TARGET VALUATION

To value synergy, we first valued the target company i.e. Paramount Cosmetics India Ltd.
(PCIL). The financial data from 2012-14 was taken into consideration for future cash
projections.
The projections were based on the following assumptions:

CAGR of Paramount is 3.09%. The sales is expected to grow at this rate over the next
five years and beyond that it is to grow at 7%.
The firms tax rate is 35%

The firm has a beta of 0.78 and a pre-tax cost of debt of 16.5%. If we use a risk-free rate of
8.36% and a risk premium of 8.3% the cost of capital for Paramount cosmetics is

Cost of equity = 8.36% + (8.3% * 0.78) = 14.85%

Cost of capital = ( 14.85%*0.47) + (10.7% * 0.52) = 12.7%

Equity
Debt
EV=Equity+Debt
D/V
E/V
D/E
Asset beta
equity beta
cost of equity

Paramount
Cosmetics India
Ltd.
161186000
175300000
336486000
0.520972641
0.479027359
1.087563436
0.457807337
0.781438775
14.85%

Based upon these inputs, Paramounts cash flows over the next five years and the terminal
value has been calculated. The table below depicts the same:

figures in crore

Sales

COGS

Growt
h rate

Actual
2012
44.59

34.88

2013
46.56
4.4180
3
38.04
9.0596
3

2014
47.39
1.782
6
38.43
1.025
2

Operating Profit

4.44

4.6

4.56

PBDIT

4.67

4.87

4.75

2.09

1.88

PBDT

2.67

2.78

2.87

Depreciation

0.73

0.6

0.6

Profit Before Tax

1.94

2.18

2.27

tax

0.57

0.76

0.75

EAT

1.37

1.42

1.52

Interest

3.09%

4.97%
9.62%
10.02
%
3.97%
6.06%
1.27%
4.79%
1.58%
3.21%

Forecast
2015

201
6

2017

2018

201
9

48.86

50.4

51.92

53.53

55.2

0.03
1

0.03

0.03
1

0.03
1

0.03

40.34

42.3

44.44

46.65

49

0.05
4.99
9
5.22
6
1.95
5
3.04
4
0.60
8
2.37
9
0.76
2
1.56
9

0.05

0.05
6.58
5

0.05

6.96
2.19
7
3.63
1
0.63
1
2.73
7
0.79
9
1.72
5

7.66

1.62

0.05
6.00
7
6.32
6
2.11
3
3.42
4
0.62
3
2.61
2
0.78
6
1.67
1

0.75

0.76

0.57

2.64

2.71

2.78

2.85

2.93

5.48
5.75
2.03
3.23
0.62
2.49
0.77

7.22

2.28
3.85
0.64
2.87
0.81
1.78

EBIT(1-tax)

2.44

2.64

2.57

Depreciation

0.73

0.6

0.6

0.6

0.6

0.6

0.6

0.6

1.17
8

0.02
5

1.24
1.35

CAPEX
NWC
unlevered FCF
terminal value
WACC
discount period

1.08

1.09

1.15

0.02

1.20
6

1.089

0.97

1.11

1.2

1.24

1.28

1.32

1.001

1.18

0.91

0.86
2

2.05

0.89
4

2.10
5

3
0.69
9
1.27
9

0.62
3.39
5

0.55

2.43%

12.70%
1
0.88
7
0.97
2

discount factor

valuation of firm

0.94
10.1

28.38

2
0.79
2.6

1.72
18.4

Similarly, valuation of Dabur India Ltd. was carried out using similar assumptions about cash flows
and growth. Dabur has a beta of 0.27 and a pre-tax cost of debt of 16%.

