Precedent transaction analysis is a valuation method in which the merger consideration previously paid for similar companies is compared and used as an indicator of the target company’s value. Using Precedent transaction analysis creates an estimated range of values of what a share of the target stock could be worth in the case of a merger or acquisition. Precedent Transaction Analysis is commonly used in Mergers and Acquisitions and may also be known as “M&A Comps”, “Comparable Transactions”, or “Deal Comps” and is related to the concept of fair value.
Precedent transaction analysis uses publicly available information (see example below) to create a relevant estimate of multiples or values that previous acquirers have paid for a publicly traded target company. As 100% identical comparatives are almost impossible to find, the analysis will consider additional factors such as the type of acquirers that have purchased similar companies under similar circumstances explore the probability that the reasons for purchase are still valid in the current situation. The analysts (Centerview in the example below) will also consider size, target operations, financial condition, future prospects and possibly the strategic reasons such as horizontal expansion of the deal.
Using Precedent Transaction Analysis
In order to fully benefit from precedent transaction analysis reliable Data sources must be used in order to avoid “garbage in, garbage out”. Traders and analysts often use (amongst others)
- The Securities Data Corporation, a repository of mergers and acquisitions data
- Trade publications
- Research reports
- Annual filings
- Investment websites such as Merger Arbitrage Limited
With the correct data, the trader may construct their own analysis and independent valuation of the target firm. In doing so, a reasonable estimate of the company’s worth may be obtained. This can be used to judge whether or no the current bid is sufficient to consummate the takeover. If the estimate is low, the trader may reason a higher bid is required or a bidding was may ensue. Armed with this analysis, the trader is better informed when making an investment decision regarding the merger arbitrage spread.
Target Enterprise Value Example
The following text is taken from the Form PREM14A Preliminary proxy statement relating to merger or acquisition filing with the SEC made by Tiffany & Co. (TIF) on December 18, 2019 in relation to the proposed takeover by LVMH
Selected Precedent Transaction Analysis
Centerview reviewed and analyzed certain information relating to the following selected transactions … deemed relevant to consider in relation to the Company and the transaction. These transactions were selected, among other reasons, because their participants, size or other factors, for purposes of Centerview’s analysis, may be considered similar to the transaction. Centerview used its experience, expertise and knowledge of the luxury and premium consumer goods industries to select transactions that involved companies with certain operations, results, business mix or product profiles that, for purposes of this analysis, may be considered similar to certain operations, results, business mix or product profiles of the Company.
Using publicly available information, Centerview calculated, for each selected transaction set forth below, among other things, the enterprise value (calculated as described above) implied for the applicable target company based on the consideration payable in the applicable selected transaction as a multiple of the target company’s EBITDA for the latest twelve-month period (“LTM”) at the time of the announcement of the transaction. The results of this analysis are summarized as follows:
| Date Announced | Target | Acquiror | EV / LTM EBITDA |
|---|---|---|---|
| Mar 2011 | Bulgari S.p.A. | LVMH Moët Hennessy-Louis Vuitton SE | 25.8x |
| Mar 2013 | Harry Winston Inc. | The Swatch Group Ltd. | 24.4x |
| Jul 2013 | Loro Piana S.p.A. | LVMH Moët Hennessy-Louis Vuitton SE | 21.0x |
| Feb 2014 | Zale Corporation | Signet Jewelers Ltd. | 15.6x |
| Apr 2016 | SMCP S.A. | Shandong Ruyi Technology Group Co., Ltd. | 12.4x |
| Apr 2017 | Christian Dior S.E. | LVMH Moët Hennessy Louis Vuitton S.E. | 15.6x |
| May 2017 | Kate Spade & Company | Coach, Inc. | 10.4x |
| Jul 2017 | Jimmy Choo PLC | Michael Kors Holdings Limited | 17.5x |
| Sep 2018 | Gianni Versace S.r.l. | Michael Kors Holdings Limited | 22.0x |
| Median | 17.5x | ||
… Centerview believed that it was inappropriate to, and therefore did not, rely solely on the quantitative results of the selected transactions analysis. This analysis involves complex considerations and qualitative judgments concerning differences in financial and operating characteristics and other factors that could affect the public trading, acquisition or other values of the selected target companies and the Company.
Based on its analysis and other considerations that Centerview deemed relevant in its professional judgment and experience, Centerview selected a reference range of multiples of enterprise value to LTM EBITDA of 15.0x to 20.0x derived from the selected target companies in the selected precedent transactions. … Centerview applied this reference range to the Company’s LTM EBITDA of $982 million for the period ended October 31, 2019 (based on the internal data), which resulted in an implied per share equity value range for the shares of common stock of approximately $117 to $157, rounded to the nearest dollar. Centerview compared this range to the merger consideration of $135.00 per share to be paid to the holders of shares of common stock (other than excluded shares) pursuant to the merger agreement.
In this document, using precedent transaction analysis, a value of Tiffany stock has been calculated. It appears that despite the level of subjectivity applied, a value per share has been derived the sits well with the offer price from LVMH.
