2.3 Director Shareholdings
2.4 Marketing Analysis
Industry overview
Bioenergy has been a major source of renewable energy in parts of the world, such as Europe and the U.S. and this trend is expected to continue in the developing markets of Australia. There are indications that this trend has begun to spread in Australia with projects already undertaken such as the Rocky Point Congregation Plant, Pioneer Congregation Plant and Condong and Broadwater Cogeneration plants utilising a variety of green waste. More of these projects shall be commissioned in the foreseeable future given the renewable energy targets set by the G20 of 20%.
The renewable energy industry in Australia is growing and includes bulk electricity generation from diverse sources such as wind, biomass and hydro power as well as photovoltaics, solar hot water and remote area power systems (RAPS). The industry holds immense potential, not only for delivering significant environmental benefits, namely reducing greenhouse gas emissions, but also for providing substantial economic and employment benefits.
Australians spend about $50 billion on energy each year, while energy exports earn more than $24 billion a year. The sector involves massive, long-lived capital items such as electricity plants, transmission lines, coal, oil and gas production facilities, pipelines, refineries, wind farms as well as a multitude of smaller facilities such as wholesale and retail distribution sites.
Demand for energy in Australia is projected to increase by 50% by 2020, and the energy industry has estimated that at least $37 billion in energy investments will be required by 2020 to meet the nation's energy needs. Meeting this increased demand for energy, while moving to a low-emissions future, is a key challenge facing Australia's future growth and living standards. This challenge can be met with the development of a renewable energy industry such as Biogen’s biomass generation plant. As seen in the figure below, biomass is set to grow steadily and continue to increase its energy contribution.
The Porter’s 5 model below illustrates the industry issues specific to Biogen. From our analysis, Biogen have positioned themselves well to overcome these challenges and to excel within their narrow field of expertise. As highlighted above, through extensive due diligence, the contracting of low-cost suppliers and investing in new renewable technology, Biogen will be able to avoid the threat of new entrants and substitutes from intruding on their market competitiveness. The attention to cost from due diligence also means that the biomass plant will be able to produce energy efficiently and at a reasonable and low cost.
2.5 Production and Operational Strategy
Operation
Biogen intends to build and operate custom-built, state-of-the-art biomass power plants aiming to maximise the efficiency of electricity generation. Once the plant operates at full capacity, it will operate with availability between 90% and 98%. However it will take one or two years to operate at these levels. Only availability in excess of 85% will be reached in the first few months.
Location
The initial biomass generating facility will be constructed in the Sydney Basin – a location that is advantageous to Biogen’s concept designs. The strategic location of this site takes advantage of the proximity to distribution networks to retail subscribers and low transportation costs for green waste.
Suppliers
The majority of Biogen’s project materials will be acquired in China through a range of large Chinese boiler and turbine manufacturers. Biogen have been able to obtain a competitive edge by securing these cheaper materials through contractual agreements with overseas manufacturers. To mitigate any product risks, Biogen have screened these companies to ensure quality standards are adhered to.
Construction strategy
In addition to cost-effective outsourcing, Biogen will be able to eliminate 30,000 hours of highly skilled installation labour from onsite construction work as a direct result of the innovative design of the two boilers required in the project.
3. Financial analysis & projections
3.1 Ratio Analysis
Our ratio analysis reveals that Biogen (BDE) is currently producing results well below the industry average. However, this is just due to the fact that Biogen is a seed company and is currently situated at the trough of its J-curve.
3.2 Comparables Analysis
Multiples Valuation
Using a range of revenue-based, book-based and industry specific multiples across different global regions, Biogen has shown to have a consistent, although wide, market capitalization ballpark range. Having found highly comparable firms from the above filtering system, international figures have been exchanged and a liquidity discount has been applied.
Summary of findings – Implied Market Capitalisation
Multiples Valuation Range by Region
Using the data generated, we have found on a relative basis that Biogen’s valuation will most likely lie between the highest and lowest means. The range is estimated to be between $17.84 mil – $39.97 mil.
3.3 Discounted Cash Flow (DCF) Analysis
Through a DCF Analysis, Biogen was valued at $23,736,641. This figure falls within the range found by the Comparables Analysis.
It was assumed that the entirety of Biogen’s revenues would be earned from management fees and distributions from its 40% ownership of the REIT.
Capital Budgeting
It was assumed that Biogen’s pre-feasibility studies and due diligence proved satisfactory and that construction of the Sydney plant commenced in 2nd quarter 2009, and was completed in 1st quarter 2011. It was assumed that the total cost of the Project would be $45million with funding of 70% equity and 30% debt. The debt funding would be in the form of a 30-year $13.5 million project-finance facility. Total equity financing of $31.5 million would be needed, with 40% ($12.6 million) coming from Biogen. As such, with the commencing of construction of the project, Biogen will have to undergo a large capital raising of around $12.6 million.
REIT Earnings Forecast
Biogen was valued by first forecasting earnings for the REIT. Earnings were forecasted for the REIT for the years 2009-2015 on the basis of the cash flows of its only asset, the Sydney plant. Electricity prices, the prices of Renewable Energy Certificates, the total cost of generation (including operating and fuel costs), and electricity output were the key earnings drivers. A balance sheet, income statement and cash flow statement were all produced for the REIT (Appendices). The forecasted earnings show strong fundamentals with strong growth over the period. This is despite not taking into account the effects of the soon-to-be implemented Carbon Emission Trading Scheme which will inevitably reduce the cost of generation and increase the price of electricity and RECs (the price for electricity and RECs were grown at 3.25% and Cost of Generation at 2.25%), which means that the forecasts are rather conservative and it is very likely that earnings and profitability will be higher in reality.