If we use a risk-free rate of 8.36% and a risk premium of 8.3% the cost of capital for
Dabur is
Cost of Equity = 10.65%
Cost of Capital = 10.64%

Equity
Debt
EV=Equity+Debt
D/V
E/V
D/E
Asset beta
equity beta

Dabur India
Ltd.
1743800000
442900000
2186700000
0.202542644
0.797457356
0.253985549
0.26
0.2768

Based upon these inputs, Paramounts cash flows over the next five years and the terminal
value has been calculated. The table below depicts the same:
Fig in cr
Net sales
COGS
S&A
Misc. expenses
Depreciation
Operating Profit
tax
EAT

2015
5590.266
3324.327
1016.683
217.8595
449.8218
581.575
203.55125
378.02375

2016
6416.954
3815.928
1167.03
250.0765
527.2563
656.6633
229.8322
426.8311

2017
7365.892
4380.227
1339.61
287.0578
625.1012
733.8962
256.8637
477.0325

2018
8455.159
5027.974
1537.711
329.5079
748.7362
811.2295
283.9303
527.2992

2019
9705.506
5771.51
1765.108
378.2354
904.9591
885.6939
309.9929
575.701

Add Depreciation
less Capex

increase in WC
FCFF
Sum of cash flows
PV of terminal
value
Total value

827.84555 954.0874 1102.134 1276.035 1480.66

456.7619 475.0024 484.2807 480.1979 456.8951

109.79
49.62
56.96
65.38
75.05
639.32
856.30 1,037.93 1,257.76 1,524.42
577.801739 699.4371 766.2194 839.1622 919.2108
3801.831239
36693.70237
40495.53361

Value of the combined firm (Dabur + Paramount) with no synergy, should be the sum of the
values of the firm independently. By adding the value of Dabur to the value of Paramount, the
value of the combined firm is:
Value of Dabur = Rs. 40495 cr
Value of Paramount = Rs. 28.38 cr
Value of combined firm = Rs. 40523 cr
This would be the value of the combined firm in the absence of synergy.
SYNERGY VALUATION
To value the synergy, we made the following assumptions about the way in which synergy would
affect cash flows and discount rates of the combined firm
As the combined firm will have cost synergies, it is expected that the combined firms pre-tax
operating income will increase by approximately Rs.324 cr.
Reinvestment rate for combined firm = 27.7%
This is calculated from the dividend payout ratio of the firms.
The beta of the combined firm was calculated in three steps. We first estimated the unlevered
betas for Dabur India Ltd. And Paramount Cosmetics India Ltd.
Unlevered Beta for Dabur India Ltd. =.2768/(1+(1-35%)*.0424)= .26936
Similarly, Unlevered Beta for Paramount Cosmetics Ltd. = .45780
We then use the weighted beta (unlevered) of the combined firm , which is equal to
0.269491596.
We further lever it back for te combined firm using the debt to equity ratio of the combined firm
and 35% as the tax rate.
The levered beta of the combined firm is 0.326337058.
Using this beta we use the CAPM model to calculate the cost of equity of the combined firm. The
values of Rf and Rm are 8.36% and 8.30% respectively.
Therefor the value of Cost of Equity = 11.068597%

Taking the weights of the debt and equity of the new firm, we calculate the cost of capital which
is equal to 0.109273656.
We calculate the cost of synergy of the firm using the FCFF.
The FCFF is calculated using the re-investment rate of 27.7% calculated earlier.
EBIT(1-T) Re-investment = FCFF
On discounting these free cash flows, with the cost of capital, we find the present value of the
combined firm.

