Pinkerton Case

The value of Pinkerton's share if the company does not do the IPO is in the range of $24.09 - $35.8. We used two different appoach in our valuation:

Method 1: Discounted Cash Flows using APV (Share price = $24.09):

In building our DCF model we took into consideration the following factors:

1. Optimum capital structure designed by the management (c. 25% target Deby) and key debt convenant ratios.

To achieve management's optimum capital structure by 1993 we reduced Pinkerton's gearing ratio (as per the table below) by retiring the debt for MHTC, and Berkeley from cash on balance sheet. Please refer to Appendix 1: Debt Calculations for the debt repayments rates. We were also able to pay dividends of $4m to Wathen in 1993 and 1994 to help him pay off his debt to Pinkerton.

3. Using Peer comparison (Wackenut) to derive asset Beta for Pinkerton:

We unlevered Wackenut asset Beta (0.7%) and plugged it into our CAPM to derive RA for Pinkerton (12.79%) as per the table below.

We calculatee the Present Value of the tax shield on interest by using a discount rate - the weighted cost of debt for Pinkerton plus the Cost of Financial Distress (COFD). We calculated the discount rate for the tax shield based on the weighted average cost of the debts to MHTC and Berkley (12%) we then calculated the cost of financial distress (4%) based on the difference between the AAA bond rate (8.67%) and the cost of debt (12%). This gave us a net discount rate for tax shield (15.8%) including the cost of financial distress.

This allowed us to come to a Enterprise value based on discounting both cash flows and interest tax shield of $174m and an equity value of $114m, which leads to a share price of $24.09. The discounted cash flow calculations are shown in the table below.

Method 2: Peer comparable multiples (Share price = $23.56)

We used Wackenhuts Price to Earnings multiple to calculate the Enterprise value for Pinkerton. Wackenhut's share price of $24 was divided by its EPS of 1.52 to give a P/E multiple of 16x. We multiplied Pinkertons PAT in 1990 of $10.9m to this P/E multiple to get an EV value of $172m. Subtracting Net debt from this we get an equity value of $111m which lead to a share price of $23.56. Please refer to Appendix 1: Pinkerton P&L for more information on forecast income statement and B/S.

We did not use Wackenhut's EV/EBITDA multiple to calculate Pinkerton's valuation as we do not have Wackenhut's cash on B/S no and thus are not able to accurately calculate Net Debt for Wackenhut.

Should Pinkerton not refinance its debt it will be able to service its existing debt, whilst staying within covenants. Also if permitted by MHTC Pinkerton will also be able to pay dividends to Wathen to help him solve his problems without breaching any convenants. Table 1 below shows Pinkerton's debt vs equity and key debt covenant ratios with its existing debt and also includes dividends