1. Author:PatrickDalton
PreparedforCharlene Sullivan
Valuation Report: Beccle’s H.C.C. Limited; Boot’s Store
Objective: DevelopadetailedreportcreatingaFairMarket Value for a single store, Beccle’sH.C.C.
Limited,until year-end,30September2015 fromyearend,30 September2006.
CompanyDescription:Bootsis a subsidiary of Walgreenswith stores located acrossthe United Kingdom
as well as Ireland.Someyearsback,Bootsmerged with Alliance Unicomto becomeBootsAlliance in
2006. In 2012, Walgreenspurchased 45% of BootsAlliance and then exercised their right to purchasethe
remaining 55% in 2014. WalgreensBootsAlliance in the U.K.and Ireland providehealth and beauty
productsto consumers.
Purpose: The purposeof thevaluation is to explorea potentialacquisition of a single Boot’sretail store.
The reportis being prepared forDr. CharleneSullivan dated 10/24/2016.
Scope of Work:The analysisconsidersfactsand data presented to me. The analyticalopinions and
assumptions would mostlikely bedifferentif anothervaluation dateormethod wereused.No
hypotheticalassumptionsweremadein this valuation analysis.
ValuationProcedure:
Examinedall financialdocuments leadingbackto January 2006
Constructedcashflowsstatement
o CalculatedEBIAT(EarningsBefore Interest,Amortization,andTax)
o FoundUnleveredCashFlows,orCashflowsfromOperations(CFO),bysubtractingthe
change in NetWorkingCapital andaddingbackDeferredTax AssetsandDepreciation
o Forecasted2016 cash flows usingthe assumed 0% growthrate
EstimatedWACCforBoots usingcompanycomparables:WalgreensBootsAlliance andCVS
Pharmacy
o Includedadditional countryriskfactor(U.K.)
o Utilizedunleveredbetastoeliminatecapital structure bias
Calculatedthe terminal valueportionof companyvaluationusingWACC,growthrate,and2016
cash flows
Discountedall cashflowsbackto the beginningof 2016/endof 2015
Enterprise Value wascalculatedusingCashFlow fromoperation.Boththe perpetuityapproach
and multiple approachwere usedtocome upwitha range of values.The multiple usedwas
EV/EBITDA fromindustry comparables.
Furthercomparable analysiswascompletedusingmultiples:P/E,Price/Sales,andPrice/Book.
SensitivityAnalysiswasperformedinordertoshow the change in enterprise andterminal
values basedonour assumptions.
2. Author:PatrickDalton
PreparedforCharlene Sullivan
Balance Sheet
Key Takeaways:
Original Balance sheetcontainedhighercashandcurrent liabilitiesdue tocurrentliability
accrual of rentpayments
o Thisbalance sheetexcludesthataccrual inorder to provide amore accurate valuation
o Startingin2013, ₤50,000 eachyear (accumulating) wastakenouteachyearto eliminate
biasfrom a lackof rentpayments
Total assetgrowthhigherthantotal liabilitygrowthresultinginincreasedbookvalue
Profit and Loss Statement
KeyTakeaways:
ProfitsforBoot’sstore reachedmaximumduring2009
2015 2014 2013 2012 2011 2010 2009 2008 2007 2006
£ £ £ £ £ £ £ £ £ £
Fixed assets Tangible assets 105220 110594 122401 12635 7649 10737 13028 17797 13045 4177
Current assets
Stocks 103834 110453 105672 100940 112964 114651 113874 109818 102245 91889
Debtors 336147 357579 360441 380451 271712 477329 432036 390338 416416 270601
Cash (bank and in hand) 229869 198012 151823 143879 295089 64513 126182 82628 235059 491227
Total Current Assets 669850 666044 617936 625270 679765 656493 672092 582784 753720 853717
Current Liabilities 513100 535323 520811 453342 561159 580210 587043 594615 760799 851928
Net Current Assets 156750 130721 97125 171928 118606 76283 85049 -11831 -7079 1789
Total Assets less Current Liabilities 261970 241315 219526 184563 126255 87020 98077 5966 5966 5966
Provisions for Liabilities
Deferred taxation 7934 10642 11186 1614 403 775 887 0
254036 230673 208340 182949 125852 86245 97190 5966 5966 5966
Capital and Reserves
Called up equity share capital 150 150 150 150 150 150 150 150 150 150
Profit and Loss Account 253886 230523 208190 182799 125702 86095 97040 5816 5816 5816
Shareholders' funds 254036 230673 208340 182949 125852 86245 97190 5966 5966 5966
ProfitandLossSummary-Boot's
2015 2014 2013 2012 2011 2010 2009 2008 2007 2006
Turnover 1,820,319£ 1,857,836£ 1,835,199£ 1,985,860£ 2,246,117£ 2,233,859£ 2,218,167£ 2,025,380£ 2,197,734£ 2,294,960£
Cost of Sales 1,270,323£ 1,321,200£ 1,308,994£ 1,415,631£ 1,694,454£ 1,628,968£ 1,603,052£ 1,535,753£ 1,561,759£ 1,633,079£
Gross profit 549,996£ 536,636£ 526,205£ 570,229£ 551,663£ 604,891£ 615,115£ 489,627£ 635,975£ 661,881£