2014

2015

2016

2017

2018

4,917.
47

5644.6
65

6479.3
96

7437.5
68

8537.4
35

3,048.
83

3,499.6
9

4,017.2
3

4,611.2
9

5,293.2
1

20

30

60

94

Total expenditure

3,479.6
9

3,987.2
3

4,551.2
9

5,199.2
1

Depreciation

51.37

51.37

51.37

51.37

Operating Profit

2,113.6
0

2,440.8
0

2,834.9
1

3,286.8
6

tax

739.76
09

854.28
02

992.21
71

1150.3
99

EAT
Dividend Pay out
Ratio
Re-investment rate of dabur

1,373.8
4
0.7229
13
27.7%

1,586.5
2

1,842.6
9

2,136.4
6

FCFF

993.16
83

1146.9
17

1332.1
04

1544.4
72

895.33
21
60007.
66
35728.
37
40612.
85
88.94

932.08
27

975.93
77

1020.0
59

Net sales
Total expenditure
Less Cost savings
per year

PV of cash flow
Terminal value
PV of terminal
value
Total value
synergy

Value of combined firm (without synergy)= 40523.91

2018
9799.9
49
6,075.9
7
120
5,955.9
7
51.37
3,792.6
1
1327.4
14
2,465.2
0

1782.1
23
1061.0
71

Value of combined firm (with synergy)= 40612.85

Value of synergy =88.94

DEAL STRUCTURE
The rationale for Daburs acquisition of Paramount Cosmetics is to diversify into another line of
business within the FMCG industry. The FMCG industry is a rapidly changing one and a competitive
one. Rather than trying to be at the forefront of every major segment of the industry, Dabur can
focus on those companies that have developed successful products. In doing so, instead of wasting
time with unsuccessful internal development attempts Dabur can pursue those companies that have
come up with successful products. Dabur had taken up a similar strategy when it acquired Fem and
Balsara. Paramount has a good mix of products which are well-placed in their respective categories.
Hence, Daburs acquisition of Paramount Cosmetics would be in line with their strategy to
aggressively expand Daburs scale of operations and strengthen its presence in the FMCG space.
Paramounts shareholders will receive Rs.61.5 for each outstanding Paramount share. The value of
the transaction should be approximately at Rs.29.86 cr, net of cash, based on the discounted cash
flow valuation of the company.
While Paramount is a highly leveraged company with a debt to equity ratio of 3.61, Dabur has very
low leverage as indicated by its debt to equity ratio of 0.25. The acquisition would result in a
company that has a moderate leverage.
Valuation of Paramount Cosmetics Ltd. = Rs. 29.86 cr
No of shares outstanding =4,855,000
Book value per share = Rs. 61.50
The transaction values Paramount Cosmetics at Rs.61.50 per share against the current price of Rs.
33.2.
The current market value of Paramount Cosmetics is Rs.33.20 which shows it is clearly undervalued.
As the target firm trades at below the estimated value.
The exchange ratio has been arrived upon by dividing the per-share offer price by market price of
Daburs shares. The price that Dabur will offer to Paramount Cosmetics is Rs 61.50 per share. This is
at 85% premium above the pre-merger market price of Paramount. In terms of Daburs shares, the
Rs 61.5 offer is equivalent to Daburs Rs.61.5/Rs.226 per share.

Exchange Ratio = Offer Price/ Share price of acquirer

= Rs.61.5/Rs.226
= 0.27

offer price
pre-merger share price
acquirer firm's share price
exchange ratio

61.50898682
33.2
228.45
0.27

The total number of shares that Dabur will have to offer Paramount in order to complete a bid for
100% is:
= [(offer price)*(total outstanding shares of target)]/Price of acquirer
= (Rs 61.5 * 4855000)/ 226
= 1321355 shares

EPS of the Surviving Company

The impact of the merger on Daburs EPS will be revealed by looking into the EPS of the surviving
company:
Combined Earnings = Present Earnings of Dabur + Present Earnings of Paramount
= Rs 672.1 + Rs. 1.5
= Rs. 673.6 cr
Total shares outstanding = 1756361314 + 4855000
= 1761216314

Dabur

Pre-acquisition EPS
Post-acquisition EPS
3.56
3.82
Table: Dabur India Ltd.s Impact on EPS Rs.61.50 offer

Pre-acquisition EPS
Post-acquisition EPS
Paramount
3.09
3.82
Table: Dabur India Ltd.s Impact on EPS Rs.61.50 offer
Both Dabur and Paramount will experience an increase in its EPS if the deal is completed.

If Dabur is to go for stock-for-stock exchange ratios, the above factors would be taken into
consideration. However, considering the lack of information, it is difficult to come up with a suitable
percentage of the acquisition which is to be financed by stock.
Moreover, Dabur is a cash rich company. Its retained earnings is Rs.1456.96 cr. Thus, the acquisition
of Paramount Cosmetics will be funded through internal accruals of Dabur India Ltd.