Health Development

Corporation

Ashutosh Dash

Ways to create value

Dont manage Earnings
Make strategic decisions
Restructuring (M&As) to maximize
value
Return excess cash to shareholders
Reward managers for long term return
Make executives bear the ownership
Provide value relevant information
10/18/16

Restructuring What it
is?
Change in business capacity by
inorganic route
Extraordinary change in capital
structure
Change in ownership & control
A combination of any two or all three
Restructure = Rethink + Reinvest +
Rebuilt + Reorganize

HDC The Issues

Identify the need for Restructuring

Identify alternative approaches

Correctly choose the alternative

based on value gains

Identify the
need for
Restructuring

Restructuring - For Risk Management

Response to external changes

- Increased competition
- Policy changes
- More efficient technology
- Emergence of new markets
- Emergence of new products
- Demographic Changes
- Business cycles

Forces Driving
Restructuring
Industry

Drivers

Banking

Deregulation/Technology

Broadcasting

Deregulation

Textiles

Liberal Trade Policy

Energy

Petroleum Price Change

Food Processing

Demographic Shift

10/18/16

HDC - Need for

Restructuring
Evaluate the real Estate Purchase
With only 20 yrs cash flow it looks very
attractive
Why TCI is considering negative?
Integrated strategy is no longer
profitable

Identify
Alternative
Approaches

Forms of Restructuring
Mergers & Acquisitions
Demergers
Spin Of
Split Up
Split Of

Divestures
Carve outs
Joint Ventures
Buy-Back
Capital reduction

Is Separation a good
Solution?
What is the Value of HDC without
Lexington?
EBITDA 3229000 (Exhibit 3)
Multiple 5X
EV (3229*5) = 16145000
Corporate Debt 1917000
Equity Value 14228000

What is the value of Lexington?

How to determine the multiplier?

Derived from perpetuity value calculation
TV in DCF is nothing but a relative valuation
Multiple = 1/ (Discount Rate Growth Rate)
Increasing Risk decreases multiple and vice

versa
High growth increases multiple and vice versa

Value of Lexington
Cash Inflow 925000
Discount Rate >8.75%
Financed with
5750000 Debt
750000 Equity
Weight of debt 88.5%

Conservative Number 10%

Multiplier = 1/(0.1-0.05) = 20

Value of Lexington
With no growth assumption:
Multiple = 1/(0.1) = 10 X

Value of Lexington with growth

925000*20 = 18500000

Value of Lexington without growth

925000*10 = 9250000

Debt against Lexington 5750000

Value to equity holders
(9250000-5750000) = 3500000 without growth
(18500000-5750000) = 12750000 with growth

Sum of Parts Valuation

Equity Value of HDC excluding Lexington
14228000
Equity Value of Lexington
(9250000-5750000) = 3500000 without growth
(18500000-5750000) = 12750000 with growth

Sum of Parts
(14228000+3500000) = 17728000 without
growth
(14228000+12750000) = 26978000 with
growth

How Spin of Can Create

Value?
Investors put a higher value on "pure
plays
Existence of a stock market inefficiency
Can increase the firm's combined cash
flows because of improved management
incentives
Eliminating the negative synergies that
arose under its integrated strategy

Value Creation
in Spin Of

Will the Proposed structure add

value?
Its a sale and lease back structure
Lease amount of Lexington will change
Annual lease rental 525000
EV of Lexington = 5250000

Equity Value of Lexington Negative

EV of Lexington 5250000
Debt of Lexington 5750000

What will be the Impact on

HDC
The EBITDA will increase since lease
rental will decrease
EBITDA 3629000
EV (3629000*5) = 18145000
Corporate Debt 1917000
Equity Value 16228000

Sum of Parts = 16228000-500000 =

15728000
Much Better than TSIs present ofer

Structuring the
Deal

Structuring the Deal

TSI

HD
C

HDC
Holdin
g

Interest of Stakeholders
TSI & HDC would agree
Banker may not agree
Loan was decided based on higher
cash flow of Lexington CF 110% of
EMI

Maximum Loan Permissible

Rental
PMT
nper
Rate
PV

525000
477273
10
0.085
3,131,552

Deal Structure
Sale proceeds 16228000
Cash infusion in HDC holding
(5750000 - 3131552) = 2618448

HDC Holding
Assets 5250000
Equity (2618448 -500000) =2118448
Debt - 3131552