Merger and Acquisition - Dividend Discount Model

Debt to equity ratio 2013-2017 equal to 44,25%

Unlevered beta telecom services industry, Europe – 0,6821

Levered beta from reuters – 1,26

Tax rate 19%

German 10 years bond yield: 0,44%

Slovenia market risk premium 6,92%  - January 2018

Valuation

Business valuation is a process of determining the economic values of a company. Telekom Slevenije is a Slovenia – based company operating in telecommunication services. The company provides fixed and mobile communication systems. In this chapter three different methods of valuation will be executed.

1. Discounted Free Cash Flow

If a company is viewed as an acquisition target, free cash flow is a more appropriate measure because the new owners will have discretion over its distribution (control perspective). DCF offers the closest estimate of stock’s intrinsic value. It is considered to be the best valuation method if the assumptions are correct. It is particularly useful when there is a high degree of confidence for future cash flows. However, it is very sensitive to the forecasts and assumptions. Even small adjustments can cause variations in the model and estimated values.

DCF = [CF1 / (1+r)1] + [CF2 / (1+r)2] + ... + [CFn / (1+r)n]

Assumptions for the DCF model:

• According to the company 5Y strategic business plan (2016-2021), Revenue will increase by 1% each year.
• Cost of services will decrease by 1% YtY due to improving efficiency of the company and it’s business.
• CAPEX and Depreciation is supposed to increase by 8% YtY due to expansion of fibre optic access network.
• Tax rate of 19% will remain the unchanged for the next years.
• Sustainable growth rate will be equal to

1. Relative Valuation Model

Relative valuation values an asset based on how similar assets are priced in the market. The valuation of Telecom Slovenija will be made by using telecom industry mean ratios. The model will concentrate on presented below ratios:

• Earning Multiples
• Book Value Multiples
• Revenue Multiples

To make this comparison we begin by converting prices into multiples – standardizing prices. Then we compare this multiples across firms that we define as competitors, which are respectively:

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