Sum of the Parts SOTP Valuation Model & Analysis

We build sensitivity tables based on the Discount Rate, Terminal Growth Rate, and Terminal Multiple to determine the range of Implied Enterprise Values for each division. 2) 15-Year Projection Period – Since Maxeon, the lower-margin manufacturing company, will take years to become profitable, we extend the projections to 15 years rather than the normal period of sotp meaning 5-10 years. There’s no point backing into an Implied Share Price based on this comparable company analysis because we want the Implied Share Price for the entire company. To do so, ask yourself what the key value drivers are and whether or not one segment is driving/distorting the overall company value.

Step 5: Cross the Bridge to Implied Equity Value

It is possible to use this valuation to defend against a hostile takeover by proving the company is worth more as a sum of its parts. It is also possible to use this valuation in situations where a company is being revalued after a restructuring. The valuation provides a range of values for a company’s equity by aggregating the standalone value of each of its business units and arriving at a single total enterprise value (TEV). The equity value is then derived by adjusting the company’s net debt and other non-operating assets and expenses. The SOTP valuation is most ordinarily used to value a company contained business units in various industries since valuation methods contrast across industries relying upon the idea of revenue. It is feasible to utilize this valuation to shield against a hostile takeover by demonstrating the company is worth more as a sum of its parts.

DCF Valuation: The Stock Market Sanity Check

This step was simple in this example because SunPower provided separate financial statements for Maxeon in its filings at the time of the spin-off. …but the installation and services segment could potentially trade at a much higher revenue multiple in the 4.0 – 5.0x range, in-line with comparable companies in that sector. (6) Divide by the sum of diluted shares outstanding to arrive at a range of equity values per diluted share. The sum-of-the-parts valuation (SOTP) is a course of esteeming a company by figuring out what its aggregate divisions would be worth on the off chance that they were veered off or acquired by another company. Since this is a spin-off that happened in real life, we want to reflect that SunPower shareholders received 0.125 Maxeon shares for each 1 SunPower share.

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While both are valuation devices, the SOTP valuation can incorporate a discounted cash flow (DCF) valuation. That is, esteeming a segment of a company might be finished with a DCF analysis. In the interim, the DCF utilizes discounted future cash flows to value a business, project or segment. The current value of expected future cash flows is discounted utilizing a discount rate. The SOTP valuation is most commonly used to value a company comprised of business units in different industries since valuation methods differ across industries depending on the nature of revenue.

While understanding enterprise value, bottom up, we will calculate the TEV of the parent by adding the individual enterprise values using the above M&A consolidation rules. For calculating the EVs of each individual entity we shall use the EBITDA multiple method, but you can use any other valuation methodology such as DCF. The sum-of-the-parts (SOTP) valuation involves valuing various business segments, and more valuations come with more inputs. As well, SOTP valuations do not take into account tax implications, notably the implications involved in a spinoff. Sum-of-parts valuation, also known as breakup value analysis, helps a company understand its true value. For example, you might hear that a young technology company is “worth more than the sum of its parts,” meaning the value of the company’s divisions could be worth more if they were sold to other companies.

Equity value is then calculated by deducting net debt and other non-operating adjustments. For a company with different business segments, each segment is valued using ranges of trading and transaction multiples appropriate for that particular segment. Relevant multiples used for valuation, depending on the individual segment’s growth and profitability, may include revenue, EBITDA, EBIT, and net income. A DCF analysis for certain segments may also be a useful tool when forecasted segment results are available or estimable. The following spreadsheet demonstrates how to set up the sum-of-the-parts analysis for a publicly traded company. Note that the analysis will typically calculate the premium/discount to the current share price to suggest whether or not the public company is worth more or less when separated into its individual businesses.

Sum-of-the-Parts Valuation – SOTP Definition

While both are valuation tools, the SOTP valuation can incorporate a discounted cash flow (DCF) valuation. That is, valuing a segment of a company may be done with a DCF analysis. Meanwhile, the DCF uses discounted future cash flows to value a business, project or segment. The present value of expected future cash flows is discounted using a discount rate.

It is likewise conceivable to involve this valuation in circumstances where a company is being revalued after a restructuring. This refers to a situation when the stock market values the assets of the diversified company at less than the estimated sum of the part. The price to earnings multiple of conglomerates tends to be lower than companies that focus on a single business. Sum-of-the-parts analysis estimates the TEV of the parent by adding up the individually estimated TEVs of the companies involved. If a company is controlled by the parent then its TEV is already part of the parent’s TEV.

Some would disagree with this adjustment and say that we should use only SunPower’s pre-spin-off share count. 1) We’ve already re-allocated corporate overhead costs appropriately in the separate models. Once we have all these individual pieces, we can put them together to estimate the value to shareholders if this spin-off proceeds as planned.

• Sum of the parts analysis (SOTP), or break-up analysis, is a method of valuation of a multi-divisional company, holding company, or a conglomerate.
• It is likewise conceivable to involve this valuation in circumstances where a company is being revalued after a restructuring.
• For a company with different business segments, each segment is valued using ranges of trading and transaction multiples appropriate for that particular segment.
• The essence of the method is to determine what divisions would be worth if the conglomerate is broken up and spun off or acquired by another company;1 see Conglomerate discount.
• The value of each business unit or segment is derived separately and can be determined by any number of analysis methods.
• As a result, the company as separate entities could be worth more than the company as a single entity.

By completing this spin-off, in other words, the total share count increased. In this SunPower / Maxeon example, a few steps are slightly different because it uses a real-life spin-off with proposed deal terms. When analysts track a large company like the energy giant Reliance Industries, they use a valuation method called sum of the parts or SOTP.

• Before the spin-off, SunPower was a solar manufacturing, installation, and services company, but it had always traded at a significant discount to pure-play solar installation/services companies.
• While both are valuation devices, the SOTP valuation can incorporate a discounted cash flow (DCF) valuation.
• That is, esteeming a segment of a company might be finished with a DCF analysis.
• We build sensitivity tables based on the Discount Rate, Terminal Growth Rate, and Terminal Multiple to determine the range of Implied Enterprise Values for each division.
• In the interim, the DCF utilizes discounted future cash flows to value a business, project or segment.
• The analysis calculates a range of values for a conglomerate’s equity by summing the value of its individual business segments or divisions to get the total conglomerate’s enterprise value.

Sum of the parts analysis (SOTP), or break-up analysis, is a method of valuation of a multi-divisional company, holding company, or a conglomerate. The essence of the method is to determine what divisions would be worth if the conglomerate is broken up and spun off or acquired by another company;1 see Conglomerate discount. The analysis calculates a range of values for a conglomerate’s equity by summing the value of its individual business segments or divisions to get the total conglomerate’s enterprise value. The equity value is then calculated by subtracting net debt and other non-operating adjustments. The value of each business unit or segment is derived separately and can be determined by any number of analysis methods. For example, discounted cash flow (DCF) valuations, asset-based valuations and multiples valuations using revenue, operating profit or profit margins are methods utilized to value a business segment.

The SOTP approach gives the analyst the liberty to choose an appropriate valuation that suits the particular sector in focus.