Del Monte Pacific

[d.o.g.]

I am valuing it in similar form to the P/E approach where I am looking it from an entire firm value standpoint rather than from just the pure equity holders'.

The "entire firm value" is not a new concept, it is commonly called the Enterprise Value or simply EV. EV is defined as the value of the net debt, plus the market value of the equity. You arrived at a value of 45 cents per share in terms of enterprise value. But Del Monte has USD 80 cents per share of net debt. Therefore, by your own metrics, the equity value of Del Monte is negative.

You have to go back to first principles: you cannot simply ignore debt when valuing a business. Sure, you can assume that future cash flows will pay off the debt, but that means that until the debt is paid off, those future cash flows are not available to you. It is obvious that all else being equal, the equity of a company with no debt is worth more than the equity of a company with debt.

If Del Monte had no net debt, then yes, the equity has substantial value because future cash flows can be extracted for the benefit of the owners. But because of the debt, most of the future cash flows will go to the lenders. The value of the equity is reduced by the value of the debt. In this case, because the debt is so large, most of the cash flows, and therefore most of the value of the entire firm, belongs to the creditors.

In short, if you use EBITDA as a valuation metric, you have to take into account the capital structure of the firm i.e. you need to use EV = net debt + equity. Assuming equity value = EV would lead to severe overpayment in the case of Del Monte, with a high likelihood of a poor outcome.

Put yourself in the shoes of Warren Buffett or your favorite billionaire - say you have $10bn and decide to buy Del Monte at 45 cents per share. Is that all you pay? No - almost invariably the bank loans will have covenants that make them due immediately upon a change of control. So your true cost of acquisition is what you paid for the equity, PLUS the debt. Your real cost would be SGD 0.45 plus USD 0.80 = SGD 1.57 per share. Whether you can refinance the debt is a separate matter. The debt cannot be ignored. Yes, the future cash flows may be able to pay off the debt, but you are buying the company NOW. You do not have access to the cash flows yet. And if you do refinance the debt, guess what? Those future cash flows go to the banks, not you.

I will not belabor the point further.