Private Company Valuation

Kohler: private company valuation

1. Please summary the case.

Kohler Co. is a maker of plumbing fixtures and manufacturer of small engines and generators In 2000, the company diversified into furniture and luxury resorts. Herber Kohler is Chairman and CEO of Kohler Co. Now he faced a dispute between the company and some of its shareholders. The dispute originated in the recapitalization in May 1998. The recapitalization aimed to buy back shares and become total family owned business. But a group of shareholders filed a law suit charging that the buyout price offered by the company undervalued their shares by a factor of 5. Dissatisfied with Kohler’s proposed final buyout price, outside shareholders, along with some family shareholders, exercised their dissenters’ rights to have the fair value of Kohler Co. stock to be determined in judicial proceedings. The dissenting shareholders believed the valuation should be $273,000/share.

The economic implications included that the cost of recapitalization increased, the current plans and long-term development of assets Foundation would be affected. The determined share price would likely be considered by the IRS among the factors used to determine the value of Kohler Co. stock owned by the estate of Kohler’s late brother, Frederic. Therefore, any value higher than Kohler’s proposed final buyout price would lead to a significantly higher estate tax on the value of the shares held by the estate.

If Kohler wanted to avoid getting the court involved, he should consider what price he should settle for plaintiffs.

2. What is total enterprise value of Kohler Co. using a discounted cash flow approach? What is the total enterprise value using multiple (market value of comparable companies) approach?

What is the value of a share held by a minority shareholder in Kohler Co. that is implied by your valuations?

• Total Enterprise Value using a discounted cash flow approach:

We first calculated the WACC by weighting the unlevered betas based on the competition’s relevant operations to Kohler Co., applied the WACC to our FCF calculations using the DCF approach. And cost of debt can be estimated by dividing the annual interest expense by the company’s total debt (long term debt + current maturities of LTD). Cost of Equity of Kohler has been calculated based of Capital Asset Pricing Model (CAPM) which is depicted as follows:
Cost of Equity=Risk-free Rate+ Market Premium ×Beta.
CAPM: k_s = k_RF + (k_M – k_RF) β or

DCF:       k_s = D₁ / P₀ + g

WACC = w_dk_d(1-T) +  w_c k_s

The total enterprise value is $1,113,343

The equity value= EV-debt=1113343-681038=432,305

The value of a share=432305/7587.9=56.97

• Total Enterprise Value using multiple approach:

Sales multiple= Total Enterprise value/ Sales

EBITDA multiple= Total Enterprise value/ EBITDA

Cash multiple = Total Enterprise value/ Cash Flow

EBIAT multiple= Total Enterprise value/ EBIAT

The total enterprise value is $2058,110.

The equity value= EV-debt=2058,110-681,038=1377072

The value of a share=1377072/7587.9=181.48

3. What assumptions can you use to arrive approximately at the share price of $55,400 that was estimated by Kohler Co.? Show how these assumptions impact your valuation?

The share price $55,400 offered by Kohler seems too low. The assumption to arrive at the price is that Kohler will continue its own growth strategy and ownership and control structure. That is, Kohler will remain as a private company.

The assumption that the company will be able to maintain the growth rate in the future seems unrealistic. To take this into consideration the perpetuity growth rate needs to be maintained at the rate of the current growth rate. This will increase the Terminal value and will increase the value of the enterprise. And hence the share will increase drastically.

4. What assumptions can you use to arrive approximately at the share price of $273,000 that was estimated by the dissenting shareholders? Show how these assumptions impact your valuation?

The Share price of $273,000 is more than 5 times of the offered price to the company. But this share price is at the time of recapitalization which cannot be considered as the correct price for today. It was impossible to manipulate either the marketability premium or lack of control assumptions to reach their target price. If the price is determined to be $273,000 like the dissenters are claiming, then Kohler will be paying a gigantic amount of taxes on the estate of Frederic Kohler.

5. What is the maximum share price at which Herbert Kohler should be willing to settle with the dissenting shareholders in order to stop the trial on April 11, 2000? Assume that (i) if the trial proceeds, it is expected to last less than a month and to result in one of two possible outcomes in terms of the price per share established in court: the $273,000 being claimed by the plaintiffs, or the $55,400 being defended by Herbert Kohler; (ii) Kohler estimates the probabilities of these two outcomes at 30% and 70%, respectively.
   Price: $273,000 Probability: 30% Expected: $81,900
   Price: $55,400 Probability: 70% Expected: $38,780

The average share price= 273,000*30%+55400*70%=$120,680

Given the probability of the two outcomes, the expected price for $273,000 per share claim (probability 30%) was $81,900 and the expected price for $55,400 per share claim (probability 70%). The sum of the expected cost per share of the two possible outcomes was $120,680.

6. How would your answer to (4) change if you also assume that: (i) the inheritance tax owed on Frederic Kohler’ estate was 50.2% of his holding of Kohler Co. (equivalent to 489 shares out of the 975 he owned); (ii) the taxes paid by the estate amounted to $27 million (489 shares at

$55,400) each); (iii) were the settlement or the trial to result in a revised share price in excess of $55,400, the IRS would likely demand a similar valuation for its claim on Frederic’s estate; and (iv) Herbert Kohler estimates the probability of the IRS’s demand at 100% if he proceeds to trial, and 50% of he settles.

   If there is a settlement and the case does not go to court, the calculated cost per share is $120,680, plus a tax on 50% of Kohler’s shares (489 shares). The estimated probability that the IRS will take action, if there is a settlement, is 50.2% so the expected tax is 50% of the total value of the 489 shares. The expected tax is $29,506,260. By subtracting the $27,000 taxes already paid, the expected extra tax calculated is $2,506,260.

7. Please give comments on what you have learned from discussing this case.

What we have learnt from the case is that we have learnt one more ways to value the company beside income approach (DCF), that is market approach (multiple).