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A few thoughts:
It's a private company, so how do you know it has negative equity value? Are you referring to book value?
I looked up the accounts on Companies Hiuse (UK). It has assets less than liabilities due to issuing a new bond. The company has EBITDA margins of c. 25% and is cash generative but NI is negative.
From what you’re saying is DCF not a valid method to value it?
Thanks!
By the 25% EBITDA margin and the negative net income, I'm assuming it has huge interest payments leading to that figure?
What Lifestylemna said above is correct, you use a long term capital structure for the proportion of debt to equity so there's no problem there. You can use a DCF if eventually the FCF becomes positive by your terminal year. Also you should be using the market value of the equity instead of the book value in cases of potentially distressed companies (market value can't be negative by definition as the limit to # of shares and share price is 0). All of these things should give you a WACC and FFCF's that you can work with for a DCF valuation.
Alternatively, you could look at the distressed valuation of the company and its assets.
Exactly this- it has large interest payments to make.
So for the WACC calculations, should I assume D and E % based on its public comps?
As it’s a private company there is no public equity.
FCF is positive btw. I was just concerned about WACC
Doesn't make sense for it to be in negative equity just because they issued a bond.
Liabilities go up (LT debt) but there is an equal cash inflow.
What'd they do with all that cash?
Unless they literally burnt it (or spent it on hookers and blow), it should still be somewhere on the asset side. Even if they bought a dorm room with it, the asset value is still there.
Something's missing in the story.
I'm assuming the OP has misdiagnosed the reason behind the negative Shareholder's Equity as the new bond issuance rather than the interest payments taking a large hit on cashflow
What's the best approach for estimating cap structure for a private company? Average of debt / equity ratio for public comps? Do you need to know the company's debt profile to be able to use the equity value you back out from your DCF?
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