Financial Analysis and Valuation of Troax Acquisition (2012): A Report

This report provides a comprehensive financial analysis of the Troax acquisition, examining the valuation of the company, the ME-ME-ME-(US) analysis, and the benefits of acquiring additional companies. The analysis includes detailed calculations of Adjusted Present Value (APV), Internal Rate of Return (IRR), and multiples. The report also evaluates the potential acquisition of Satech, considering the financial implications and strategic advantages. Furthermore, the document explores the pros and cons of offering Satech shareholders a stake in the combined company versus issuing high-yield bonds to finance the acquisition. The report concludes with a thorough examination of the strategic and financial considerations involved in the acquisition process.

Financial Analysis and Quantitative Valuation
Answer to Question 1
Troax was acquired by FSN in 2012 at a price of Euro 97 Million post sale by the Accent which
acquired the company in 2010. The acquisition was partly financed by equity from FSN Capital Fund
III of Euro 43 Million, 4 Miilion of equity investment from Troax Management, Bank loan from
Nordic Banks of Euro 40 Million and 10 Million loan from Vendor.
Before conducting an indepth analysis of Troax on qualitative front in 2012, let us understand the
basic nature of the company. Troax Group AB (‘Troax’) is one of the leading producer of metal-based
mesh panel solutions for various industrial customers all over the world. The basic raw material used
in manufacturing of the product encompass welded steel and several unique concepts and solutions.
The company was founded in 1955 by four brothers of Axelsson family in the small town of
Hillerstorp in the country of Sweden.The company was founded in a farm at Tyngel. The company
expanded from a small business to having a presence in entire Europe and internationally. Further, the
company has undergone purchase and sale from its very inception and Axelsson brothers have started
two companies since then.
On the qualitative front, the company is attractive for the following reasons:
(a) The company is a pioneer and market leader in a growing niche market with a differntiated value
proposition;
(b) The company is twice compared to its next competitor in terms of size;
(c) Excellent sales and distribution network of the company;
(d) Growing size of the industry and positive long-run trends in relation to automation and changing
distribution structures;
(e) Excellent production facilities with state-to art technology;
(f) Strong Cash flow generation with a very low capital expenditure requirement and high margins
of Earning Before Profit, Tax, Depreciation and Ammortisation.
(g) Large Sales force of the company to provide flexible and quick solutions to customer;
(h) Ability to charge premium prices from customers on account of strong brand image and
reputation in market;
(i) Chances of greater expansion globally;
(j) Positive future outlook of industry;
(k) Concentration of industry by more acquistion of competitors;
(l) Excellent management with constant meeting of targets;
On the basis of above, it can be seen that company on the market, management and operational fron
has a positive outlook and shall be an attractiev investment on 2012 based on the aforestated reasons.
ME-ME-ME-(US) Analysis
The ME-ME-ME-(US) analysis suggest whether the proposed acquistion is lucrative or attractive
based on various factors without paying heed to the spreadsheet and forcecasted figures. The
following facts are taken into consideration for deciding the ME-ME-ME-(US) analysis:
(1) Understanding the Business environment of the company:
(a) Macro Factors;
(b) Micro Factors;

(c) Management Factors
(2) In what way the buyout shall create a positive NPV. The following three modes have been
prescribed:
(a) Entry;
(b) Engineering;
(c) Exit.
(3) Major uncertainty and how shall deal be structured?
(4) Do number support analysis?
The analysis of Troax has been provided here-in-below:
(1) Understanding the Business environment of the company:
(a) Macro Factors
Troax Group AB (‘Troax’) is one of the leading producer of metal-based mesh panel solutions
for various industrial customers all over the world. The basic raw material used in manufacturing
of the product encompass welded steel and several unique concepts and solutions The market of
the products manufactured by Troax are quite promising on account of automation which is very
fast spreading across globe, thereby creating a strong market for the products manufactured by
Troax. Further, the industry observes a long positive uptrend cycles and the same is expected to
persist in the long run as the macro economic outlook for the consumer industries are positive.
The consuming industries have witnessed a string growth specially:
(i) Automation and Robotics have witnessed a growth of 8-11% during the year 2003 to 2011
and the same is expected over the years to come;
(ii) Material Handling and logistic market is growing at the rate of 1-3% since 2003 even during
the period of economic crisis and the same is expected to persist over next few years;
(iii) Property Protection
The key success factors of the industry is the increased automation and a very strong growth of
market of the products in developing industries.
Further, the companies in the industry are laden with debt based on data of companies and
balance sheet.
(b) Micro Factors
Troax is a market leader compared to peer and marks its strong foothold in the industry with a
size double to its largest competitor. Further, the company has a strong brand reputation in the
market and is able to charge premium prices from its customers. In addition, the company marks
global presence.

