VALUATION PERSPECTIVES UNDER THE 2017 TAX CUT AND JOBS ACT

Transcription

1 VALUATION PERSPECTIVES UNDER THE 2017 TAX CUT AND JOBS ACT 1

2 PANELISTS Curt Monday is a Principal in PwC s Deals Practice, focusing in the area of valuation. He has over 15 years of experience helping clients navigate the complexities of valuations related to mergers and acquisitions, financial reporting, tax planning, bankruptcy reorganization, and dispute resolution. Curt works extensively with television and radio broadcasters, telecommunications and cable providers, and cable television networks. He is a Chartered Financial Analyst Charterholder from the CFA Institute. Carlo Alberici is a Principal in the New York office of KPMG s Economic & Valuation Services Practice. He has worked with multi-national corporations providing valuation services for financial reporting, tax planning, mergers and acquisitions, and corporate restructuring purposes. Mr. Alberici has experience with domestic and cross-border transactions in telecom and media industry. He is a Chartered Financial Analyst Charterholder, a member of the CFA Institute and the New York Society of Security Analysts. Ty Kearns is a Vice President at Liberty Media Corporation. 2

3 AGENDA Impact of the new Tax Law Valuation Issues/Opportunities Acquisitions Diligence/Deal models GAAP Purchase Accounting Forecasting Cash Taxes Benchmarking Transfer pricing Capital Deployment Debt retirement Stock buybacks Dividends Acquisitions 3

4 Tax reform overview Impact on value Tax Reforms Tax rate decrease 35% 21% Shift to territorial system Tax credits 100% foreign div. exemption Capex deductibility increase ~10-20%p.a. 100% (5yrs) New NOL utilization limit No limit 80% (EBT) R&D deductibility reduction Expense Amortize (from 2023) Interest deductibility limit No limit 30% (EBITDA/ EBIT) Base erosion GILTI (-), BEAT (-), FDII (+) Direct value impacts Cash Flows Lower tax paid due to lower rate Foreign dividend tax exemption Lower tax paid due to increased capex deductibility Less new NOLs utilization for loss-making companies More tax paid upfront due to less R&D deductibility More tax paid due to less interest deductions (if limited) Base erosion reduces tax avoidance Key Decisions/ Reactions How to use additional cash from tax reform Invest (capex, acquisitions, employee compensation) Return to shareholders (dividends, capital) Repay debt (reduce leverage, cost of capital) Portfolio optimization and strategic value analysis Cost of Capital Higher post tax cost of debt (Kd) Higher post tax cost of equity (beta) Lower optimal leverage ratio (maybe) 4

5 Key impacts to deal models post tax reform Forecast periods Models should forecast cash flows for at least 10 years to reflect the full impact of bonus depreciation on capex Taxable income and deal returns Modeling of taxable income and returns must be adjusted for asset deals where FMV of personal property can be expensed NOL utilization The modeling associated with NOL utilization must be updated BEAT and GILTI Models must consider tax reform base erosion impacts State tax Models may need to be updated to reflect impact of reform on state taxes US vs International Need to discretely model US and international cash flows to accurately calculate and forecast cash tax for cross border deals Tax reform fundamentally changes cash flows and returns. Deal models must be updated to reflect these impacts. Interest expense utilization Models must be updated to reflect the impact of changes to interest expense utilization rules R&D treatment Amended treatment of R&D from expense to amortization Discount rates Cash flows must be discounted at rate that reflects tax reform impact on capital structure Market Multiples Closely assess multiples to evaluate companies that are bigger beneficiaries, and therefore have more capacity for multiple expansion 5

6 Key considerations post tax reform Impact on Deal Modeling Capital budgeting and allocation Cost of Capital - treasury function Operational Considerations Capital market considerations How should we update our deal decision making process? How should our capital budgeting process be amended? How does tax reform impact your required rates of return? Are there operational implications I need to consider? How have the capital markets reacted? Models must reflect longterm cash flow projection Foreign operations add increased complexity to modeling What are the value impacts under different investment options? o Capex expensing o Acquisition (asset v. stock deal) o Reduce debt o Dividend/ share buyback o EPS accretion/dilution Optimal level of debt? Refine existing metrics including o Return on investment o Cost o Performance KPIs Strategic planning to maximize tax reform s impact on value How does the changes impact our portfolio of capex investments and does it unlock projects that previously did not meet return requirements Limited interest expense deductibility may increase the post tax cost of debt What are the costs and expected returns from delevering? What is the optimal capital structure under the new tax regime? New discount rate assumption required for deal decision making Do we need to assess our legal entity organizational structure and consider rationalizing or restricting entities? Has the location of R&D and sourcing strategy relative to new IP export regulations been evaluate? How is my device and network equipment supply chain impacted? Reassessing valuation multiples for the business as a whole and for M&A targets How have investor expectations changed and what assumptions has the market priced into your stock price? Have you reassessed your options for enhancing shareholder value? 6

7 Full expensing of fixed assets in a transaction with a change in tax basis It will be increasingly important for buyers to perform proper valuation due diligence on the target s fixed assets to have the insight to bid more competitively and confidently. By reviewing inputs such as historical fixed-asset records, capital pricing trends, technology drivers, industry disruptors, economic useful life and market pricing trends, savvy dealmakers can become better informed during diligence and gain a competitive advantage over competitors. 7

8 Full expensing of assets in an asset deal Illustrative example 8

9 Full expensing of assets in an asset deal Illustrative example The higher the step up in the tangible assets the higher the incremental tax shield resulting in higher value creation. B A 9

10 Questions / Answers 10