Nexans is paying EUR 680M plus up to EUR 43M for a copper and aluminium wire maker with EUR 520M revenue. Do revenue multiples mean anything here?

In deals like this, revenue multiples can be misleading, especially for a metals-based product like copper and aluminum wire, where revenue fluctuates with commodity prices. Here's how you might approach the valuation and analysis:

1. Anchor on EBITDA or Value-Add Metrics:

   • Revenue multiples are less reliable due to the volatility of metal prices. Instead, focus on EBITDA multiples or value-add per pound of wire. These metrics better capture the operational efficiency and profitability of the business, independent of raw material price swings.
   • For example, EBITDA per unit or EBITDA margin can provide a clearer picture of the company's performance and its ability to generate cash flow.

2. Handling the Earn-Out in Valuation:

   • The earn-out (up to EUR 43M) should be treated as contingent consideration. In fairness or precedent analysis, you might:
     • Include the base price (EUR 680M) as the primary valuation anchor.
     • Model scenarios for the earn-out, such as a probability-weighted approach, to estimate its likely impact on the total purchase price.
     • Present both "base case" (EUR 680M) and "maximum case" (EUR 723M) valuations to the board, ensuring transparency about potential outcomes.

3. European Strategic Buying a US Family Business:

   • The cross-border nature of the deal introduces additional considerations:
     • Synergies: Highlight potential synergies, such as cost savings, expanded market access, or operational efficiencies, which could justify a premium valuation.
     • Cultural and Operational Fit: Address integration risks, especially given the family-owned nature of Republic Wire and its established relationships in the US and Canada.
     • Currency and Regulatory Factors: Account for currency exchange risks (EUR/USD) and any regulatory hurdles in the US.

4. Building the Story for the Board:

   • Emphasize the strategic rationale: Nexans' expansion into the US and Canadian markets, diversification of its product portfolio, and potential synergies.
   • Use precedent transactions in the wire and cable industry to benchmark valuation multiples, focusing on EBITDA rather than revenue.
   • Address the commodity price impact by normalizing revenue and EBITDA for fluctuations in copper and aluminum prices, ensuring the board understands the underlying profitability.

In summary, while the revenue multiple (1.3x) provides a quick snapshot, it's not the most reliable metric here. EBITDA multiples, operational metrics, and strategic considerations should take precedence in evaluating and presenting this deal.

Sources: Beginners Guide to Valuation and Metrics By Sector, Biotech finance part 2: valuation methodologies and modeling considerations, Beginners Guide to Valuation and Metrics By Sector