The company has excellent sales and distribution network of the company with a strong and large
workforce to provide flexible solutions to client and marks its presence in fast growing markets
of the world.
The company has a very strong cash flows with a low investment in capital expenditure. Further,
the company already accommodates a huge amount of debt and bank is not willing to provide
any further debt to the company.
(c) Management
The Current management of the company is performing excellently with constantly meeting
performance targets and requirement of profitability year –on- year basis.
Further, the management of the company is quite hungry even after one successful exit. Further,
the management is ready for an investment proposal for exit strategy.
(2) In what way the buyout shall create a positive NPV. The following three modes have been
prescribed:
(a) Engineering
The company expects to increase the sale of the company by expanding into new
geographical market and business and is expecting to increase the sale of the company.
(b) Exit
The exit strategy has been strategized to be an IPO.
(3) Major uncertainness and how shall deal be structured?
The major uncertainty revolves around the project is competition and market segmentation.
Further, the takeover and acquisition by peers shall reduce its peer size.
Further, the acquisition is more than 50% funded by debt on account of huge cash flow resources
project from the operations of the company.
(4) Do number support analysis?
The valuation of the company has been carried out at 6.52 times of EBITDA. The proposed
acquisition is quite attractive and the number support the analysis.
Answer to Question 2

For the purpose of computation corporate tax rate has been taken at 20%, pay in kind interest rate on
vendor loan has been considered to be tax deductible, Discounting rate has been considered at 8%
without including any compensation fees, carry fees or liquidity fees. It is also assumed that term loan
B has not been repaid and FSN expects exit at 8 times of 2017 EBITDA accordingly for the purpose
of exit 8X multiple has been considered.
Further, the ownership has been divided on the basis of equity proportion at the initiation of
calculation. Further, 2012 estimated data has been considered as base data and not relevant for the
purpose of analysis carried out.
On the basis of above assumptions and analysis, Adjusted Present Value of Troax has been computed
at Euro 87 Million and the Internal Rate of return on investment made has been computed at 18% and
the Multiple has been computed at 2.29X. For detailed computation refer excel.
Answer to Question 3
The benefits of acquiring additional company to the Troax shall be as follows:
(a) It can help in creation of economies of scale;
(b) Reduction in cost of production by using technology and strategic advantages of peers;
(c) Increased Global Presence;
(d) Entering into new markets;
(e) Increase in revenue and EBITDA of the company;
(f) Aids in listing and procuring additional finance from the market;
(g) Inorganic growth of the company;
(h) Concentration of market and premium pricing.
(i) Synergies in cost shall be realised on different fronts.
On the basis of the details provide in Appendix 6, the company should target Italy and UK market to
gain the market share and shall try to acquire Axelent as acquiring the said company can give Torax a
dominant position in both the countries. Hence, acquiring Axelent shall be the first best option in the
hands of the company.
Answer to Question 4
On the basis of details provided regarding the financial projections of standalone of Satech for the
period 2014 to 2017, average of sales and Ebitda has been taken and the Ebitda has been multiplied
with the multiple to derive the Enterprise value of Satech which stands at 22.47 Euro Million based on
average. Further, the valuation of company based on comparable stands at Euro 42.08 Million.
Further, for computing the combined value of company the standalone figures of two companies have
been taken into consideration since no data for synergy has been provided in the case study. Further,
the computation also includes assumption regarding the Market rate of return and liquidity premium
which has been assumed to be 6% and 2% respectively.
The Enterprise value of the company post acquisition of Satech has been computed at 577.3 Million
Euro when no debt is taken and the enterprise value of Troax before Satech stands at 188.1 Million
Euro. Thus, the value added by Satech to the company exceeds the investment made. Hence, the
investment proposal is beneficial.
The pros and con of acquiring Satech by Torax has been detailed here-in-below:

