What is the role of enterprise valuation in a privatization program such as Turkey’s?
Enterprise value is evaluated as market capitalization plus debt, marginal interest and preferred shares, minus total cash and cash equivalents. Enterprise value as the theoretical acquirer price. In the case of an acquisition, an acquirer will have to pocket its cash and to take on the company's debt. Enterprise value can be different considerably from simple market capitalization in numerous modes and it is a more precise account of a firm's value than market capitalization. EV portrays a much more accurate takeover valuation because it comprises debt in its value calculation.
There is no such significant difference between the enterprise valuation of emerging market and developed market. In the valuation process of Anatolia National Telecommunication (“ANT”), this assumption is used. In fact , the privatization process of ANT explains some factors which affect privatization not just in Turkey but also in other emerging markets of countries. These factors come from different outlook that include: view point of government administration; the view point of management of privatized firm; the prospective of other stakeholders; and the viewpoint of domestic and foreign investors. In given situation, the ANT simulation has two significant purposes; the first purpose is to explore the different factors affecting ANT’s privatization process and to classify them according to their risks. Moreover, the second objective is to develop such a framework theoretically and practically in order to evaluate the privatization process by these factors.
In the procedure of following these two objectives; this case has also provided a way into the likeness and unlikeness of enterprise valuation in emerging- versus developed-market countries. Enterprise valuing is not only an important function in the privatization process; but it is also composite and difficult. This case summarizes central theoretical doctrines of cross-border valuation in environments such as those surrounding many privatizations in emerging-markets. There are three different methodologies for evaluating the value of privatizing enterprises like ANT. Those approaches include: a discounted cash flow (“DCF”) approach; a comparable multiples approach; and and a Monte Carlo simulation approach.
How do factors related to the country or region, to the telecom industry, and to Anatolia National Telekom itself influence the enterprise’s value from the perspective of foreign investors?
ANT’s privatization comes to pass in the perspectives of different factors related to regional and political, national geography, culture, technological, legal and regulatory aspects of the telecommunication industry and to the idiosyncrasies of ANT’s past and future goals. The general suggestion attached with the IBS report put emphasis on many risks connected with different factors. Both cases highlight the need to consider such factors and risks from the point of view of many ANT stakeholders, especially potential foreign investors. This point raises a question about how foreign investors approach the valuation of an enterprise like ANT.
The fundamental approach for valuation of foreign enterprise is similar to the approach that is used for valuing the domestic enterprise. However, it is important to consider following factors when valuing the foreign enterprise:
- The selection of currency, foreign or domestic in which the analysis will be performed;
- When a foreign cash flow should be discounted, whether at time of when it has been earned or at the time of remittance to parent;
- Which tax rate should be used foreign or domestic;
- An appropriate calculation of the cost of capital used to discount the cash flows; and
- The proper management of risks exclusively attached with foreign investments, especially foreign exchange risk, political risk and so on.
Cash flows must be converted into the “operating currency” of the investor, and the future exchange rate fluctuation should be monitored properly. At the time of dividend tax rate of foreign or domestic government. Additionally, foreign government may restrict the amount of cash that may be sent back to the foreign investors. Any dividend that have be paid have subject to both overseas and domestic-country government taxation. Furthermore, an overseas government may limit the amount of cash flow that may be sent back to the foreign investor. Some analysts suggest that from the point of view of a foreign investor, the cash flows related for the analysis of a foreign investment should be considered in the same way to the cash flows from a foreign “subsidiary” unit to its parent company in the residence country.
The principle of consistency should be remembered when valuing a cross-border investment. Overseas currency cash flows should be discounted with a overseas currency discount rate, and US-dollar cash flows should be discounted with an US-dollar discount rate. The subsequent table summarizes the two diverse methods of valuing a foreign corporation, one based on home-currency cash flows, and a second one based on foreign-denominated cash flows..................
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