Billabonged Part 2 - TPG offer in early 2012 seemed right on the money!

Been continuing my series on Billabong in conjunction with my CFA Level 2 Equity revision.

The next part of Equity valuation is all about Free Cash Flow to the Firm (FCFF) and Free Cash Flow to Equity (FCFE). These values refer to the amount of cash available to all capital holders (FCFF) or just to equity holders (FCFE...with Debt Repayments and increases removed)
The formulas are as follows

FCFF = Cash flow from operations + (Interest expense*(1- Effective tax rate)) - Cash Flow from Investments

FCFE = FCFF + Debt increases - Debt repayments

Once you have FCFE, you can then use a DCF model to find the intrinsic value of equity and then divide by the number of shares on issue to get a value per share.

the DCF model used : Price = FCFE*(1*SustainableGrowthRatio)/(Rate of return - SustainableGrowthRatio)

Sustainable growth ration = ROE*(1- DividendPayoutratio)

So using all these formula's brings us to the following FCFE over the years for Billabong

2012           2011         2010         2009        2008        2007
85 million  64 million  13 million  32 million   197 million  196 million

Again 2009 was the year when people should have got out. A really massive drop in FCFE


Looking at the SustainableGrowthRatios is also reflective

2012           2011           2010        2009        2008          2007

-26%          3.74%       4.53%       4.55%      7.95%         8.36%

Rate of returns (Using CAPM, equity risk premium calculated August 2012 earlier on Blog, 1 year average of monthly 10 year Commbonds yields for riskfree rate and Beta calculated using moving monthly returns over 5 years, and then adjusted)

2012          2011             2010        2009       2008        2007
15%           12.65%        10.75%    13.06%   13.7%      14%

All up leads to the following intrinsic share prices

2012         2011             2010         2009       2008         2009
$0.49         $2.99           $0.86        $1.79      $17.97     $18.25

All these are based on the beginning of the next financial year...i.e in July 2012, the intrinsic price based on the FCFE was $0.49. The TPG offer was made in Feb 2012, when the intrinsic value was still at $3. They offered $3.30 which was a nice 10% premium. A lot of investors, I'm sure would have been hoping for that offer to be accepted, especially now as the share price is at 0.477. Actually might be worth a buy now as it is trading at a 2.7% discount :-)

Proves a couple of things
1. Private Equity are using FCFE for valuation
2. Good idea to watch these values over the years.
Note: Not a recommendation to invest/not invest in Billabong. Please see your financial advisor etc.