(a) It can help in creation of economies of scale;
(b) Reduction in cost of production by using technology and strategic advantages of peers;
(c) Increased Global Presence;
(d) Entering into new markets;
(e) Increase in revenue and EBITDA of the company;
(f) Aids in listing and procuring additional finance from the market;
(g) Inorganic growth of the company;
(h) Concentration of market and premium pricing.
(i) Elimination of competition;
(j) Preventing U.S. Manufacturer for getting foothold in the U.S. Market;
(k) It shall add on acquisition strategy of the company;
(l) Synergies in cost shall be realised on different fronts.
The cons of acquiring Satech by Torax have been detailed here-in-below:
(a) Alternative investment opportunity shall be lost;
(b) Synergies as predicted might not crystallised;
(c) Risk of redundancy;
(d) Clash of culture and values of the company with that of acquired company;
(e) Higher rate of bonds;
(f) Impact on cash flow;
(g) Impact on the return of the Private Equity Company i.e. major shareholder of the company.
Answer to Question 5
The pros and cons of offering Satech shareholders a stake in the combined company as a part of the
consideration has been detailed here-in-below:
Pros
(a) Reduce burden of borrowing significant funds;
(b) Reduced impacts on the cash flow of the company;
(c) Reduced risk of default of the company;
(d) Additional funds can be procured in future to finance future acquisitions;
(e) Existing Shareholders are part of the future of the company’s operation;
(f) Sharing of risk of uncertainties of future.
Cons
The cons of providing shares to the shareholders of Satech have been detailed here-in-below:
(a) Dilution of equity;
(b) Interference in management of the company;
(c) Sharing of benefits of the synergy with the shareholders of Satech;
(d) Benefit of tax deduction on account of interest on debt shall not be available;
(e) Reduce return to the FSN

The pros and cons of issuing a high bond yield and refinancing bank loan has been detailed here-in-
below:
Pros
(a) No dilution of equity;
(b) Benefit of trading on equity;
(c) Tax deduction on account of interest component;
(d) No interference in management of company;
(e) Increased return to FSN.
Cons
(a) Higher interest rate to be paid;
(b) Higher risk of default;
(c) Burden on cash flow of the company;
(d) Interference in the management of the company in case of default;

Appendix
LP NPV from APV
$79.
7 IRR 18.0%
Mo
M 2.3x
Assumptions
Sources & Uses of
Funds
Terminal growth rate
(g)
Uses 2%
Equity Purchase Price
$73
.0
Additional hold Co cash
$2.
0
Pay back old debt
$17
.0
Transaction Fees &
Expenses
$5.
0 Discount rate (ra)
8.7%
Total Uses
$97
.0
Memo: Entry
EV/EBITDA multiple 9.4x
Sources
Bank loans $40
Vendor note $10
FSN equity $43
Management equity $4
Total Sources
$97
.0
SUMMARY
FINANCIALS
Historic
Estima
ted
Termi
nal
Termi
nal CAGR
2011 2012 2013 2014 2015 2016 2017
'01E
-'06P
Revenue $60.8 $71.5 $68.6 $71.3 $77.0 $84.3 $92.7 3.4%

LP NPV from APV
$79.
7 IRR 18.0%
Mo
M 2.3x
% YoY Growth 17.6% (4.1%) 3.9% 8.0% 9.5% 10.0
%
EBITDA $9.6 $14.4 $11.9 $13.0 $14.6 $16.9 $18.5 3.2%
% Margin 15.8% 20.1% 17.3% 18.2% 19.0% 20.0% 20.0
%
Depreciation $2.4 $2.0 $1.6 $1.2 $1.0
% Revenue 3.5% 2.8% 2.1% 1.4% 1.1%
CapEx ($0.9) ($5.4) ($3.5) ($1.5) ($1.0)
Investment in Net
Working Capital ($0.8) ($1.5) ($1.2) ($1.8) ($2.1)
NWC % of sales 27.6% (55.6
%)
(21.1
%)
(25.0
%)
(25.0
%)
EBIT $9.6 $14.4 $9.5 $11.0 $13.0 $15.7 $17.5 1.7%
% Margin 15.8% 20.1% 13.8% 15.4% 16.9% 18.6%
18.9
%
Net Interest Expense (3.7) (3.7) (3.7) (3.3) (3.3)
EBT $14.4 $5.8 $7.3 $9.3 $12.3 $14.3
Taxes ($2.9) ($1.2) ($1.5) ($1.9) ($2.5) ($2.9)
% Tax Rate 20% 20% 20% 20% 20% 20%
Net Income $11.5 $4.6 $5.8 $7.4 $9.9 $11.4
% Margin 16.1% 6.8% 8.2% 9.7% 11.7%
12.3
%
CASH FLOW
STATEMENT

