00 1,204,000,000.00 607,000,000.00
Ratios
Beta 0.35 0.48 0.29 0.72 Average (all four companies) 0.46 Parent Company Beta 0.84
A Quantitative and Qualitative Analysis of the Repurchase of Stock Between Quebecor and CDP A. Bottausci – M. Lemoine – Y. Madani
EMBA 681 – Corporate Finance – Harjeet Bhabra John Molson School of Business – Concordia University
27
REFERENCES
1 National Post, Quebecor buys back shares from caisee ; $1.5B Deal, October 4, 2012. 2 Informart – Historical Reports, Quebecor Inc., Postemedia Network, 2012. 3 Wikipedia, The Caisse de dépôt et placement du Québec, http://en.wikipedia.org/wiki/Caisse_de_d%C3%A9p%C3%B4t_et_placement_du_Qu%C3%A9bec [Accessed, November 24, 2012]. 4 Globe & Mail, Quebec’s Caisse to help block takeovers: Pauline Marois http://m.theglobeandmail.com/report-‐on-‐business/quebecs-‐caisse-‐to-‐help-‐block-‐takeovers-‐pauline-‐marois/article4555375/?service=mobile, [Accessed, November 30, 2012]. 5 The Caisse de dépôt et placement du Québec, Profile of the Caisse, http://www.lacaisse.com/en/about-‐us/profile, [Accessed November 24, 2012]. 6 Wikipedia, The Caisse de dépôt et placement du Québec, http://en.wikipedia.org/wiki/Caisse_de_d%C3%A9p%C3%B4t_et_placement_du_Qu%C3%A9bec [Accessed, November 24, 2012]. 7 http://www.lacaisse.com/en/about-‐us/profile. 8 Wikipedia, Bell Canada, http://en.wikipedia.org/wiki/Bell_Canada [Accessed Nov 25, 2012]. 9 Wikipedia, Rogers, http://en.wikipedia.org/wiki/Rogers_Communications, [Accessed November 26, 2012]. 10 Wikipedia, Shaw Communications, http://en.wikipedia.org/wiki/Shaw_Communications, [Accessed November 26, 2012]. 11 Ladurantaye , S. , Quebecor pays up for media stake, Globe & Mail, http://m.theglobeandmail.com/globe-‐investor/quebecor-‐pays-‐up-‐for-‐media-‐stake/article4584575/?service=mobile, globe & mail, [acessed november 30, 2012] 12 National Post, Quebecor buys back shares from caisee ; $1.5B Deal, October 4, 2012. 13 Quebecor, Information Document, October 3, 2012. 14 The Caisse de dépôt et placement du Québec, Press Release, October 3, 2012. 15 National Post, Quebecor buys back shares from caisee ; $1.5B Deal, October 4, 2012. 16 National Post, Quebecor buys back shares from caisee ; $1.5B Deal, October 4, 2012. 17Investopedia, Valuing Private Companies, http://www.investopedia.com/articles/fundamental-‐analysis/11/valuing-‐private-‐companies.asp, [Accessed November 27, 2012] 18Invesopedia, Discounted Cash Flow – DCF, http://www.investopedia.com/terms/d/dcf.asp, [Accessed November 27, 2012] 19 Quebecor Media Inc. , Financial Statements, http://www.quebecor.com/sites/default/files/Final-‐avec%20annexes.PDF/, [Accessed November 22, 2012]. 20 http://www.reuters.com/finance/stocks/financialHighlights?symbol=QBCAF.PK, [Accessed November 22, 2012]. 21 Ross, Westerfield, Jaffe and Roberts, Corporate Finance: 6th
Canadian Edition 2011, pg. 276, McGraw-‐Hill Ryerson
Publishers, 2011. 22 http://www.bankofcanada.ca/rates/interest-‐rates/lookup-‐bond-‐yields/, [Accessed November 29, 2012]. 23 http://www.quebecor.com/en/content/communications-‐giant/, [Accessed November 22, 2012]. 24 Quebecor Inc., Quebecor Inc, Annual Documentation Quebecor Inc., Annual Documentation 2011, http://www.quebecor.com/en/annual_doc_quebecor_inc, [Accessed, November 25, 2012] 25 http://www.quebecor.com/sites/default/files/Final-‐avec%20annexes.PDF/, [Accessed November 22, 2012]. 26 Ladurantaye , S. , Quebecor pays up for media stake, Globe & Mail, http://m.theglobeandmail.com/globe-‐investor/quebecor-‐pays-‐up-‐for-‐media-‐stake/article4584575/?service=mobile, globe & mail, [acessed november 30, 2012] 27 Ladurantaye , S. , Quebecor pays up for media stake, Globe & Mail, http://m.theglobeandmail.com/globe-‐investor/quebecor-‐pays-‐up-‐for-‐media-‐stake/article4584575/?service=mobile, globe & mail, [acessed november 30, 2012] 28 Ladurantaye , S. , Quebecor pays up for media stake, Globe & Mail, http://m.theglobeandmail.com/globe-‐investor/quebecor-‐pays-‐up-‐for-‐media-‐stake/article4584575/?service=mobile, globe & mail, [acessed november 30, 2012] 29 Boyd, E., Caisse forced to bail on weak Quebecor investment. Globe & Mail, http://m.theglobeandmail.com/globe-‐investor/quebecor-‐pays-‐up-‐for-‐media-‐stake/article4584575/?service=mobile&contentRedirect=true&articleId=4584976 [Accessed November 30, 2012].