Administrative expenses 526,864£ 510,739£ 493,352£ 498,933£ 501,944£ 504,629£ 502,010£ 496,091£ 641,043£ 665,115£
Total Operating Profit 23,132£ 25,897£ 32,853£ 71,296£ 49,719£ 100,264£ 113,105£ 6,364-£ 4,918-£ 2,734-£
Profit on ordinary activities 25,423£ 28,045£ 32,963£ 71,371£ 49,784£ 100,327£ 114,185£ -£ -£ 77£
Tax on profit from normal activities 2,060£ 5,712£ 7,572£ 14,274£ 10,177£ 21,068£ 22,961£ -£ 77£
Profit for the financial year 23,363£ 22,333£ 25,391£ 57,097£ 39,607£ 79,259£ 91,224£ -£ -£ -£
(Gross Profit Margin) 30.51% 29.24% 29.09% 29.17% 24.86% 27.08% 27.73% 24.17% 28.94% 28.84%
4. Author:PatrickDalton
PreparedforCharlene Sullivan
potential isnotas highwhichcontributestothe 1.5% future growthrate assumptionwhichisslightly
lowerthanaverage GDP growth.
Range of Valuation:
Boot’sAlliance is worthbetween ₤240,000– ₤707,000 according to my analysis.
The range givenabove wasfoundthroughthe perpetuityapproachthroughdiscountingcashflows,the
EBITDA multiple approach,andusingvariousfinancial multiplesfromsimilarcompaniesinthe industry.
The followingshowthe calculationsforeachof the valuations:
Primarily,the perpetuityapproach returnsthesmallestvaluation butit is my recommendation to
understand itto bethe mostaccurate.Using pastfinancialdocumentsto forecastcash flows,I
believe the perpetuityapproach throughfinding theterminalvalueis the mostprecise valuation.
Additionally,Iwantto pointoutthatthis valuation is similar in value to thebookvalue.Boot’s
bookvaluein 2015 wasabout ₤260,000 which showsthemarketand bookvalueof this store are
very similar.
The EBITDA multiple approach usesthesamecash flowsas thevaluation abovebutis almost
doublethe valueof the perpetuity approach.Dueto a large differencein EBITDA and EBIT,Boot’s
multiple approach valuation using EBITDA could beoverstated.Through furtherresearch,Ifound
thatBoot’sdepreciation asa percentageof EBIT wasmore significantthan themajority of the
competitorsin the industry which is a reason forseeing a significantincrease in the enterprise
valuethrough theEBITDA multiple approach.
Unlevered FCF in last forecast period (2016) 16,211£
FCF(t+1) 16,211£
Long term growth rate 1.5%
Terminal Value 242,583£
PV of Terminal Value 224,235£
Present value of stage 1 cash flows 14,985€
Enterprise Value 239,220£
Perpetuity Approach
Terminal year EBITDA 33,319€
Terminal value EBITDA multiple 11.35
Present value of terminal value 378,170.65€
Present value of stage 1 cash flows 14,764€
Enterprise Value 392,934.19€
Exit EBITDA Multiple Approach
5. Author:PatrickDalton
PreparedforCharlene Sullivan
See belowa description of the similar companiesused in this analysis.Using variousfinancial
metrics, I found multiplesto show comparablevaluations. Themultipleapproach can bevery
beneficial asit takessimilar companies operating in the sameindustry and applying their
financialmetrics to yourcash flow analysis.Onedrawbackof thisvaluation techniqueis that
assumptionssuch asgrowthrateareleft out.Especially in our casewhere the growth rateis
1.5%, comparablecompany analysisisnotalwaysprecise becausecompaniestypically have
growthrateassumptionsslightly higherthan this.In addition,anotherdrawbackisthatthe
Boot’svaluation islooking at onestore’scash flowsand metrics and the comparablesarefull
corporations.Furthermore,theEV/EBITDA is a review of theprevioustable.P/E metric is a
common multipleused in company valuations.Thevaluation isstill higherthan the perpetuity
approach thatwastouched on earlier.One reason forthis differencecould be the conservative
1.5% growthassumption thatissignificantly impacting thevaluation given by the perpetuity
approach. Next,theprice/bookmetricreturnsa valuation even greaterthan P/E.At ₤707,319,
the Price/Bookvaluation isthe largestout of all valuation methods.Through furtheranalysis,a
potentialcausefor thisoutlier valuation isthatassetshavegrown at a much fasterratethan
liabilities over thepast4-5 years.The changein assetsis almosta completeresult of cash
increasesover the past4 years while liabilities are growing minutely.SinceBoot’s hasn’tbeen
billed fortheir rent in about3 yearsyet they arestill accruing theliability, assetsand liabilities
should bemoving in tandem. Thebookvaluemultiple is overstating Boot’svaluedueto the
excesscash Boot’shason their balancesheet.Multiples retrieved fromMorningstaranalysis.
