The Conglomerate Discount: SOTP Valuation of GN Store Nord

Martin Midtgaard Frich

Student thesis: Master thesis


The term ‘conglomerate discount’ refers to a phenomenon where corporate entities engaged in different industries are traded below the combined value of its subsidiaries. This thesis investigates the existence of a conglomerate discount to the stock of GN Store Nord on 27th February 2019 when its latest annual report was published. Initially, a comprehensive literature review establishes the relevance of considering a conglomerate discount. The rationale behind corporate diversification is often described as market power, internal capital markets, resource and skills transference and diversification. However, a multitude of drawbacks related to manager entrenchment, personal risk reduction, private control benefits, agency costs and organisational cost disadvantages are identified. The subsequent review of empirical evidence suggests a negative effect on stock prices due to corporate diversification, although no general consensus of the magnitude was found. GN is structured as a conglomerate with operations in hearing aids as well as the call centre and office industries in GN Hearing and GN Audio. A strategic analysis of both segments was conducted to identify the key non-financial value drivers. Both segments show promise with great outlooks to the macroeconomic and industry specific factors as well as valuable internal resources. Looking ahead, the main difficulties for both segments lie in the intensifying competitive environments which might limit long term revenue growth and profitability. To investigate the presence of a conglomerate discount in the stock of GN Store Nord, a valuation of each subsidiary was made using the sum-of-the-parts (SOTP) framework. The segments were valued using a discounted cash flow approach, while the recent acquisition of Altia Systems was estimated at transaction value. The results from the SOTP valuation estimates a fair price per share of DKK 333.64 as of 27th February 2019. Relative to the observed share price of DKK 324.00 on the valuation date, an implied conglomerate discount of ~3% was found. A subsequent discussion from an investor point-ofview determined that abnormal returns, independent of the underlying performance would be realisable if either GN Hearing or GN Audio are sold off.

EducationsMSc in Finance and Investments, (Graduate Programme) Final Thesis
Publication date2019
Number of pages129