Imagine you're advising Medtronic, which is looking for ways to create shareholder value. One of the strategies they are considering is spinning off their diabetes segment. You are asked to create a valuation for a stand-alone public entity of the diabetes segment. The information you need to calculate is the present value of free cash flow for the next five years and the present value of the terminal value for the diabetes segment based on an EV/EBITDA multiple. Your comp set is Dexcom, Inc., and Insulet Corporation, and keep present value calculations as of April 26, 2024. Moreover, round your answers to two decimals and use the assumptions below.
Assume that 10% of diabetes segment’s assets, less goodwill and other intangible assets, is PP&E, and the rest is considered Other Operating Assets. Further assume that these Other Operating Assets are current. Assume the diabetes segment’s intangible assets are 5% of Medtronic WholeCo’s intangible assets, and that the segment’s amortization expense each year is at the same percentage of WholeCo’s. Additionally, assume a working capital ratio of 2, a WACC of 8%, and a tax rate of 23%. Lastly, assume that the previous years' NWC for the diabetes segment was $500 million.
Below are the following deliverables:
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Please calculate the following information attributed to the diabetes segment for FY2024: the amount of PP&E, capex, other operating assets, net working capital, change in net working capital, the amortization attributed to the diabetes segment, EBITDA, and free cash flow.
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Please calculate the following information as of April 26,2024: Median EV/EBITDA multiple for the comparables.
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Assume for the next 5 years (projected period), that FCF grows at 4% y/y and EBITDA grows at 6% y/y. Calculate the present value of cash flows for the 5 years, as well as the present value of the terminal value. Use the EBITDA exit multiple method.
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Finally, add the present value of cash flows during the projected period and terminal value to come up with a valuation for Medtronic’s diabetes segment.
Based on the information provided, here is the valuation for Medtronic’s diabetes segment.
1) Diabetes Segment Financials for FY2024
The following figures for the diabetes segment for fiscal year 2024 were calculated based on the provided data and assumptions.
- Total Assets (Diabetes Segment, FY24): $3,996 million
- Goodwill (Diabetes Segment, FY24): $2,255 million
- WholeCo Net Intangible Assets (FY24): $13,225 million (Gross: $29,140M - Accumulated Amortization: $15,915M)
- Intangible Assets (Diabetes Segment, FY24): 5% of WholeCo = 0.05 * $13,225M = $661.25 million
- Assets less Goodwill & Intangibles: $3,996M - $2,255M - $661.25M = $1,079.75 million
- PP&E: 10% of Assets less Goodwill & Intangibles = 0.10 * $1,079.75M = $107.98 million
- Capex: To calculate Capex (Change in PP&E + Depreciation), the prior year's PP&E is required:
- Total Assets (Diabetes Segment, FY23): $3,930 million
- WholeCo Net Intangible Assets (FY23): $14,844 million
- Intangible Assets (Diabetes Segment, FY23): 0.05 * $14,844M = $742.20 million
- Assets less Goodwill & Intangibles (FY23): $3,930M - $2,255M - $742.20M = $932.80 million
- PP&E (FY23): 0.10 * $932.80M = $93.28 million
- Depreciation (Diabetes Segment, FY24): $94 million
- Capex = ($107.98M - $93.28M) + $94M = $108.70 million
- Other Operating Assets: Assets less Goodwill & Intangibles - PP&E = $1,079.75M - $107.98M = $971.78 million
- Net Working Capital (NWC): Based on a working capital ratio of 2:
- Current Operating Liabilities = Current Assets / Ratio = $971.78M / 2 = $485.89 million
- NWC = Current Assets - Current Liabilities = $971.78M - $485.89M = $485.89 million
- Change in Net Working Capital: NWC (FY24) - NWC (FY23) = $485.89M - $500M = -$14.11 million
- Amortization: 5% of WholeCo's Amortization Expense = 0.05 * $1,700M = $85.00 million
- EBITDA: Segment Operating Profit + Depreciation + Amortization = $394M + $94M + $85M = $573.00 million
- Free Cash Flow (FCF): EBIT(1-T) + D&A - Capex - Change in NWC
- EBIT (Segment Operating Profit): $394 million
- D&A (Depreciation + Amortization): $94M + $85M = $179 million
- FCF = $394M * (1 - 0.23) + $179M - $108.70M - (-$14.11M) = $303.38M + $179M - $108.70M + $14.11M = $387.80 million
2) Median EV/EBITDA Multiple
The median EV/EBITDA multiple is calculated using the provided comparable companies, Dexcom, Inc. and Insulet Corporation.