Otherfinancial information retrieved fromYahooFinance.
Industry Overview and Analysis
IndustryOverview(retrievedfromIBISWorld)
Boot’sis a memberof the Retail Drugand PharmacyIndustry.Since 2011, thisindustryhas
experienced2.7%growthyearoveryear.The marketsize iscurrentlyrightunder$300 billion
which isequivalenttoapproximately ₤245billion.Overthe pastfew years,thisindustryhas
gaineda lotof interestasBigPharmacompanieshave come underfire forchargingoutrageous
pricesforthe drugs.Although companiesinthe Retail Drugindustryhave littleimpactonthe
sellingprice of the drugstheysell,the mediaisupsetwiththembecause theyare the face of the
drug manufacturingcompanies.The retail drugcompaniesare the onesdirectlysellingto
consumers.Onthe otherhand,innovationhassoaredinthe Pharmaceutical industryoverthe
past 10 years.Withmore competition,retaildrugstoresare betteroff because theyhave
leverage withpharmaceutical companies.Pharmacompaniesmustofferthe retail side
discountsandrebatessothat the retail store will holdtheirproductinstores.Additionally,on
the political side,healthcare reforminthe UnitedStatesisprovidingmanyconsumerswith
healthinsurance.More consumersonhealthinsurance will ultimatelyleadtoanincrease inthe
Comparable Multiple: Boot's Value (2016 Forecasted) Valuation Range
EV/EBITDA 11.63 33,319£ 387,500£
P/E Ratio 19.70 18,506£ 364,560£
Price/Book 2.70 261,970£ 707,319£
6. Author:PatrickDalton
PreparedforCharlene Sullivan
volume of pharmaceutical sales.Overthe next5years,the industryisexpectedtogrow at least
at the same rate of experiencedgrowthsince 2011.
The main competitorsinthisindustryconsistof CVSPharmacy,WalgreensBoot’sAlliance and
RiteAidCorporation.Inmyanalysisof these companies,Idecidedtouse onlyCVSand
Walgreensascomparable companies.RiteAidfell toafraudulentcase some yearsbackand their
unethical actionsare still effectingtheirfinancialstothisday ultimatelyeffectingall of their
financial metricsandmultiples.AnotherreasonIdecidedRiteAiddidn’tpose asanaccurate
comparable wasbecause of theirsignificantdebtleverage.RiteAidisleveragingtheircompany
withdebtat much higherlevelsthanthe restof the industry. Lastly,the competitive landscape
ismade upof a small numberof companies.These 3companieslistedabove make upforabout
65% of the total marketrevenue.Itisdifficultforsmall competitorstospring updue to
economiesof scale andthe inability tonegotiate contractswithBigPharmacompanies.
InformationaboutfinancialsandoperationsfrombothCVSandWalgreenswere retrievedfrom
theircompanywebsites,YahooFinance,andYCharts.com.
Comparable Companies:
WalgreensBoot’sAlliance (WBA):OurBoot’sstore isa memberof WalgreensBoot’sAlliance.In
additiontothe store we analyzed,Walgreensboastsover13,000 storesworldwide.Witha
marketcap of $85 billion,Walgreen’sisthe secondlargestcompanyinthe industry.The overall
corporation wasusedinmy valuationbecause the Boot’sstore isamemberof thiscorporation.
I wantedtoanalyze howthe single store relatedtothe corporationasa whole.Additionally,asa
memberof Walgreen’s,Boot’sfinancial metricsshouldcloselyreflectthose of WBA. Lastly,
Walgreen’shasseeninconsistentgrowthoverthe pastfew years.Althoughonaverage,
Walgreenshasgrownat approximately3% yearoveryear since 2010.
