For over ten years, SORGEM Evaluation has been analysing public offers relating to the French market using data published on the AMF’s website. We have chosen to play an active role in disseminating the economic and financial analyses carried out in connection with public offers, and will regularly publish selected analyses drawn from our review of independent expert reports.
This note presents, amongst other things, trends in the number and type of public takeover bids, the valuation methods and parameters used by independent experts, and highlights some recent articles on the subject.
As a reminder, in the case of public offers likely to give rise to conflicts of interest within the board of directors, the supervisory board or the competent body of the target company, as well as in the case of mandatory delistings, an independent expert is appointed by the management bodies of the company whose securities are the subject of the offer. Their role is to issue an opinion on the fairness of the financial terms offered by the offeror to the shareholders of the target company. The expert issues a detailed report in which they analyse the value of the company, the valuation work carried out by the presenting institution and any related agreements (transactions prior to or following the offer, management packages, service contracts, liquidity guarantees, financing of the offer, etc.).
Number of equity certificates recorded by the AMF in connection with public offers and the average fees charged by independent experts
The number of fairness opinions produced in connection with public offers fell significantly in 2018 (an annual average of 39 certificates between 2011 and 2017) but rose again over the following three years, with a particularly sharp increase in 2021.
The trend for 2022 appears to be downward, although historically the number of certificates issued in the first half of the year does not necessarily indicate the annual trend.
The expert’s remuneration remains at the level reached in 2021, although it should be noted that in 2021, certain transactions had pushed up the average (notably fees of €1,500k for Veolia’s takeover bid for Suez in 2021).
Types of Public Offers Encountered and the Target’s Sector
We note that public offers followed by a mandatory withdrawal account for more than three-quarters of the offers made in the first half of 2022.
In terms of sector, the companies that have attracted the most public offers over the last two years are consultancy firms (industrial services, IT, etc.), manufacturing and financial services companies.
Methods favoured by experts
The method favoured by independent experts remains discounted cash flow analysis, which has been the primary method used in more than 8 out of 10 cases in recent years.
We note that all valuations for the first half of 2022 used this method as the primary approach.
Whilst the use of the market comparables method was historically significant, we have observed a decline over the last two years. The impact of the health crisis on companies’ latest financial results may have led to this method being abandoned as the primary approach. We note, however, that in 2021 and the first half of 2022, the method was widely used for information purposes only – that is, without being selected to establish a valuation range (~44% of valuations).
The comparable transactions method appears to be losing ground recently. It is indeed possible that, against a backdrop of significant changes in the financial markets (inflation, a fall in certain multiples – SaaS multiples, for example, etc.), questions may arise regarding the relevance of an older transactional benchmark.
Focus on the multiples considered
When the market comparables method is used as the primary approach, the multiples generally employed by experts relate to the aggregates of EBITDA and EBIT.
Whilst we observed a shift away from the EBITDA multiple between 2018 and 2020 in favour of the EBIT multiple (coinciding with the initial impacts of IFRS 16 in 2019), this trend reversed in 2021, with two-thirds of the analyses using comparables based on an EBITDA multiple.
The trend appears to be reversing once again in the first half of 2022, with EBIT multiples being favoured over EBITDA multiples. Analysis covering a full year will confirm whether or not this trend is holding.
Benchmarks selected by the experts
In the case of public offers for listed companies, it is not surprising to find the share price cited as the primary benchmark used by the independent experts (benchmarks used for information purposes only are not listed here).
Share capital transactions are regularly used where such transactions have taken place close to the date of the offer announcement.
Target share prices are, by definition, only available where analysts cover the target company. As such, the use of this benchmark varies and depends on the extent to which the company is covered by analysts.
Components of the discount rate and long-term growth
The discount rate used by the experts is almost exclusively estimated using the CAPM formula.
The equity market risk premium used in this context has historically fallen within a range of between 7.0% and 8.0%. We note a significant increase between the first half of 2020 and the first half of 2021, which may be linked to the rise in uncertainties surrounding the health crisis during this period. Its recent decline can be partly explained by the change in the risk-free rate (see below), since, for a given required rate of return, an increase in the risk-free rate automatically leads to a decrease in the market risk premium.
The risk-free rate had been falling steadily for the past 10 years, in line with trends in the bond yields of countries considered risk-free.
We have observed a notable increase in the first half of 2022 linked to the rise in sovereign bond yields (notably due to inflation and the war in Ukraine). The rate now stands at just over 0.70%, compared with around 0.25% previously.
The long-term growth rate, used in particular to calculate the terminal value, has remained relatively stable over time and has been close to 1.5% over the last two years.
A selection of articles on the subject
- An article by Thomas Hachette published in Option Finance, discussing the valuation of SaaS companies against the backdrop of falling markets -> link_to_article
- An article in L’Agefi on the ongoing EDF transaction and the issue of how the compensation claimed from the State is factored into the independent valuation and the offer price -> link_article
- The Vernimenn letter ‘Improving the governance of listed companies and public offers’ -> link_to_article
- The risk map presented by the AMF -> link_to_article
Disclaimer & contact details
This study has been carried out for information purposes only, based on SORGEM Evaluation’s databases compiled from publicly available information on the AMF website.
The authors and SORGEM Evaluation accept no liability whatsoever for the transcription, analysis or interpretation of the information contained in this note.
Contacts for this study:
- Thomas HACHETTE, Partner, SORGEM Evaluation;
- Etienne LANGER, Manager, SORGEM Evaluation.