Biogen Earning Forecast & Valuation
Since Biogen has a 40% stake in the REIT, and it is the only investment it has, the value of Biogen is inextricably linked to the earnings of the REIT. In valuing Biogen, distributions from the REIT and management fees were forecast, as well as Selling, General & Administrative Expenses. Moreover line by line consolidation accounting was utilised in preparing Biogen’s Financial Statements to better show the operating characteristics of Biogen.
Once Biogen’s earnings were forecasted for the years 2009-2015, a Terminal Value was calculated. It was found using the perpetual growth method, where the terminal growth rate used was 6.5%. We believed such a growth rate was justified in that subsequent to 2015, Biogen would IPO and continue to grow by using those funds to invest in new assets and expand its portfolio of renewable energy projects well into the future, which would lead to an increase in the growth rate of distributions and management fees received.
When all the free cash flows to firm were discounted back to 2008, an NPV of $23,736,641 was found.
Sensitivity Analysis
The terminal value makes the biggest contribution to firm value, and as such it is important to see how sensitive it is to changes in the key assumptions of WACC and terminal Growth Rate.
As can be seen, Biogen’s value is heavily dependant on the WACC and Terminal Growth Rate used.
The growth rate used in forecasting future prices for electricity & RECs and future costs of generation will also have an impact on Firm Value.
S
As can be seen, Biogen’s value is also heavily dependant on the Growth in prices for electricity and RECs and Growth in costs. So depending on the economics of electricity generation in the future, the value of Biogen could be very different to the value ascribed in this
3.5 Adjusted Present Value
Under the Adjusted Present Value Method, we accounted for the change in capital structure of Biogen. The optimal capital structure Biogen is targeting is 0.25 to be aligned with the industry’s average.
Unlevered Cost of Equity - RSU
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To calculate the unlevered cost of equity, the two methods, MM assumption of no taxes and the Hamada equation were implemented. To receive the most accurate unlevered cost of equity, the mean between the two approaches were obtained, 9.82%.
Free Cash Flow
- The firm’s free cash flow from the previous DCF analysis was used to maintain consistency with the overall valuation.
Interest Expense
- Interest expense was used to calculate Biogen’s tax shield.
Tax Shield
- Interest Expense x Tax Rate
The combined value of tax shield & the Free Cash Flow from period 0 to period 7 (2008- 2015) will provide Venture Partners with the firm value. It is important to note that this figure must be discounted at the cost of unlevered equity rate.
Hence, the Value of Operations for Biogen obtained through this method is $21560372.56. The net debt at 2008 is zero because Biogen has no debt for the first two years.
The share price can be safely concluded as $0.23.
3.6 Venture Capital Method
If one were to use the VC Method, the VC firm would end up owning 45.9% of Biogen for a $2million investment, giving an implied market value of $4,356,703.
4. The Deal
4.1 Pricing and justification
For the $ 2million investment, the venture capitalist will receive 10,622,401 new shares in the company at a price of $0.19 per share, giving it a 10.3% ownership stake in Biogen.
Using an average of the DCF, APV, Comparables and Venture Capital valuations, Biogen had an Implied Market Valuation of $19,661,112.
4.2 Types of securities
Funding will proceed through the issue of Convertible Preferred Stock, each stock carrying one vote. In the event of an IPO, a mandatory conversion clause will convert all preferred stock into common stock, allowing our investors to participate in the value we expect to achieve. The Preferred Stock will also include full ratchet anti-dilution protection, provided the holders participate pro rata to their common equivalent position in any future financing rounds.
Debt securities would be unsuitable at this early stage due to the extra bankruptcy risk for Biogen. Of Equity securities, the Convertible Preferred Stock is preferable to all other securities because of its convertibility to equity and protection for the investor through its liquidation preference, allowing the investor to benefit from unlimited upside potential and limiting downside risk. It also aligns the interests of the VC firm and Biogen, encouraging Biogen’s management to make value-maximising decisions. The anti-dilution provisions are included because a future funding round is fully expected to occur in the event that Biogen’s pre-feasibility studies and due diligence approves the shift into the Construction Financial Close stage.
4.3 Exit Strategies
At present, 3 potential exiting strategies exist, in order of preference:
- Initial Public Offering.
This is the preferred method of exit, and we believe this is fully achievable in around 2015, on a terminal value of $57.4 million. Our financial projections show that earnings will be positive and growing, and that cash generation will be significant, which we believe will result in strong market support for an IPO. This would maximize the gains for our investors. An IPO exit would also enable Biogen’s ambitious future expansion plans, where it would invest aggressively in new biomass power plants, increasing generation capacity. Moreover, careful monitoring of the economic environment will be employed to establish a suitable time for an IPO.
- Trade Sale
The trade sale would be a feasible method of exit in around 2015. The same cash generation and growing earnings that would give an IPO strong support, would also make the purchase of Biogen an attractive option for several potential strategic buyers. We have identified several potential buyers for Biogen:
- Leveraged Buyout
An unlikely method of exit, which is nevertheless possible. There certainly exists strong stable cash flows, and cash generation to handle a substantial debt load, meaning that there is potential for a LBO transaction. It would also provide attractive returns for investors as LBO transactions tend to have higher transaction multiples than trade sales.
5. Term Sheet
Summary of term sheet
See Appendix 1 for more detail
See Appendix 2 for equation and calculations.
