Steve, I have also been trying to wrap my mind around this monster and came up with SEVERAL valuations, but have nagging issues.
To arrive at $300+ I tried to value portions of TBR based on earnings and P/E. Lets look at another valuation method...
One caveat (and it bugs me) with what I say is that the Govt has 50.1% voting control through preferred shares yet only owns 23% of the equity.
So what exactly does this mean? Normally if someone is taking over another company and they pay $X/sh, to someone for their shares this means your share is also worth $X. But with TBR we have two classes. Someone may pay the govt $400/sh to get control yet the rest of the 77% of the common equity may be worth much less. A higher premium might be paid for the preferred shares.
Ok sorry for muddying the water...lets try to get back out of the woods. Does anyone know if there is any economic difference in ownership between a preferred and a common share? ie. Does the preferred and common shareholder get the same dividend?
If we can answer this question we are one HUGE step closer in valueing TBR. (maybe I should read the annual report over in more detail...)
One way to value a company is by the present value of future cash flows, ie. dividends (eg. using a dividend discount model). If the preferred and common shareholder get the same dividend then this implies the shares should have the same economic value and should track closely in price due to arbitrage and possibilities for risk free returns. (Assuming you don't care about control...short the overvalued one and buy the undervalued one.)
If we assume that a TBR common and a preferred share have the same economic value, we know that if the govt gets $300/sh, our share should also be worth approximately $300.
So lets try another valuation method I used. It has been reported that the govt expects to get 20B for TBR. This is probably in the right ball park. We also know that a consortium led by Solomon Smith Barney won the contract for privatizing TBR and they bid something like .00069 of what the govt gets, which translates into less than $15M. This doesn't sound like much for the amount of work they are going to do (laywers, accountants, analysts, etc....). All I can say is that Solomon must be anticipating a very large sale price.
Anyhow here are some scenarios:
1) Lets say the govt gets 20B for 23% of the equity (assuming a preferred share and common have the same economic interest - you better sit down because the number is large). This means that 100% is worth 87B and one share is worth over $400. (Wow!! I'll be mortgage free with that and you can meet me on a beach in Rio).
2) Lets say that instead the govt is actually getting 20B for the 50% voting rights. This implies a total value of 40B and a price of around $200. (I'll still be happy but I'll still have the mortgage).
This is a pretty large spread in estimated price, so we really need to know if a preferred share = a common share for economic purposes. I want to emphasize this again. Does anyone know if a preffered share = a common share for economic purposes?
Steve, Regarding the timeframe for my calculations, they are target prices for whenever the privitization happens - end of July according the govt, personally I think it will be delayed a couple of months especially with the world cup taking up a month (Imagine the Superbowl only every 4th year). |
