Finance- Sanofi Aventis Valuation

TABLE OF CONTENTS

I. INTRODUCTION 3
II. WHO IS SANOFI-AVENTIS ? 3
III. DISCOUNTED FREE CASH FLOW METHOD (DCF) 3
A. INTRODUCTION 3
B. WACC APPROACH 3
1. After Tax WACC Calculation 3
2. Calculation and Forecast of the Free Cash Flows 6
3. Present Value of the Free Cash Flows 6
4. Present Value of the Company 6
5. Stock Value 6
C. APV APPROACH 6
IV. VALUATIONBASED ON COMPARABLE FIRMS: VALUATION MULTIPLES 6
A. INTRODUCTION 6
B. CHOICE OF COMPARABLE FIRMS 6
C. CHOICE OF VALUATION MULTIPLES 6
1. Price Earnings Ratio 6
2. Price to Book Ratio 6
D. LIMITATIONS OF MULTIPLES 6
V. COMPARISON OF CURRENT VALUE AND ESTIMATED VALUE 6
VI. CONCLUSION 6

INTRODUCTION
For this second assignment we have to estimate the enterprise value and thestock value of a company included in the Euronext 100 index or the Bel 20 index. We decided to choose Sanofi-Aventis, a French multinational pharmaceutical company present in the Euronext 100 index.
In order to estimate the enterprise and the stock value of Sanofi-Aventis, we will use two different approaches: the Discounted Free Cash Flow and valuation multiples. For the DCF approach we willuse two different methods, namely first the Weighted Average Cost of Capital (WACC) and secondly, the Adjusted Present Value (APV). As for the valuation multiples, we chose the Price Earnings Ratio (PER) and the Price-to-Book Ratio (PBR).
Finally, we will compare those estimated values with the current enterprise value and stock price of Sanofi-Aventis.
WHO IS SANOFI-AVENTIS ?
Sanofi-Aventisis the largest pharmaceutical group in Europe and the fourth largest in the world. It was created in 2004 when Sanofi-Synthélabo acquired Aventis for €54,5 billion. Sanofi-Aventis is also a leading company in emerging markets and made €29,3 billion in sales last year. Future arising challenges are: planned cost savings of €2 billion by 2013, genericization of some of its flagship products andthe Genzyme takeover. However, because of the high uncertainty related with the success or the failure of this takeover, we will not take it into account in our free cash flow forecast calculations.
DISCOUNTED FREE CASH FLOW METHOD (DCF)
INTRODUCTION
To estimate the
WACC APPROACH
After Tax WACC Calculation
We need to calculate the WACC in order to use it as discount rate for the two DCFapproaches we will use next. The WACC is “the average of a firm’s equity and after-tax cost of capital, weighted by the fraction of the firm’s enterprise value that corresponds to equity and debt, respectively. Discounting free cash flows using the WACC computes their value including the interest tax shield. ”
rWACC = EE+DRE+DE+DRD1- τc
* E : market value of the firm’s equity

* D : netdebt (short term debt + long term debt – cash and cash equivalents)

* RE : cost of equity

* Rd : cost of debt

* τc : corporate tax rate
Value of Equity and Debt
We base our values on the 2009 annual report numbers.
* Total equity for 2009 = €48446 million

* Net Debt for 2009 = 2866 + 5961 – 4692 = €4135 million
Cost of equity
In order to calculate the cost of equity(RE) we will use the Capital Asset Pricing Model (CAPM):
CAPM : rE =rf + βE(rm-rf)
* rf : risk free rate

* We took the German ten year bond’s rate = 2,86% because Sanofi-Aventis is a European company and because of the great safety associated with German government bonds.

* We chose a ten year bond for we believe it will provide an appropriate forecast for our company’s valuationtime horizon.

* rm-rf : market risk premium

* Since Sanofi-Aventis sales come mainly from Europe (€12059 million) and the US (€9426 million) and because the US historical average risk premium (5,10%) and Europe’s historical average risk premium (5%) are different, we calculated a weighted risk premium based on each region sales balanced by its respective risk premium.

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