A good amalgamation or acquisition can be synonymous with a good investing. Therefore we will get down our attack on the proposed amalgamation with ENER1 from a fiscal reappraisal place. We will so transition into a rating place followed by grounds why this amalgamation is a good tantrum for Exide. Before we get started it is of import to understand the industry in which ENER1 competes and the basic make-up of ENER1 concern and organisation.
Oil has been the primary beginning of energy for over the last 150 old ages ( Petersen, 2010 ) . During this clip batteries have been thought of every bit small more than a grudge purchase, devices that cipher wanted but everybody needed. Now that issues such as clime alteration, rapid industrialisation of Asia and South America along with volatility in oil monetary values, alternate energy solutions is get downing to take on more prominence ( Petersen, 2010 ) . Investors are get downing to recognize that energy storage will be the “ beating bosom of the clentech revolution ” ( Petersen, 2010 ) . This is the industry in which ENER1 competes. ENER1 sub-industry is Electrical Components & A ; Equipment. Standard and Poors has a impersonal mentality for this industry believing that consequences are likely to better.
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ENER1 Company Background
Ener1, Inc. is engaged in the concern of designing, developing and fabricating rechargeable lithium-ion batteries and battery systems for energy storage. Its terminal markets include transit, stationary power ( energy storage for public-service corporations and renewable energy, such as air current and solar power in add-on to battery backup systems for the place ) , military applications and little cell markets. In the transit markets, the Company is developing systems to power the following coevals of intercrossed electric vehicles ( HEVs ) , plug-in intercrossed electric vehicles ( PHEVs ) and electric vehicles ( EVs ) . This engineering is besides developed for other transit markets, including coachs and trucks, every bit good as alternate transit vehicles. The Company besides conducts research on and develops fuel cells and nano coating processes. The Company has three runing sections: battery, fuel cell and nanotechnology. The company ‘s officer and managers are listed in Table 1.
Larry Selden ( professor emeritus of finance and economic sciences, Columbia Graduate School of Business and Geoffrey Colvin ( senior editor at big for FORTUNE magazine and co-anchor of PBS ‘ WALL STREET WEEK ) published a paper titled “ M & A ; A Need n’t Be a Loser ‘s Game, ” ( Harvard Business Review, June 2003 ) . In that paper it was stated that the ground that many acquisitions destroy stockholder wealth is because geting directors are disregarding the balance sheet. We will take a recognition analysis attack and analyze ENER1 ‘s balance sheet every bit good as income statement. This analysis will be broken out into 4 classs. Graphic word pictures along with Industry benchmarks are shown in Exhibit Angstrom
Net incomes and Profit Margin
Is ENER1 bring forthing healthy net income degrees? Most finance professionals would hold that the net income country is the most of import one to reexamine over clip. However, we can non presume that positive net incomes will ever give positive hard currency flow from operations. The company ‘s underside line has non changed really much from last period. However, gross revenues have gone up significantly and the net border has improved. This is a slightly positive tendency, because it means the company is runing more expeditiously than it was antecedently. It looks like some operating costs have been cut to carry through this. It is a good consequence even though the net border is still hapless compared to similar companies. When a company has a weak net border, it is really important that all disbursals be monitored carefully. In this instance, higher direct costs over last period negatively affected the bottom line. The company brought in significantly more gross revenues this period, but gross net income degrees have stayed comparatively changeless because of some higher direct costs, ensuing in a lower gross border.
Is ENER1 efficaciously utilizing debt? This state of affairs is instead unfavourable with respect to this specific analysis country. Entire debt has increased this period with net profitableness falling. ENER1 ‘s overall consequences in this country do non compare good to the industry. It does non look to be bring forthing adequate net incomes ( before involvement and non-cash disbursals ) relative to involvement disbursals, even with a low degree of debt ( compared to equity ) on its Balance Sheet. The most likely beginning of this job is in net incomes.
How effectual is ENER1 in utilizing fixed assets? These consequences are unfavourable. The company increased its fixed plus base significantly, but one time once more profitableness fell from last period. This consequences in a diminution in return on assets. ENER1 is merely passing more money on assets while net profitableness declined. Offseting these consequences a small is the fact that both the net net income border and overall liquidness have improved from last period. The acquisition of assets does non look to hold hurt efficiency.
Is ENER1 liquid plenty? This is a inquiry on efficiency and hard currency flow. Since last period, the company has generated negative hard currency flow from operations and profitableness ( although hard currency flow has increased comparative to gross revenues ) . These are by and large non favourable consequences, although they do non look critical at this clip, as overall and short-run liquidness appear adequate. Still, negative hard currency flow will necessitate to be addressed, as it is the biggest driver of long-term profitableness over clip. ENER1 ‘s liquidness ratios seem to be in line with other similar companies. ENER1 has some extra countries to concentrate on for certain constituents of overall liquidness. Inventory yearss, histories receivable yearss, and histories collectible yearss are all higher than industry norms. This indicates that the company may be taking longer to sell stock list and may besides be slow in roll uping receivables and paying seller measures. All of these factors can impact the hard currency history significantly, and it might be good to see these prosodies reduced over clip.
