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
7/21/2017 2
HDC The Issues
Identify the need for Restructuring

Identify alternative approaches

Correctly choose the alternative based on

value gains
Identify the need
for Restructuring
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
 HDC - Need for Restructuring
With only 20 yrs cash flow it looks very
attractive
Why TCI is considering negative?
Integrated strategy is no longer profitable
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

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Identify Alternative
Approaches
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
The Form of Corporate Restructuring

Restructuring Activity Potential Strategy

Corporate Portfolio Redeploy Assets

Restructuring Mergers, Break-Ups, & Spin-Offs
Balance Sheet Acquisitions, divestitures, etc.
Assets Only

Financial Restructuring Increase leverage to lower cost of

(liabilities only) capital or as a takeover defense

Organizational Divestitures, widespread employee

Restructuring reduction, or reorganization
 Alternative Forms of Restructuring
Corporate
Restructuring

Portfolio Restructuring Financial

Restructuring

Entry Exit
Strategy Strategy
Mergers Spin Off Debt & Equity
Acquisitions Split Off Restructuring
Divesture IPO/Buyback/
Stock Split/LBO
Forms of Restructuring

Mergers & Acquisitions

Demergers
Spin Off
Split Up
Split Off
Divestures
Carve outs
Buy-Back
Capital reduction
 Spin-Offs

Stage 1 Stage 2

Parent Parent Firm Parent Parent Firm

Firm Shareholders Firm Shareholders

Subsidiary Stock Parent Shareholders Subsidiary

Paid to Shareholders Own Both Parent & Independent
Subsidiary As Dividend Subsidiary Stock of Former
Parent
 Equity Carve-Outs
Initial Public Offering Subsidiary Equity Carve-Out

Private Firm Sells Parent Firm Sells Cash Public/Private

A Portion of Its Equity A Portion of Its
Equity Markets
to the Public Subsidiary Stock
to the Public

Stock Cash

Subsidiary Stock
Public/Private
Subsidiary of
Equity Markets
Parent Firm
Tracking Stocks
Parent Firm Value of the
Tracking Stocks Parent Common Tracking Stock
Issued by the Depends on the
Sub 1 Tracking Stock
Parent Firm Performance of
Sub 2 Tracking Stock
Subsidiary
Sub 3 Tracking Stock

Subsidiary 1 Subsidiary 2 Subsidiary 3

 Split-Offs
Stage 1 Stage 2

Parent
Former
Parent Stock Parent Firm Parent
Parent Firm
Firm Shareholders Firm
Shareholders

Subsidiary stock
Subsidiary
Subsidiary Stock now held by former
Independent
Subsidiary parent shareholders.
of Former
Parent has no
Parent
relationship with former
subsidiary
Value Creation in
Restructuring
How Spin off 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
 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 offer
Structuring the
Deal
Structuring the Deal

TSI HDC
Holdin

HDC
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 525000
PMT 477273
nper 10
Rate 0.085
PV 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