How do you analyze and value restructured companies?

1 1. Understand the restructuring plan

The first step is to understand the restructuring plan, which is usually proposed by the company, its creditors, or a court-appointed trustee. The plan outlines the changes to the capital structure, such as debt reduction, equity conversion, asset sales, or new financing. It also describes the operational improvements, such as cost-cutting, revenue enhancement, or strategic repositioning. The plan should provide a clear picture of the post-restructuring situation and the expected impact on the company's cash flow, profitability, and growth.

2 2. Assess the post-restructuring risks

The second step is to assess the post-restructuring risks, which are the factors that could affect the company's ability to execute the plan and achieve its targets. These risks could be internal, such as operational inefficiencies, management turnover, or customer retention, or external, such as market conditions, competition, or regulation. You should identify the key risks, their likelihood, and their potential impact on the company's performance and value.

3 3. Estimate the post-restructuring cash flows

The third step is to estimate the post-restructuring cash flows, which are the cash inflows and outflows generated by the company's core operations. You should use the restructuring plan as a base case and adjust it for the risks identified in the previous step. You should also consider different scenarios, such as optimistic, pessimistic, or realistic, to capture the range of possible outcomes. The cash flow estimation should reflect the company's sustainable earnings potential and growth prospects.

4 4. Determine the post-restructuring cost of capital

The fourth step is to determine the post-restructuring cost of capital, which is the rate of return required by the investors to invest in the company. The cost of capital depends on the company's capital structure, risk profile, and market conditions. You should use the weighted average cost of capital (WACC) formula, which combines the cost of debt and the cost of equity based on their relative proportions in the capital structure. You should also adjust the WACC for the specific characteristics of the restructured company, such as its leverage, volatility, or liquidity.

5 5. Calculate the post-restructuring enterprise value

The fifth step is to calculate the post-restructuring enterprise value, which is the present value of the company's future cash flows discounted by the cost of capital. You should use the discounted cash flow (DCF) method, which is the most widely used valuation technique for restructured companies. The DCF method captures the intrinsic value of the company based on its fundamentals and expectations. You should also perform a sensitivity analysis, which shows how the enterprise value changes with different assumptions and inputs.

6 6. Allocate the post-restructuring enterprise value

The sixth and final step is to allocate the post-restructuring enterprise value among the different claimholders, such as debtors, equity holders, or other stakeholders. You should use the waterfall analysis, which is a hierarchical distribution of the enterprise value based on the seniority and priority of the claims. The waterfall analysis determines the recovery rate, which is the percentage of the original claim that is recovered, and the implied value, which is the value of the claim after the restructuring. You should also compare the implied value with the market value, which is the price of the claim in the secondary market, to assess the valuation gap and the arbitrage opportunity.

7 Here’s what else to consider

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