Value should non be confused with monetary value. Price is the in agreement upon sum between marketer and purchaser in the sale of company. From our point of view, value is the maximal sum that should be paid. Valuing a company with negative net incomes is highly hard. Our sentiment is that ENER1 ‘s negative net incomes can be attributed to where they are in the house ‘s life rhythm. We will necessitate to gauge the hard currency flows of the house over its lifecycle and allow them turn positive at the right phase of the rhythm. We utilized a discounted hard currency flow method to value the company.
The first measure in our rating was to measure ENER1 ‘s current standings and do certain the most current information is being used. We are utilizing the company ‘s latest one-year study for twelvemonth stoping 12/31/10. A drumhead position of market statistics, income statement and balance sheet are shown in Exhibit B.
The 2nd measure in our rating was to gauge gross growing. ENER1 has grown at a significant rate since 2008. Their grosss have increased from $ 6.8 million in 2008 to $ 34.8 million in 2009 to $ 77.4 million in 2010. The growing rate last twelvemonth was 122.4 % . The 5 twelvemonth growing rate for the industry is 14.6 % . Due to the current province of the economic system and the overall babyhood of the market we were conservative about our estimation of gross growing. Exhibit C summarizes our prognosiss of gross growing and dollar grosss at ENER1 for the following 10 old ages. The dollar addition in grosss each twelvemonth is greater than the old twelvemonth until twelvemonth 7
In measure 3 we estimated a sustainable runing border in stable growing. A cardinal premise in our rating is that while the operating borders are negative now they will be positive in the hereafter. The average runing border of concerns in ENER1 ‘s concern section was 5.55 % . We assumed that ENER1 ‘s borders would make 5.5 % by twelvemonth 10. Fringy betterments will be greater in the first few old ages but runing net incomes will non be seen until twelvemonth 5. Exhibit D summarizes the forecasted operating borders and net incomes before involvement and revenue enhancements for the following 10 old ages and for the terminal twelvemonth.
The 4th measure in our rating was to gauge the reinvestment needed to bring forth growing since this is a immature house and reinvestment is important to their success. For our analysis we estimated the expected reinvestment by spliting the expected alteration in gross by the gross revenues to capital ratio. We utilized a gross revenues to capital ratio of 1.5. The consequences are shown in Exhibit E. The entire capital invested in ENER1 is derived by adding the entire reinvestment to the capital invested at the beginning of the period.
The 5th measure in our rating was to gauge the price reduction rate and value the company. There is adequate historical informations to get at a leaden cost of capital which we used in our price reduction theoretical account. Using a leaden mean cost of capital of 9.3 % , inputs on net incomes, reinvestment rates we were able to cipher the present value of the estimated free hard currency flows for old ages 1 through 10.A sum-up of the estimated free hard currency flows is shown in Exhibit F. The consequence is a negative value of $ 290 million. There is one important hard currency flow that is non reported in Exhibit F and that is the terminal value of the house. The hard currency flow of the terminal value is $ 1.2 million and was calculated without attending to growing. Using the terminal value hard currency flow brings the value of ENER1 to $ 164 million. To finish our rating we added hard currency on manus of $ 71 million to convey the value of ENER1 to $ 235 million.
Why the amalgamation makes sense and possible hazards
Financing this acquisition with 100 % stock will be dilutive for the first 4 old ages. The initial benefit to stockholders and 5 twelvemonth net incomes per portion prognosis is shown in Exhibit G. A conservative estimation of synergisms is valued at about $ 1.6 million ( See Exhibit H ) . The current lithium-ion battery market is about $ 13 billion per twelvemonth. This figure is estimated to increase to $ 44 billion in 2015 with $ 13 billion in consumer electronics, $ 13 billion in vehicle applications and $ 18 billion in power storage ( Wallstreet, 2011 ) . In the vehicle application market the heavy responsibility section is expected to turn from $ 110 million in 2010 to $ 642 million in 2016 ( Peterson ) . ENER1 failing due to a deficiency of cognition in the automotive heavy responsibility section as noted in their one-year study is a strength of Exide. ENER1 failing of high volume fabrication is a strength of Exide. Exide ‘s failing in advanced battery engineerings is a strength of ENER1. It is anticipated that the current direction squads would stay in topographic point after the amalgamation. This would guarantee specific industry cognition is maintained during the clip after the amalgamation. Labor nest eggs may be generated a few old ages after the amalgamation due to economic systems of graduated table but these nest eggs were non used in the rating. There are a few hazard associated with this amalgamation. A major hazard is the current ownership Ener1 Group and Bzinfin are attached entities that as of December 31, 2010, ain 49.3 % of ENER1 outstanding common stock ( and 57.3 % if these entities exercised all of the warrants they own ) . Ener1 Group and Bzinfin have the ability to efficaciously command all affairs submitted to a ballot of the stockholders of ENER1, including any determination sing any possible amalgamation. Other hazards include the lessening in the monetary value of oil and lessening in authorities grants and loans.