Assessment of the value creation in the TDC buyout: IRR calculation, IRR “decomposition” and discussion of the value generation

Christian Elletoft Aaen

Student thesis: Master thesis


This thesis addresses the value creation in the TDC buyout and attempts to give a broad and holistic view on the value creation in TDC since the takeover by NTCH in February 2006. The purpose of the thesis is to estimate the magnitude of value creation and analyze the sources of value creation. The first part of the thesis seeks to estimate NTCH’s return on their equity investment in TDC. In order to do so, the thesis estimates the value TDC as of September 2010. The background for the valuation is a strategic analysis and a financial analysis, which combined leads to forecasts of TDC’s financials. The forecasted financials then enables a Discounted Cash Flow- and a market multiple valuation. Based on a strategic analysis, I find that the traditional industry revenue streams are maturing and in some markets even declining and thus leaves limited potential for future growth. By applying different valuation methods – DCF and market multiple valuations – a set of value ranges for the enterprise value of TDC are estimated. The diffferent valuation methods are triangulated, results in an enterprise value of DKK 74.5bn. By subtracting the net interest-bearing debt in TDC and the additional debt in NTCH (high-yield bonds that were one of the main debt instruments for NTCH when financing their stake in TDC), the thesis estimates NTCH will be yield an IRR of 11.42% on their equity commitment in TDC. The second part attempts to separate and quantify the contributions to value creation and thus determine what the main value drivers has been. In this thesis four different groups of value drivers are analyzed. These are financial leverage, earnings improvement (measured by the EBITDA growth), the free cash flow effect (measured by debt paydowns and dividends payouts) and market multiple effect. The thesis find that the main sources of value in the buyout has been leverage and operational effects in form of EBITDA growth and the free cash flow effect. The market effect has not contributed positively to the value creation as valuation of assets has deteriorated substantially as a consequence of the financial crisis and that multiples in the capital markets has significantly decreased. The last part discussed which changes in TDC’s strategy and governance model that might have affected the value creation. With NTCH as owners TDC has spun-off assets to focus on the Nordic markets, effectively defended their home markets and hedged their risk of customer migration by means of several small-scale addon acquisitions and a multi-brand strategy. TDC has also continued a stringent FTE redundancy program. Finally TDC has redesigned its organizational structure around customers instead of technologies in order to create a more customer-centric company and shifting the focus of product development from technology to customers. Furthermore the thesis discusses how NTCH might have created value by reducing agency costs in TDC. Agency costs can have been reduced by NTCH being a more active owner and by reducing the free cash flow available to management by increasing leverage. The thesis finds that the main difference in TDC’s governance structure has been a narrowing of distance between shareholders and TDC’s management through significant presence in TDC’s board by NTCH and more frequent management replacements.

EducationsMSc in Finance and Strategic Management, (Graduate Programme) Final Thesis
Publication date2010
Number of pages94