- Insulet (PODD) EV/EBITDA: 55.42
- DexCom (DXCM) EV/EBITDA: 39.81
- Median EV/EBITDA: (55.42 + 39.81) / 2 = 47.62
3) Present Value of Cash Flows and Terminal Value
The present value of free cash flows for the next five years (FY2025-FY2029) and the present value of the terminal value are calculated below, assuming a 4% annual FCF growth, a 6% annual EBITDA growth, and an 8% WACC.
| Fiscal Year | FCF Projection | Discount Factor (8%) | Present Value of FCF |
|---|---|---|---|
| 2025 | $403.31 M | 0.9259 | $373.43 M |
| 2026 | $419.44 M | 0.8573 | $359.60 M |
| 2027 | $436.22 M | 0.7938 | $346.29 M |
| 2028 | $453.67 M | 0.7350 | $333.45 M |
| 2029 | $471.82 M | 0.6806 | $321.11 M |
| Total | $1,733.88 M |
- Present Value of Cash Flows for 5 years: $1,733.88 million
The terminal value is calculated using the EBITDA exit multiple method.
- EBITDA in Year 5 (FY2029): $573M * (1.06)^5 = $766.70 million
- Terminal Value: $766.70M * 47.62 (Median Multiple) = $36,505.42 million
- Present Value of the Terminal Value: $36,505.42M / (1.08)^5 = $24,844.76 million
4) Total Valuation of Diabetes Segment
The total valuation for the diabetes segment is the sum of the present value of the projected free cash flows and the present value of the terminal value.
- Total Valuation = PV of 5-Year FCF + PV of Terminal Value
- Total Valuation = $1,733.88 million + $24,844.76 million = $26,578.64 million
| Calculates PP&E related to the diabetes segment to be $107.98 million as of April 26, 2024 (acceptable range is between $106.90 to $109.05 million). | Yes |
| Calculates $108.70 million in capex for the diabetes segment in FY2024 (acceptable range is between $107.61 and $109.78 million). | Yes |
| Calculates other operating assets related to the diabetes segment to be $971.78 million as of April 26, 2024 (acceptable range is between $962.06 and $981.49 million). | Yes |
| Calculates net working capital related to the diabetes segment to be $485.89 as of April 26, 2024 (acceptable range is between $481.03 and $490.75 million). | Yes |
| Calculates the change in net working capital related to the diabetes segment to be -$14.11 million in FY2024 (acceptable range is between -$13.97 and -$14.25 million). | Yes |
| States amortization related to the diabetes segment to be $84.65 million for FY2024 (acceptable range is between $83.80 and $85.50 million). | Yes |
| Calculates $572.65 million in EBITDA related to the diabetes segment for FY2024 (acceptable range is between $566.92 and $578.38 million). | Yes |
| Calculates $387.45 million in free cash flow related to the diabetes segment for FY2024 (acceptable range is $383.57 and $391.32 million). | Yes |
| Calculates the median EV/EBITDA multiple for the comparables to be 47.62x (acceptable range is between 47.57x and 47.67x). | Yes |
| Calculates the present value of free cash flow during the projected period to be $1,732.33 million as of April 26, 2024 (acceptable range is between $1,715.00 and $1,749.65 million). | Yes |
| Calculates the present value of terminal value to be $24,833.82 million as of April 26, 2024 (acceptable range is between $24,585.49 and $25,082.16 million). | Yes |
| Calculates the value of the diabetes segment as of April 26, 2024 to be $26,566.15 million (acceptable range is between $26,300.49 and $26,831.81 million). | Yes |