LP NPV from APV
$79.
7 IRR 18.0%
Mo
M 2.3x
2,013.
0
2,014.
0
2,015.
0
2,016.
0
2,017.
0
EBITDA $11.9 $13.0 $14.6 $16.9 $18.5
(-) Interest Expense ($2.6) ($2.5) ($2.3) ($1.8) ($1.6)
(-) Taxes ($1.2) ($1.5) ($1.9) ($2.5) ($2.9)
(-) CapEx ($0.9) ($5.4) ($3.5) ($1.5) ($1.0)
(-) Ch. NWC ($0.8) ($1.5) ($1.2) ($1.8) ($2.1)
Cash Flow For Debt
Paydown $6.4 $2.2 $5.7 $9.2 $11.0
Debt Paydown ($1.8) ($2.3) ($3.0) ($3.8) ($5.0)
Net Change in Cash 1 $4.6 ($0.1) $2.7 $5.4 $6.0
cash Positon $5.6 $4.5 $2.6 $8.1 $11.4
DEBT PAYDOWN
Bank Loan (Term Loan
A)
BOP $18.0 $16.2 $13.9 $10.9 $7.1
Paydown ($1.8) ($2.3) ($3.0) ($3.8) ($5.0)
EOP $40.0 $16.2 $13.9 $10.9 $7.1 $2.1
Net Debt/ Ebitda 3.5757
98
3.183
886
2.762
746
1.835
479
1.223
072
Cash Interest Rate 6.20% 6.20% 6.20% 5.20% 5.20%
Interest Expense ($1.1) ($1.0) ($0.9) ($0.6) ($0.4)
Bank Loan (Term Loan
B)
BOP $22.0 $22.0 $22.0 $22.0 $22.0
Paydown $0.0 $0.0 $0.0 $0.0 $0.0
EOP $0.0 $22.0 $22.0 $22.0 $22.0 $22.0
Cash Interest Rate 6.70% 6.70% 6.70% 5.70% 5.70%
Interest Expense ($1.5) ($1.5) ($1.5) ($1.3) ($1.3)
Vendor Loan

LP NPV from APV
$79.
7 IRR 18.0%
Mo
M 2.3x
BOP $10.0 $11.1 $12.3 $13.7 $15.2
PIK interest $1.1 $1.2 $1.4 $1.5 $1.7
Paydown
EOP $10.0
Cash Interest Rate 6.78% 6.90% 7.10% 6.26% 6.74%
Interest Expense ($2.6) ($2.5) ($2.3) ($1.8) ($1.6)
PIK Interest Rate 11.00
%
11.00
%
11.00
%
11.00
%
11.00
%
PIK Interest added to
principal $1.1 $1.2 $1.4 $1.5 $1.7
Cash on Hand
BOP $1.0 $5.6 $5.5 $8.2 $13.7
Change in Cash $4.6 ($0.1) $2.7 $5.4 $6.0
EOP
$1 $5.6 $5.5 $8.2 $13.7 $19.6
Net Debt / (Cash) $49.3 $48.2 $46.6 $44.3 $41.0
Credit Stats PF at Close
EBITDA / Interest 3.0x 4.6x 5.2x 6.3x 9.3x 11.4x
Net Debt / EBITDA 5.1x 4.1x 3.7x 3.2x 2.6x 2.2x
APV
Free Cash Flows:
2,013.
0
2,014.
0
2,015.
0
2,016.
0
2,017.
0
EBIT(1-T) $7.6 $8.8 $10.4 $12.5 $14.0
+Depreciation $2.4 $2.0 $1.6 $1.2 $1.0
-CapEx ($0.9) ($5.4) ($3.5) ($1.5) ($1.0)
-Ch. NWC ($0.8) ($1.5) ($1.2) ($1.8) ($2.1)

LP NPV from APV
$79.
7 IRR 18.0%
Mo
M 2.3x
FCF $8.3 $3.9 $7.3 $10.4 $11.9
Debt Tax Shield $0.7 $0.7 $0.7 $0.7 $0.7
Capital Cash Flows
(=FCF+DTS) $9.0 $4.6 $8.0 $11.1 $12.6
Terminal value CCF
$203.
1
SUM CCF+TV $9.0 $4.6 $8.0 $11.1
$215.
7
Value (levered)
$173
.7
-Old debt
($17.
0)
+Excess Cash $1
Equity value $158
-Purchase price (equity)
($73
)
-Transaction fees
($5.0
)
NPV(transaction)
$79.
7
(Goes to sponsor if new debt is
fairly valued)
LBO model
Year 0
2,013.
0
2,014.
0
2,015.
0
2,016.
0
2,017.
0
Enterprise value $173.7 $178.5
$188.
1
$195.
2
$199.
7
$148.
4
EV/EBITDA multiple 12.1x 15.0x 14.5x 13.4x 11.8x 8.0x
Net (Debt) / Cash $49.3 $48.2 $46.6 $44.3 $41.0
Equity value $129.2
$139.
9
$148.
6
$155.
4
$107.
4
Cash flow to levered
equity:
Sponsor investment ($43.0)

LP NPV from APV
$79.
7 IRR 18.0%
Mo
M 2.3x
Dividends $0.0 $0.0 $0.0 $0.0 $0.0
Exit value to sponsor $98.3
Sponsor cash flows ($43.0) $0.0 $0.0 $0.0 $0.0 $98.3
IRR
18.0
%
Multiple 2.3x