Giddy | Case study - Actavis Valuation

Case study
Actavis: Valuation

Prof. Ian Giddy, New York University

The Company
Based in Iceland, Actavis is one of the world's faster growing generic pharmaceutical companies. In mid 2006, the company made a bid for Croatia's leading generics company. The offer was half in cash, and half in shares. Management of the target company advised shareholders not to accept Actavis' bid, which was made in shares. Actavis, they argued, was overvalued and overleveraged, like the Icelandic market as a whole. They pointed to the fact that while the bidder's share price had risen 35% during the past year, earnings were flat.

Financials
HSBC was hired by a group of the target company's investors to provide an objective valuation of Actavis, based on the company's projected free cash flows. The financial information they used was as follows:

Free Cash Flows	EUR m	Share Value
Revenue	566.00
-Expenses	(415.00)	Share price
-Depreciation	(30.00)	58	ISK
EBIT	121.00	0.69	EUR @	84.2
EBIT(1-t)	105.72	3339	shares
+Depreciation	30.00	193662	Mkt cap (isk m)
-CapEx	(98.00)	2300	Mkt cap (eur m)
-Change in WC	(17.00)	970	Debt (eur m)
FCFF	20.72

Cost of Capital
Debt	10-year bond yield	6.00%

Equity	Beta	1.7
	Risk-free Treasury	5.00%
	Market Risk Premium (europe)	4.50%

Growth assumptions
		Growth rate
Constant growth model		7%

2-stage growth model
Stage 1 (5 years)		20%
Stage 2 (after 5 years)		6%

Projected Cap Ex expected to be 1/3 2005 level, growing at same rate as revenues
Depreciation = previous year's Cap Ex
Working capital expected to grow at same rate as revenues

Questions

1. Use the data given above to calculate the Enterprise Value of Actavis
2. How could you use your estimate to value the company's equity value?