Fair Market Valuation

The Client, headquartered in France, was in the process of making an open offer to acquire a global logistics and supply chain company based out of Switzerland (Logistics Company). The Client needed an independent financial consulting firm (Advisor) for the valuation of its logistics business spread across the globe.

Our approach was bifurcated into the following phases:

Phase I - Understanding the Business & Industry dynamics

Discussions with the management of the Indian Operations, the Client, and the Advisor coupled with an analysis of the business model of Indian Operations helped us understand their service offerings. This gave us valuable insights about the future business plans of the Indian Operations. As part of our research process, the team:

• Referred to proprietary databases and research reports to establish the current Indian logistics industry scenario
• Used this understanding to adopt a top-down approach to estimate the industry’s future
• Based on gathered knowledge identified the Client’s peers with similar business models
• Analyzed the historical financials of the Indian Operations (including individual subsidiaries) to obtain qualitative and quantitative information of the revenues, costs, and margins

Phase II -Evaluation of Valuation Approaches and Methodologies

As a first step, we evaluated all valuation approaches, viz. Asset Approach, Income Approach, and Market Approach.

The Client’s global logistics business plan was prepared according to geographic regions. Since there were multiple entities operating in the same country, company-specific business plans were not available. A reasonable bifurcation of the global and Indian Operations business plans for each company was not possible, ruling out the Discounted Cash Flow method.

There were recent transactions involving the Client’s Indian Operations. Additionally, comparable listed peers in India could be identified. Taking into consideration these factors, we identified the PORT and CCM methods under the ‘Market Approach’ to value the Indian Operations.

Price of Recent Transaction (PORT)

Price of Recent Transaction can be considered when a transaction results in a material change in the shareholding structure of a company. The recent investment provides a good indication of the value of a company.

This particular case entailed:

• An analysis of the recent transaction of the Indian Operations
• Verification of significant changes in the Indian Operations or in the industry in which the Companies operate after the transaction

Since the transaction had taken place in the last year and there had not been any significant changes in the Indian Operations since the transaction, we considered PORT to arrive at the fair value.

Comparable Companies Method (CCM)

Under this method, the value of the equity shares is derived by examining and comparing key ratios and valuation multiples of publicly listed companies, in the peer group same as that of the Indian Operations.

Selection of peers: We conducted a comprehensive search to identify listed companies in India whose shares were freely and frequently traded on recognized stock exchanges. The peers identified had a similar service portfolio, industry focus, company size, growth characteristics, etc.

Selection of multiple: The peer group companies worked on two business models: Asset-heavy companies owned assets like vehicles/trucks/vessels used in freight and forwarding services, while Asset-light companies leased them.

To access the comparable performance of asset-light companies that pay lease rentals and asset-heavy companies that charge depreciation, we considered EV/EBIT as the valuation basis.

Adjustment to the multiple: We adjusted the selected peer EV/EBIT multiple for fundamental impact due to a difference in size, stake, and operating performance between the Indian Operations and its peers.

Arriving at Enterprise Value: The adjusted EV/EBIT multiple was applied to the trailing twelve months EBIT of the Indian Operations to arrive at the EV.

Arriving at Equity Value: The calculated EV was increased by cash-in-hand, reduced by outstanding debts and reduced by the fair value of minority interest to arrive at the equity value.

Fair value of minority interest is the summation of the fair value of the minority stake of all the Indian and global subsidiaries of the Indian Operations. The Advisor calculated this fair value of subsidiaries located outside India and Nexdigm (SKP) calculated the fair value of subsidiaries in India.

Applying the Discount for Lack of Marketability to arrive at Fair Value: We applied DLOM considering that the Indian Operations were privately owned and closely held, with no access to an active market to arrive at the fair market value.

Phase III - Valuation Conclusion

Using CCM method with the EV to EBIT multiple and PORT method, we presented our findings to the Client and the Advisor in the form of a Valuation Report.

To provide a sound conclusion, we used both the methods, as mentioned above, to arrive at the fair market value of the closely held Indian Operations.

Nexdigm(SKP) coordinated and supported the Advisor in arriving at the global transaction price of the overall logistics business of the Client. Our approach (divided into three distinct phases) helped analyze the industry and business model of the Client, evaluate multiple valuation methodologies, and provide clear findings to the Advisor in the form of a Valuation Report.

By drawing on significant insights, we managed to deliver a complex assignment, spread across the globe, well within time.