investment banking international university viet nam

Moreover, a failed broad auction might lead to a deterioration of the sales price as the asset appears to be unattractive, and new investors might only be willing to buy at a substantial

VIETNAM NATIONAL UNIVERSITY — HO CHI MINH CITY

INTERNATIONAL UNIVERSITY

FINAL EXAMINATION

Subject: INVESTMENT BANKING

Lecturer: Trinh Thu Nga, Ph.D

Nguyén Phuong Uyén - BAFNIU17009

Ho Chi Minh City, Vietnam

Question 1:

a Our team works on M&A of ThaiBev & Sabeco

ThaiBev is a powerhouse in the Thai beer and alcohol industries, controlling more than 90% of the alcohol market and 35% of the beer market ThaiBev's major financial source is the alcohol business, which accounts for more than 90% of overall profit and EBITDA

Sabeco's future expansion will be constrained by the acquisition at a premium price and the financing of the deal with bonds at 83 percent With a 10-year payback time, Sabeco must grow at least 24 percent per year to cover the cost of capital from bondholders as well as the opportunity cost of ThaiBev shareholders

The expected synergies is whether the predicted growth of ThaiBev is feasible or not

b

ThaiBev business health

Due to a huge loan, ThaiBev financed $4 billion in debt securities deals worth $4.8 billion, with

an average maturity of five to six years Accordingly, interest and principal due in 2020 is 7,562

billion VND while due in 2021 is 10,850 billion VND During the period from 2018 to the first

year of 2021, ThaiBev received a total cash dividend from VietBev of VND5,326 billion The cash dividend from Sabeco is currently insufficient to repay the loans to finance the deal in 2020

and 2021, and ThaiBev will have to use its income to pay the interest and principal due of 9,209 billion dongs Not only that, Sabeco's annual dividend payment rate fluctuates between 50 - 60%, making it difficult for Sabeco's income to service ThaiBev loans due from 2020 to 2028

Particularly in 2022, the total liabilities paid is 36,596 billion VND As a result, ThaiBev will

have to continue to use the proceeds from its Beer and Wine business in Thailand to service Sabeco-related loans

ThaiBev's consolidated net profit from 2017 to 2020

40000

34510

35000

30000

25000 23272 22752

15000

10000

5000

0

ThaiBev's consolidated net profit from 2017 to 2020

Source: ThaiBev Financial Report

ThaiBev's financial status has deteriorated dramatically after purchasing Sabeco, according to its

2017 to 2020 consolidated financial statements ThaiBev's current payment ratio has declined

from 1.17 in 2017 to less than 0.95 in September 2020 Furthermore, from 0.68 times in 2017 to 3.91 times in 2020, the Net Debt to EBITDA ratio has climbed dramatically ThaiBEv's status

deteriorated as a result of Fitch's downgrade of its credit rating

The operation of ThaiBev throughout the tough period of the Covid 19 outbreak is another indicator of the company's bad health In comparison to pre-purchase returns to Sabeco,

ThaiBev's earnings after tax have declined dramatically from 2018 to 2020 Profit after tax has

decreased by 34%, from 34,510 billion baht in 2017 to 22.752 billion baht in 2020 Sabeco's

strengthening led to this favorable financial outcome

Business performance of Sabeco:

Management effectiveness

Sabeco's internal modifications are much more obvious than the improvements on the surface Previously, several international institutional owners voiced concerns about this state- owned company's lack of openness in procuring input materials and delivering goods Thai is Sabeco's new leader, and he focuses on material procurement across units as well as working with ThaiBev, which allows the firm to acquire materials in bulk at reduced costs big, lower the cost of input

Manufacturing, inventory management, and distribution are among the areas where Sabeco 1s making changes According to the distribution system, a control tower with a vehicle tracking and tracking system is installed to improve distribution efficiency; coordinate fleets of vehicles and collect data to optimize transportation routes; reduce distributor inventory to ensure product freshness; improve beer production efficiency, fermentation performance

Sabeco has dramatically lowered expenses as a result of production modifications, allowing the massive ship to run more efficiently and rapidly

Financial index

35,949 37,899 | 27,961

6,743 | 6,061 7,371 |6,769

19.70% | 16.90% | 19.50% | 24.20%

5.10% |5.40% | -26.20%

-10.10% | 21.60% | -8.20%

The chart above outlines key factors that provide light on Sabeco's performance from 2017 to

2020 However, all evidence point to 2020 being a difficult year In 2018 and 2019, Sabeco's revenue climbed by 5.1 percent and 5.4 percent, respectively; however, in 2020, it decreased by 26.2 percent While EBITA is expected to fall by more than 600 billion dollars by 2020, the EBITDA margin is expected to rise to roughly 24.2 percent This tension arises when non-

productive costs must be reduced to reduce the economy's burden Due to the fast rise in raw material prices, Sabeco's cost price grew quickly, and the domestic beer sector was

under pressure to raise the special consumption tax from 60% to 65% in 2018 Expenses for administration and marketing have shifted Changes, as well as the ratio of selling expenditures

to revenue, have reduced from 8.2% in 2017 to 7.6% in 2018 In 2018, the revenue

administration expenditure ratio fell from 2.7 percent to 2.5 percent This lessens the impact of the excise tax's lower gross profit margin The Government's issue of "Decree 100/2019 / ND-

