If you were buying a vending machine business, would you pay a higher multiple for a business where you owned the machines and they depreciated normally, or one in which you leased the machines? The cost of depreciation and lease are the same dollar amounts and everything else is held constant.
Two companies have the exact same financial profiles and are bought by the same acquirer, but the EBITDA multiple for one transaction is twice the multiple of the other transaction – how could this happen?
Im not sure about 1, but for 2, I would definitely mention location and the senior management talent?
For the first don't we want to own the machines and get the tax benefits of deprecation leading to higher net profit?
for two, management and location could play an issue. so could the deal dynamics (i.e. 2nd one had a much more heated bidding process) and market position (better positioning, proprietary tech, supply chain monopoly, distribution channel dominance, etc.)
The reasoning here is off. You don't get any tax benefits from depreciation when the alternative is just paying for leased machines; they are both expenses that decrease pretax income / the tax bill. In this situation Net Income would be the exact same whether the machines are leased, or owned + depreciated.
the correct answer is that the TEV would increase, and, as a result, the multiple would increase, right? Because the NI would stay the same, but the TEV would increase due to D/A being a non-cash expense (due to FCFF being EBIT(1-T)+D/A-change in NWC-CapEx)?
Don't know what you mean by TEV would increase, but the answer to question 1 is you'd pay a higher multiple for the business that leases.
isn't this only if it's an EBITDA multiple?
Re my comment about TEV increasing:
I meant that, because the enterprise value on top of a multiple is basically a mini-DCF, and all things being the same, owning the property means that the depreciation is a non-cash expense, and therefore would be added back to the unlevered free cashflow, wouldn't the TEV increase compared to the company who leases?
So if it's something like a TEV/EBIT multiple, shouldn't the two companies have the same EBIT but the one who owns rather than leases would have a higher TEV, resulting in a higher multiple?
This is exactly right. You'd pay a higher multiple for the business that leases; this is because the lease costs are getting deducted from EBITDA (lower EBITDA = higher multiple). In the business that owns, the D&A costs are not included in the EBITDA so you would pay a lower multiple.
(Very simple) example: Leased business: 100mm gross profit, 50mm lease expense, 50mm EBITDA
Owned business: 100mm gross profit, 50mm D&A, 100mm EBITDA
If you would pay the same for both businesses (e.g. 500mm), youre paying 10x for the "lease" business and only 5x for the "own" business
I think the reasoning here is that leasing moves the risk of owning the machines away from the company, effectively reducing its overall risk. The company owning its machines may generate more cash flow, but the leasing company will garner a higher multiple on what it does generate.
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For question 2, the two most important factors are: (1) growth and (2) industry.
By the way, if all the mess I wrote above is right, and you decide to treat lease payments as below-EBITDA item (and I've seen such approach on live deals), then the answer is quite opposite - mathematically there will be higher multiple for the company with equipment in ownership!
I hope someone will write and comment my post because I'd really like to know whether I am right in my reasonings.
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