Hutchison Whampoa was considering strategies for its long-term capital structure. The HK$35 billion Hong Kong-based conglomerate had ambitious growth plans in multiple business sectors in different geographies. Traditionally, like many of its domestic peers, Hutchison had relied entirely on short to medium-term bank loans. Its demand for long-term financing, attractive rates in other capital markets (especially the U.S.) and concern about a more diversified investor base had led Hutchison to explore other financing options. In particular, the company was debating the benefits of a Yankee Bond Offering. At the time, Hutchison had already approached Moody's and Standard & Poor's for a bond rating.
This note provides an overview of business valuation techniques. The discounted cash flow method is described in a simple six-step process. A numerical example is also provided. Other valuation methods are briefly discussed, including the price-earnings approach, break-up value, and an acquisition premium approach. This note is ideally suited for an executive audience. (A more in-depth note in this area can be found in A Note on Mergers and Acquisitions and Valuation, case number 9A95B023.)
A diversified global interests company, which is financed through medium and long-term loans, is preparing a US$1 billion bond offering. Students will have to figure the individual bond price, including the possible cost of the issue, while considering the receptiveness of the market, given the change in sovereignty over Hong Kong.
Huaneng Power International (HPI), an independent power producer in the People's Republic of China (PRC), is in the process of executing a global equity issue to raise funds for the construction of new power plants. The company is planning to list the new shares through an American Depositary Receipt program on the New York Stock Exchange. The company has recently reduced the price of the issue due to poor market conditions and investor resistance to the price range stated in the preliminary prospectus. HPI's management must decide whether the new offer price and choice of listing exchange is reasonable in light of recent market events and the political, economic, social and technological environment in the PRC.
Wascana Energy Inc., an oil and gas producer, had just rejected an unsolicited $1.8 billion takeover offer from Talisman Energy Inc. Rival Canadian Occidental Petroleum Ltd. had gained access to confidential Wascana data in order to determine whether a higher bid than Talisman's was warranted, and if so, how to structure the deal. The acquisition would need to make strategic sense.
The international investments program initiated in 1990 by the Ontario Teachers' Pension Plan, Canada's largest public pension fund, had created a large exposure to currency risk. Some successful tactical currency hedging activities in 1995 prompted management to pursue the possibility of a structured foreign currency hedging program. The issue before management was whether such a hedging program should be undertaken and what form it should take.