CP" on December 30, 2019, superseding "Decree 46/2016 / ND-CP" on fines for infractions in

the field of road and rail traffic, can be attributed to the drop in sales volume "Motorcycle and motorcycle drivers who consume alcohol or beer (even a little) shall also be penalized," the Decree states (the previous Decree stipulates that it is easier to limit it than to have an alcohol concentration over 50 milligrams per 100 milliliters) 0.25 milligrams per liter of authorized

breathing gas)" The Lunar New Year, in particular, is a significant occasion in 2020, driving

the unique return of each company; nevertheless, the previous year's rigorous control has

reduced residents’ desire and maintained society's discipline to limit beer consumption

Furthermore, the impacts of the Covid-19 epidemic, which resulted in social separation and

prohibitions on gatherings in large cities like Ho Chi Minh City and Hanoi, have impacted

aggregate demand

Stock market

e e

n

az

Set oe mo

If financial experts solely consider the stock price while evaluating Sabeco, they will advise ThaiBev to sell the company since the risk is too high Vietnam Beverage purchased 343.6

million SAB shares in December 2017 at a winning offer price of 320,000 VND per share SAB shares had earlier grown to 339,000 VND/share

However, the price had been drastically decreased before the auction day, and the price had

plunged rapidly to less than 300,000 VND/share following the auction SAB stock is only trading

at 205,000 - 210,000 VND/share one year after the transaction, due to several market impacts

Even though ThaiBev paid a cash dividend of VND 5,326 billion to decrease debt three years

later, the share price remained below VND 320,000 ThaiBev had to record a short-term loss of

USD 1.97 billion or a 42 percent drop in value from the initial investment

When evaluating the effectiveness of disposal, stock yield isn't the only aspect to examine Many

short-term market variables impact stock price swings, but they do not predict long-term success Financial analysts must analyze numerous elements that lead to the success of an MA

deal to assess its efficacy For example, the government may set goals for divestment

effectiveness, business attractiveness, future growth, enhanced governance, and other ethical considerations Indeed, the government has effectively divested, generated a significant number

of money, and correctly thinks that ThaiBev will boost the national brand, even though ThaiBev

is currently restructuring and dealing with several issues After the merger, there must be a resolution

Question 2

a

Broad Auction

A broad auction enables a highly competitive bidding environment by inviting a large number of potential bidders, usually more than 10 In some rare cases, the advisor might even open the auction to the public to encourage all interested parties to step forward and submit their interest

As the other bidders are aware of the many involved parties, their negotiation leverage is reduced, and they might be more willing to close the deal at the seller’s terms

At the same time, a broad M&A auction has many drawbacks that should be considered Sales processes are often a very confidential subject, and only the management is aware In case the word spreads to the market, and employees of the target become aware, they might feel discouraged, potentially leading to severe operational disruptions Furthermore, a broad auction takes up a substantial amount of management's time, further disrupting daily operations By giving a large range of competitors access to commercially sensitive information, it could damage a company’s commercial interests and undermine competitiveness Moreover, a failed broad auction might lead to a deterioration of the sales price as the asset appears to be unattractive, and new investors might only be willing to buy at a substantial discount

Targeted M&A Auction

A targeted auction is somehow the middle ground between a broad auction and a negotiated sale It provides the seller with the opportunity to address only a few selected bidders that promise a high strategic fit and, therefore, a high likelihood of closing the transaction On top of that, the chance of a breach of confidentiality is reduced, as well as the overall work for the management and hence the chance of business disruptions Given the fact that there are still multiple bidders in the process, competition stays high, and bidders are not likely pushing for their terms as they could fear missing out on the deal

Nevertheless, a targeted auction might bear the risk of excluding credible bidders and therefore missing out on the highest possible purchase price Furthermore, the workload of the management is still high as they have to go through multiple Q&A and expert sessions, management presentations and data preparation Often, due to confidentiality, without any help from their employees

b

Valuation

One of the main roles of investment banking in mergers and acquisitions is to establish fair value for the companies involved in the transaction Investment banks are experts at calculating what a business is worth They are also able to predict how that worth could be altered (i.e., what happens to the value of a company in a number of different scenarios and what those potential futures would mean financially) Financial models are constructed by investment banks

to capture the most important fixed and variable financial components that could influence the overall value of a company These models, depending upon the proposed transaction, can be extremely complex with special variables being added for special areas (i.e., there are different financial factors to consider in different sectors, countries, and markets when predicting or measuring a company’s value)

