Ecco Sko A/S: A private company valuation

Martin Joller

Student thesis: Master thesis


Executive summary: The primary objective of this thesis is to estimate the market equity value of ECCO Sko A/S in the event of an initial public offering (IPO) or an equity sale to a publicly listed company by performing comprehensive and prudent analyses of strategic, financial and comparative elements. Founded in 1963, ECCO Sko A/S is a global manufacturer, wholesaler and retailer of footwear products and related accessories. The Group is headquartered in Bredebro, Denmark, and employs 18 500 people as of 31 December 2013. As the company’s vision is to be the best shoe company in the world, it follows a unique business model in which the aim is to control the whole value chain from leather tanning to product sales. Over the past 10 years, ECCO has experienced impressive growth by more than doubling its revenues while remaining consistently profitable. The external macroeconomic, industry dependent and industry independent factors influencing ECCO were identified by performing PESTEL, six forces framework and VRIO analysis, respectively. The results revealed the most important strategic drivers affecting the company’s performance, such as economic growth and expenditure levels in footwear industry, and thus their implications for the future. For valuation purposes, as ECCO’s and its peer group companies’ financial statements were reformulated to reflect their core operational performance, it effectively provided a robust basis for profitability and growth analysis. The identified companies in ECCO’s peer group were Crocs, Deckers, Geox, Wolverine and Tod’s, and their data was analysed 8 years into the past. Compared to its peers, it became evident that ECCO’s return on invested capital is mainly driven by its ability to earn high NOPLAT margin, which compensates for its low invested capital turnover rate due to heavy investments in its value chain. Coupled with the fact that the company is relatively highly leveraged, the financial gearing effect greatly enhances its returns to equity investors. Additionally, ECCO’s high sustainable growth rates indicate that the company is a growth business, although its elevating dividend payments suggest that lesser part is being reinvested in the company. As the sales-driven approach is used to develop the pro forma reformulated financial statements, the forecasted revenue of the company incorporates the main strategic drivers identified in the strategic analysis part. The assessment of forecast assumptions revealed that ECCO’s financial drivers will remain relatively on the same levels compared to the historical 10 year averages. Since ECCO is a private company, its equity value was estimated iteratively by discounted cash flow method (DCF) using a weighted average cost of capital (WACC) of 7,13%-7,16%. Additionally, the accompanying sensitivity analysis revealed that a 25 basis point change in WACC and long-term growth rate of the company’s free cash flows resulted in an equity value range of 10 105 829-13 117 732 thousand DKK, with the mean value of 11 611 780 thousand DKK. In order to determine whether the company’s forecasted free cash flows were plausible, ECCO’s equity value was also estimated by using the relative valuation method. The industry’s median multiples of EV/EBITDA and EV/EBIT implied that ECCO’s equity value is overvalued by discounted cash flow method, whereas the multiples of Tod’s, a company with similar characteristics to ECCO, confirmed the equity value range estimated by using free cash flows.

EducationsMSc in Applied Economics and Finance, (Graduate Programme) Final Thesis
Publication date2014
Number of pages162