CVSPharmacy (CVS) –CVS hasa marketcap of $92B whichmakesthemthe largestcorporation
inthe industry.Withsimilarmetricsall aroundtoWalgreens,CVSwasusedasa comparable to
showa companythat Boot’swas not a part of.Earningsfor CVShave grownat a little bitfaster
rate thanits maincompetitor,Walgreens.CVShasrealized4-6% growthsince 2010. Later on in
the valuationreport,Iuse multiplesfromthese twocomparablestovalue Boot’s.Pleasenote
that the growthrates forthese twoorganizationsare higherthanthe assumedgrowthrate for
Boot’swhichmay leadtooverstatementsinvaluation.
WACC Calculation:
Adjusted Risk-Free Rate:
Walgreens Boots Alliance CVS Pharmacy Comparable Average
Credit Rating BBB BBB+
Respective Cost of Debt 2.25% 2% 2.13%
2.625%Adjusted Risk Free Rate (Risk Free Rate + Country Risk Premium of 0.5%)
7. Author:PatrickDalton
PreparedforCharlene Sullivan
Weighted Average Cost of Capital:
The WACC (weightedaverage costof capital) Iam assumingthroughoutmyanalysis is8.18% andthe
calculationsonhowarrivedat thatvalue are shownabove.Primarily,usingthe costof debtassociated
withthe creditratingsof ourcomparables,WalgreensBootsAlliance andCVSPharmacy,the riskfree
rate wasfound.Inaddition,asthe Boot’sstore is locatedinEngland,there isa countryriskpremiumof
0.5% to account for the riskassociatedwithinternational investments.
Furthermore,inthe nexttable we see variousmetrics
includingDebt/Equityandbetas.Inordertoeliminate the
leverage bias,we unleveredthe betainouranalysis.Using
CAPM,Returnon Equitywas calculatedandthenthe
average wastakenbetweenCVSandWalgreens.Lastly,the
WACC foreach comparable wascalculatedusingthe
capital structure of theircompaniesandour8.18% WACC
assumptionisthe average of the twocomparables. Refer
to the table on the rightwhichshowsassumptionsmade throughoutthese calculations.ReturnonDebt
assumptionwasmade byanalyzingthe balance sheetsof comparablesandouranalysiskeptconsistent
the 20% tax rate from oursingle Boot’sstore.The MarketRisk Premiumof 6% is a historical value.
Walgreens Boots Alliance CVS Pharmacy Comparable Average
Ticker WBA CVS
Total Debt (Book Value) 13,530,000,000$ 28,640,000,000$
Market Cap (Equity) 85,120,000,000$ 99,500,000,000$
Debt/Equity 0.4319 0.8237 0.628
Debt Percentage 13.72% 22.35% 18.03%
Equity Percentage 86.28% 77.65% 81.97%
Beta (levered) 1.12 0.88 1.00
Beta (Unlevered) 0.832 0.530 0.681
ROE (CAPM) 9.35% 7.91% 8.63%
WACC 8.9% 7.5% 8.18%
Return on Debt: 7.50%
AfterTax Debt Return: 6.00%
Tax Rate: 20%
Risk Free Rate: 2.63%
Market Risk Premium: 6.0%
Assumptions:
8. Author:PatrickDalton
PreparedforCharlene Sullivan
Sensitivity Analysis
Growth Rate and WACC:
The WACC that I usedwas8.18%, whichwasfoundthroughcomparable companycalculations.
Throughoutmyanalysis,Iam assuminga 1.5% growthrate infuture cash flows.Throughsensitivity
analysis,Ican showhowthe Terminal Value of the undiscounted2016 cash flow isaffected.Please note,
the outputsabove refertothe undiscountedterminalvalue of the forecasted2016 cash flow anddo not
represententerprisevalue forthisBoot’sstore. EnterpriseValueiscomposedusingthisterminalvalue
but foranalysispurposes,Iwantedtosee the directeffectonthe terminal valuewhenchangingthese
twovariables. Fromthe analysisabove,the growthrate hasthe most significanteffectonthe terminal
value.AlthoughourWACChasan influence,the terminalvalue canchange upto a factor of 4-times
whatwe see withagrowth rate of -1% comparedto3%. Additionally,growthrate hasa largereffecton
the terminal value whenthe WACCissmaller.A lowerWACCoutputsalargerterminal value whichwill
ultimatelycreate more variance withchangesinourgrowthrate assumption.
