Valuing Amber Grid: A Five-Year DCF
A private equity client is considering acquiring Amber Grid, a utilities business in Europe. You have been asked to build the valuation case.
The company generated €855 M of revenue last year at an EBIT margin of 21%. Management projects revenue growth of 10% per year for five years, after which the business is expected to settle into mature, GDP-like growth.
Capital expenditure runs at 9% of revenue and depreciation & amortisation at 3%. Changes in net working capital consume roughly 4% of incremental revenue. The effective tax rate is 23%.
The company's equity beta is 1.59, the risk-free rate is 5.6%, and the equity risk premium is 6.6%. Debt carries a pre-tax cost of 6.6% and makes up 34% of the capital structure.
The seller is asking €2294 M for the enterprise.
operating
- revenue m
- 855
- tax rate pct
- 23
- ebit margin pct
- 21
- da pct of revenue
- 3
- revenue growth pct
- 10
- capex pct of revenue
- 9
- nwc pct of incremental revenue
- 4
transaction
- asking enterprise value m
- 2294
capital structure
- equity beta
- 1.59
- debt weight pct
- 34
- risk free rate pct
- 5.6
- equity risk premium pct
- 6.6
- pre tax cost of debt pct
- 6.6
Value the business and advise on the asking price. Provide:
- Analysis — a five-year free cash flow projection, your WACC, and a terminal value.
- Risks — the assumptions your valuation is most sensitive to.
- Recommendation — is €2294 M attractive? What would you pay?
Show your calculations. State assumptions explicitly where the case is silent.
100 points, 60% to pass.
- discount rate20
- recommendation20
- terminal value20
- cash flow projection25
- sensitivity analysis15
Reveal suggested structure
-
Free cash flow for each of years 1-5: FCF = EBIT × (1 − t) + D&A − capex − ΔNWC
-
WACC:
- Cost of equity = 5.6% + 1.59 × 6.6% = 16.09%
- After-tax cost of debt = 6.6% × (1 − 23%) = 5.08%
- WACC = 66% × cost of equity + 34% × after-tax cost of debt
-
Terminal value at year 5, using either perpetuity growth (g below long-run GDP) or an exit EBITDA multiple. Sanity-check one against the other.
-
Discount everything to today, sum, and compare with the asking price.
-
Sensitivity across WACC and terminal growth.