Transaction Multiples
What are Transaction Multiples?
Transaction multiples are a relative valuation method that compare a value to a relevant value driver. They are used in transaction comparables analysis where valuation insight comes from analyzing and comparing the price paid in similar M&A deals.
Transaction multiples help buyers and analysts estimate a business’s value based on the multiples used in a peer group of transactions. These multiples are used to produce a valuation range.
Key Learning Points
- Transaction multiples are a relative valuation method that compare a value number with a value driver and always expressed a multiple
- Multiples divide a value by a value driver and must be consistently defined
- Multiples are calculated at the time an agreed deal is announced
- Value drivers must be last twelve months (LTM) at time of deal announcement
- Deals often happen under different circumstances (quoted company vs private company) and an analyst must make sure to compare relevant deals
Understanding Transaction Multiples
Multiples are calculated by dividing a value number by a value driver.
Transaction Multiple = Value / Value driver
The value number is Enterprise Value (EV) or equity value. All equity to enterprise value bridge adjustments must be made based on the latest balance sheet data available at the deal announcement date. Ideally, the market value data should be used if available.
The value driver represents a driver of value for the company (usually a profit number). These figures must be adjusted to the last twelve months (LTM) at time of deal announcement.
It is important that the value driver is consistent with the value number used. As an example, EV is unaffected by a company’s capital structure and must therefore be compared to a suitable value driver like EBIT.
Calculating Transaction Multiples
Here is an example of comparing transaction multiples:
A couple of important points to remember about the numbers to use for value and value driver.
Consistency of value and value driver
Enterprise value represents the net operating assets of a business, while EBIT or EBITDA represent the operating profit. Therefore, the EV/LTM EBITDA multiple is a good measure of operational efficiency. It helps analysts measure the premium buyers are willing to pay for the operational assets in relation to the operational income of the business.
Using the information available on the announcement date
The value figure should be based on the latest balance sheet data available on the deal announcement date. If the market value is used (for data points like share price), even that information should be as of the announcement date. Irrespective of the source, the information relevant for analysts is one on the announcement date and not the deal completion date or after.
Likewise, the most relevant information for the value driver is that of the last 12 months (LTM) up to the deal announcement date. For the EV/EBIT multiple, the most relevant EBIT number is the one for the last 12 months. If you are calculating earnings per share, you will use the net income for LTM as of the announcement date.
Transaction Comparables Interpretation
The transaction multiples inform a valuation range for the business being valued. Just as with trading comparables, the mean and median often provide the starting point. The high and low multiples are used for context but are less meaningful. Understanding the deal story for comparable transactions is critical to narrow down the multiples range. If the median LTM EBITDA multiple is 14.5x but the closest comparable transactions were in the range of 12.0x to 13.0x then the selected range might be from 13.5x to 14.5x. This has the effect of weighting towards the closest comparables.
As always, the choice of comparables is subjective, and needs to be justified with robust back up.
Transaction Multiples Grid
Different types of transactions have different transaction multiples. We look at five different deals happening under different circumstances to understand the differences between transaction multiples.
Quoted company
For a publicly quoted company, the following information is available to analysts:
- Unaffected share price
- Offer price
- Control premium (%)
Analysts use the equity and enterprise value bridge to calculate the enterprise value, and eventually, the EV/LTM EBITDA multiple.
Private companies
For a private company, analysts will not have the offer price and the control premium. The transaction multiples are calculated using the acquisition equity value.
Asset deal
In an asset deal, the acquirer is acquiring the enterprise value or operational assets of a business. In such deals, analysts have the enterprise value for comparison. They do not need the debt and cash equivalents to make an equity to EV bridge.
Merger of equals
In a merger of equals, two groups of shareholders give up their shares to get shares in a newly created company after the deal. Both groups enjoy the benefits of the transaction almost equally. Therefore, such deals do not involve a significant premium. This is reflected in the low premium for this deal in the transaction multiples grid.
Leveraged buyouts
LBOs involve private equity companies buying mature companies. For a private equity company to make the required returns, the purchase price has to be attractive. That is why the transaction multiples are comparatively lower for LBOs.