Because of their expertise in business valuation, investment banks can also provide the service

of arbitrage opportunities for their clients For instance, if a bank has performed valuation on a potential target company that suggests its market value (or the value of its shares in the

marketplace) is less than what the business is actually worth, it may facilitate a merger or acquisition of this target company for its client that carries with it substantial profit opportunity Buyers Versus Sellers

Investment banks do not just rely on buyers and sellers approaching them They will also source deals by studying the market themselves and approaching companies with their own strategic ideas (i.e., they might suggest that two companies merge, or that one company acquires, or sells to, another) An investment bank that represents a potential seller has a much greater likelihood of completing a transaction (and therefore being paid) than an investment bank that represents a potential acquirer This seller representation, also known as “sell-side work,” is the type of advisory assignment that is generated by a company when it approaches an investment bank and asks it to find a buyer of either the entire company or part of its assets Generally speaking, the work involved in finding a buyer includes writing a “Selling Memorandum’ (a detailed sales document) and then contacting potential strategic or financial buyers

In advising sellers, the investment bank’s work is complete once another party purchases the business up for sale (i.e., once another party buys the client's company or assets) However, representing a buyer is not always as straightforward The advisory work itself is simple enough: The investment bank contacts the firm their client wishes to purchase, attempts to structure an acceptable offer for all parties, and make the deal a reality However, many of these proposals

do not work out; few firms or owners are willing to readily sell their business Because investment banks primarily collect fees based on completed transactions, they are often forced

to defend their proposals

Provision of Financing

Of course, buying a company will require the funds to do so Options available to a company wishing to raise funds include selling shares in itself or raising debt financing Investment banks can, yet again, play a role in making this happen In fact, one of the main roles investment banks play is to introduce new securities to the market Not only can an investment bank determine the best price for new issues—be they equity or debt—by valuing the company and examining the market, but they can also find buyers for those new issues Therefore, they are referred to as market makers, since they perform the functions of both a buyer and seller Question 3: (20 points)

a

1 In accounting, goodwill is an intangible asset The concept of goodwill comes into play when a company looking to acquire another company is willing to pay a price premium over the fair market value of the company’s net assets Once calculated, Goodwill is an intangible asset on the acquirer’s balance sheet

Goodwill is added to the asset side of the acquirer's balance sheet and tested annually for impairment It’s no longer amortized in the U.S., but impairment serves as a “write- down’ to book value and a one-time charge to earnings

2 Itis because, In order to rectify the accrual/cash timing difference, tax is recorded as a deferred tax liability The deferred tax liability is a record of taxes that have been incurred but have not yet been paid This line item on a company's balance sheet reserves money for a known future expense

b Calculate goodwill given the following information: ($ in million) (10 points) Equity purchase price = $6,300+($50xA) (with A: the value assigned to you in the Appendix at the end of this exam paper; for example, for Anh, the equity purchase price is $6,350) Target company’s net

identifiable assets = $3,800 Allocation to asset write-up: Tangible assets: 16% Intangible assets: 11% Tax rate = 34%

A=18

Equity purchase price = $6,300 + ($50 x 18)

= $7,200 Less Net Identifiable Asset = $3,800

= $3,400

Less Tangible Asset Write Up = - $3,400 x 16% = - $ 544

Less Intangible Asset Write Up = - $3,400 x 11% = - $374

Plus Deffered Tax Liablity = ($ 544 + $374) x 34% = $312.12

= Goodwill = $3,400 - $544 - $374 + $312.12 = $2.794,12

Question 4: (35 points)

a Discuss advantages of using Leveraged Buyout (LBO) deal structure (5 points)

This is advantages of LBO

e You'll have to invest some money in the transaction, but not nearly as much as you would in a traditional buyout The leveraged buyout approach is based on the idea that debt does the majority of the labor

e Your firm and personal finances are secure if the acquisition fails after the purchase and you are unable to repay the debt You are not obligated to pay the money

« Because the transaction is debt-driven, an LBO may provide tax benefits to your organization

e If everything goes according to plan, you might expect a high rate of return on your investment

e The seller normally has no objections to selling the firm if the price is reasonable Your lenders, on the other hand, may desire a lengthy inquiry of the firm, which might irritate a seller who is eager to sell

b Calculate Internal Rate of Return (IRR) of the following LBO transaction: (10 points) Transaction value: $1,200,000,000

Debt: $800,000,000+($100,000xA) (with A defined above)

Equity: ?

Assume that in the exit year (year 7):

Cumulative cash available for debt repayment: $305,000,000

EBITDA: $250,000,000+($100,000xA) (with A defined above)

EBITDA multiple: 10

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Cum mative Rigo $ 305, 090, 0V0

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c Given the following information of the industry and an LBO firm, calculate levered beta of the firm each year from year 1 to year 3: (10 points)

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