Growth Rate and PV of Final ForecastedCashFlow:
In myvaluationanalysis,Iassumedaconstantgrowthrate of 0% and the PresentValue of the lastyear’s
(2016) cash flowwas ₤14,985. With potential variance inthe forecastedcashflow aswell asthe future
growthrate, I have providedasensitivityanalysisforthese twovariables.The outputsabove reflectthe
Enterprise Valuesof the store.Please note,similartoabove,the change ingrowthrate significantly
impactsthe enterprise value.The difference betweena -1% and 3% growthrate changesthe Enterprise
Terminal Value (Undiscounted): 242,583.29€ -1.0% -0.5% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0%
5.00% 270,186$ 294,749$ 324,223$ 360,248$ 405,279$ 463,176$ 540,372$ 648,447$ 810,559$
5.50% 249,403$ 270,186$ 294,749$ 324,223$ 360,248$ 405,279$ 463,176$ 540,372$ 648,447$
6.00% 231,588$ 249,403$ 270,186$ 294,749$ 324,223$ 360,248$ 405,279$ 463,176$ 540,372$
6.50% 216,149$ 231,588$ 249,403$ 270,186$ 294,749$ 324,223$ 360,248$ 405,279$ 463,176$
7.00% 202,640$ 216,149$ 231,588$ 249,403$ 270,186$ 294,749$ 324,223$ 360,248$ 405,279$
7.50% 190,720$ 202,640$ 216,149$ 231,588$ 249,403$ 270,186$ 294,749$ 324,223$ 360,248$
8.00% 180,124$ 190,720$ 202,640$ 216,149$ 231,588$ 249,403$ 270,186$ 294,749$ 324,223$
8.18% 176,592$ 186,765$ 198,181$ 211,083$ 225,782$ 242,682$ 262,317$ 285,408$ 312,957$
9.00% 162,112$ 170,644$ 180,124$ 190,720$ 202,640$ 216,149$ 231,588$ 249,403$ 270,186$
9.50% 154,392$ 162,112$ 170,644$ 180,124$ 190,720$ 202,640$ 216,149$ 231,588$ 249,403$
Growth Rate
WACC
Enterprise Value (Perpetuity) 239,219.77£ -1.0% -0.5% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0%
12,000£ 142,680$ 150,205$ 158,650$ 168,195$ 179,068$ 191,567$ 206,089$ 223,166$ 243,538$
15,000£ 178,350$ 187,757$ 198,313$ 210,243$ 223,834$ 239,459$ 257,611$ 278,958$ 304,423$
18,000£ 214,020$ 225,308$ 237,976$ 252,292$ 268,601$ 287,351$ 309,134$ 334,749$ 365,308$
21,000£ 249,690$ 262,860$ 277,638$ 294,341$ 313,368$ 335,243$ 360,656$ 390,541$ 426,192$
24,000£ 285,360$ 300,411$ 317,301$ 336,389$ 358,135$ 383,135$ 412,178$ 446,333$ 487,077$
27,000£ 321,030$ 337,962$ 356,963$ 378,438$ 402,902$ 431,027$ 463,701$ 502,124$ 547,961$
30,000£ 356,700$ 375,514$ 396,626$ 420,486$ 447,669$ 478,919$ 515,223$ 557,916$ 608,846$
33,000£ 392,370$ 413,065$ 436,289$ 462,535$ 492,436$ 526,811$ 566,745$ 613,707$ 669,731$
36,000£ 428,040$ 450,616$ 475,951$ 504,584$ 537,203$ 574,702$ 618,268$ 669,499$ 730,615$
39,000£ 463,711$ 488,168$ 515,614$ 546,632$ 581,969$ 622,594$ 669,790$ 725,290$ 791,500$
Final PV Forecast Cash Flow
(2016)
Growth Rate
9. Author:PatrickDalton
PreparedforCharlene Sullivan
Value bya multiple of between4and 5. Additionally,ourforecastedcashflow fallsonthe lowerendof
the sensitivityspectrum.If thisBoot’sstore experiencesbetterthanexpectedsalesorenhances
efficiencies,itcouldsee muchhighervaluationsevenwiththe assumed future growthrate of 1.5%.
Currently,like mentionedearlier,thisvaluationwiththe assumptionsof a1.5% growthrate anda cash
flowof ₤14,985 representsavalue verysimilartoBoot’sbookvalue.
Sources of Information (External):
Yahoo.com/finance
Financials.morningstar.com
Stock-analysis-on.net
Ycharts.com
AppleDCF Valuation Booklet
IBISWorld
