Health Development Corporation

Ashutosh Dash
 Value of
Lexington?????
 Value of Lexington
• Cash Inflow – 925000
• Discount Rate >8.75%
• Financed with
– 5750000 Debt
– 750000 Equity
– Weight of debt 88.5%
 Was Investment a wrong decision?
PMT 925000 RF 6.5% Kd 8.75%
Eco Life 40 B Debt 0.30 Wd 0.88
Rate (WACC) 10.9% Equity Beta 6.37 We 0.12
MV 6500000 RP 7.50% B Assets 1.00
COE 54%
PV no growth 83,61,663 40 yrs data PV of Inflow 8951878

Value Creation 18,61,663  Outflow 6500000

20 yrs data PV of Inflow 6782019 NPV 2451878

Outflow 6500000

NPV 282019
 Value of Lexington – Multiples
• EBITDA Multiple of 5

• Incremental EBITDA with Lexington

– $925 thousands

• Hence Value of Lexington

– 925*5 = $ 4.625 Million
Negative
Equity Value
• Investment - $6.5 Million
 HDC without Lexington
• What is the Value of HDC without Lexington?
– EBITDA 3229000 (Exhibit 3)
– Multiple 5X
– EV (3229*5) = 16145000
– Corporate Debt (1917000)
– Cash = 750000
– Equity Value 14228000
 Is Separation a good Solution?
Without
  Lexington Lexington SoTP
EBITDA 3229 925 4154
Multiple 5 5 5
Enterprise Value 16145 4625 20770
Debt 1917 5750 7667
Operating Value of
Equity 14228 -1125 13103
Cash (Non operating
Assets) 750 -750 0
Equity Value 14978 -1875 13103
 Why
Separation?????
 HDC - Need for Restructuring

• The real Estate with only 20 yrs cash flow it

looks very attractive
• Why TCI is considering negative?

• Integrated strategy is no longer profitable

 How Spin off Can Create Value?
• Investors put a higher value on "pure plays“
• Existence of a stock market inefficiency
• Can increase the firm's combined cash flows because
of improved management incentives
• Eliminating the negative synergies that arose under
its integrated strategy
 How to determine the multiplier?

• Derived from perpetuity value calculation

• TV in DCF is nothing but a relative valuation

• Multiple = 1/ (Discount Rate – Growth Rate)

• Increasing Risk decreases multiple and vice versa

• High growth increases multiple and vice versa

 Value of Lexington
• Cash Inflow – 925000
• Discount Rate >8.75%
• Financed with
– 5750000 Debt
– 750000 Equity
– Weight of debt 88.5%
• Conservative Number – 10%
• Multiplier = 1/(0.1-0.05) = 20
 Value of Lexington
• With no growth assumption:
– Multiple = 1/(0.1) = 10 X
• Value of Lexington with growth
– 925000*20 = 18500000
• Value of Lexington without growth
– 925000*10 = 9250000
• Debt against Lexington – 5750000
• Value to equity holders
– (9250000-5750000) = 3500000 without growth
– (18500000-5750000) = 12750000 with growth
 Sum of Parts Valuation
• Equity Value of HDC excluding Lexington
14228000
• Equity Value of Lexington
– (9250000-5750000) = 3500000 without growth
– (18500000-5750000) = 12750000 with growth
• Sum of Parts
– (14228000+3500000) = 17728000 without growth
– (14228000+12750000) = 26978000 with growth
 Ways to create value
• Don’t manage Earnings
• Make strategic decisions
• Restructuring (M&As) to maximize value
• Return excess cash to shareholders
• Reward managers for long term return
• Make executives bear the ownership
• Provide value relevant information
08/04/2020 15
Restructuring????
 HDC Restructuring – The Issues
• Identify the need for Restructuring

• Identify alternative approaches

• Correctly choose the alternative based on value

gains
 Restructuring - The Need
• Response to external changes

- Increased competition

- Policy changes

- More efficient technology

- Emergence of new markets

- Emergence of new products

- Demographic Changes

- Business cycles
 Forces Driving Restructuring
Industry Drivers

Banking Deregulation/Technology

Broadcasting Deregulation

Textiles Liberal Trade Policy

Energy Petroleum Price Change

Food Processing Demographic Shift

08/04/2020 19
 Restructuring Alternatives -

• Mergers & Acquisitions

• Demergers
Spin Off
Split Up
Split Off
• Divestures
• Carve outs
• Joint Ventures
• Buy-Back
• Capital reduction
Value Creation in
HDC Spin Off
 Structuring the Deal

TSI HDC
Holding

HDC
Will the Proposed structure add value?

• It’s a sale and lease back structure

– Lease amount of Lexington will change
– Annual lease rental 525000
– EV of Lexington = 5250000

• Equity Value of Lexington Negative

– EV of Lexington 5250000
– Debt of Lexington 5750000
 What will be the Impact on HDC
• The EBITDA will increase since lease rental will
decrease
– EBITDA 3629000
– EV (3629000*5) = 18145000
– Corporate Debt 1917000
– Equity Value 16228000
• Sum of Parts = 16228000-500000 = 15728000
• Much Better than TSI’s present offer
Structuring the
Deal
 Interest of Stakeholders
• TSI & HDC would agree

• Banker may not agree

• Loan was decided based on higher cash flow

of Lexington – CF 110% of EMI
Maximum Loan Permissible

Rental 525000
PMT 477273
nper 10
Rate 0.085
PV 3,131,552
 Deal Structure
• Sale proceeds – 16228000

• Cash infusion in HDC holding

– (5750000 - 3131552) = 2618448

• HDC Holding
– Assets – 5250000
– Equity – (2618448 -500000) =2118448
– Debt - 3131552