Question 14.2: Wagner, Inc., is a private company that designs, manufacture...
Wagner, Inc., is a private company that designs, manufactures, and distributes branded consumer products. During its most recent fiscal year, Wagner had revenues of $325 million and earnings of $15 million. Wagner has filed a registration statement with the SEC for its IPO. Before the stock is offered, Wagner’s investment bankers would like to estimate the value of the company using comparable companies. The investment bankers have assembled the following Information based on data for other companies in the same industry that have recently gone public. In each case, the ratios are based on the IPO price.
| Company | Price/Earnings | Price/Revenues |
| Ray Products Corp. | 18.8 × | 1.2 × |
| Byce-Frasier Inc. | 19.5 × | 0.9 × |
| Fashion Industries Group | 24.1 × | 0.8 × |
| Recreation International | \underline{22.4 × } | \underline{0.7 × } |
| Average | 21.2 × | 0.9 × |
After the IPO, Wagner will have 20 million shares outstanding. Estimate the IPO price for Wagner using the price/earnings ratio and the price/revenues ratio.
PLAN
If the IPO price of Wagner is based on a price/earnings ratio that is similar to those for recent IPOs, then this ratio will equal the average of recent deals. Thus, to compute the IPO price based on the P/E ratio, we will first take the average P/E ratio from the comparison group and multiply it by Wagner’s total earnings. This will give us a total value of equity for Wagner. To get the per share IPO price, we need to divide the total equity value by the number of shares outstanding after the IPO (20 million). The approach will be the same for the price/revenues ratio.
EXECUTE
The average P/E ratio for recent deals is 21.2. Given earnings of $15 million, the total market value of Wagner’s stock will be $15 million × 21.2 = $318 million. With 20 million shares outstanding, the price per share should be $318 million/20 million = $15.90.
Similarly, if Wagner’s IPO price implies a price/revenues ratio equal to the recent average of 0.9, then using its revenues of $325 million, the total market value of Wagner will be $325 million × 0.9 = $292.5 million, or $14.63 per share ($292.5/20).
EVALUATE
As we found in Chapter 10, using multiples for valuation always produces a range of estimates—you should not expect to get the same value from different ratios. Based on these estimates, the underwriters will probably establish an initial price range for Wagner stock of $13 to $17 per share to take on the road show.