Professional Documents
Culture Documents
FUQ-04-2010
Rev. April 30, 2010
This note was prepared by David Keller, Belisario Galarcep, Massimo Paone, and Javier Vilardell under the supervision of
Professor Campbell R. Harvey for the sole purpose of aiding classroom instructors in the use of Autopista Central, S.A., The
Valuation of a Toll Road Project in Chile, FUQ-04-2010. It provides analysis and questions that are intended to present
alternative approaches to deepening students comprehension of business issues and energizing classroom discussion.
Copyright 2010 - all rights reserved. The Fuqua School of Business, Duke University, 1 Towerview Drive,
Durham, NC 27705, USA. http://www.fuqua.duke.edu .
TEACHING NOTE - Autopista Central, SA: The Valuation of a Toll Road Project in Chile
FUQ-04-2010
Pedagogical Objectives
This case is part of a module on calculating the cost of capital in an emerging market in the
elective curriculum course entitled Advanced Topics in Corporate Finance. It was designed for
MBA students and executives with either a financial or strategic interest in emerging-market
investments. For this reason, it is appropriate for business, public policy, government, strategy, and
international finance courses. The case has three pedagogical objectives:
1. It discusses the valuation of a long-term project in a developing country environment and
highlights many of the common emerging market-risk factors that a manager must consider
when calculating a projects cost of capital in such a setting.
2. It presents the Damodaran Modified World CAPM and Erb-Harvey-Viskanta Cost of
Capital (EHV) models as an alternative to the traditional CAPM given that this method relies
on assumptions that are largely absent in emerging markets and therefore have limited
practical value in an emerging market context.
3. It considers some of the qualitative factors that a selling party should consider when
considering the sale of an asset such as strategic goals and market conditions.
Substantive Analysis
Class discussion falls into three main topics: (1) an initial discussion of the history of the
project including a description of the current owners and proposed owners, (2) how the projects
risks and other inputs should be translated into the Damodaran Modified World CAPM and the
EHV cost of capital calculator (Note: The accompanying Microsoft Excel spreadsheet file
<<Autopista Central_Exhibits.xls>> is an integral part of this case and necessary to complete this
cases cost of capital calculation) to produce a range of appropriate discount rates for the project and
(3) the derivation of an appropriate range of values for ACS stake in the project. The class ends
with a final discussion about the price that ACS should ask for its stake in Autopista Central.
TEACHING NOTE - Autopista Central, SA: The Valuation of a Toll Road Project in Chile
FUQ-04-2010
the total Chilean population lives), and the concept of the project (first free flowing toll system in
Chile which connects to other major Chilean highways).
The instructor should discuss with the class the ownership structure of Autopista Central by
referring to Exhibits 4a and 4b. Upon doing so we confirm that the company is effectively owned
48% by ACS and 48% by Skanska with the remaining 4% of shares being held by two Chilean
construction companies.
Who are the common equity owners of Autopista Central and what are some of their interests
and motivations? Both Skanska and ACS are very similar in the sense that both are large
multinationals with a broad experience in a number of emerging markets like Chile. Both companies
have a little over 50% of their voting shares floating in public markets although ACS has only four
shareholders of non-public shares that control 48.5% of the company. In addition, most of the
non-public shares of Skanska are held by institutional investors. Both companies are better known
for their construction capabilities than for their post-construction management of projects.
The class should be able to describe the details of the capital structure of the project. For
example, total invested capital is $815 million which is composed of $87 million in common equity
+ $603 million in debt + $125 million in subordinated debt. What are the characteristics of the
bonds that were issued to finance the project? If the students translate all of Exhibit 11 to USD,
they will get the following:
Date
Description
18-Dec-03 Amount issued in Chile (USD)
22-Dec-03 Amount issued in USA (USD)
Total Amount Issued (USD)
15-Dec-03
$353,000,000
$250,000,000
$603,000,000
This table will be useful later on when determining the projects weight of debt in the capital
structure which will be needed to value the equity of Autopista Central.
Finally, the instructor should briefly mention something of the interests of the proposed
buyers of ACS equity stake. To begin, why does Abertis want a piece of Autopista Central? Besides
being a company whose core operating strength is the operation of public infrastructure projects,
the firm is also looking to add complementary assets to its Chile infrastructure portfolio which
includes two large toll roads, parking lots, a logistics center, and the Santiago airport. Why is
Santander so keen on investing in the toll road project? At this point in 2007 Santander Private
Equity is looking to build up a pipeline of investments that it can later pass on to the proposed $2.1
billion Santander Infraestructuras II (S2) fund. To do so the bank is eager to put up its own capital
immediately. Also, although not implicitly stated, the fact that all three firms ACS, Abertis, and
Santander are Spanish makes doing business culturally, linguistically, and perhaps fiscally favorable.
TEACHING NOTE - Autopista Central, SA: The Valuation of a Toll Road Project in Chile
FUQ-04-2010
2005
2006
2007
LTComposite
Treasury
(>10 yrs)
20-yrCMT
4.57%
4.97%
4.87%
4.64%
5.00%
4.91%
TEACHING NOTE - Autopista Central, SA: The Valuation of a Toll Road Project in Chile
FUQ-04-2010
U.S.
92.4
92.5
93.5
94.5
94.0
94.1
Chile
70.0
71.6
73.6
73.2
76.4
77.6
d) Beta ( )
The beta of the project measures the risk of the project relative to the market risk. In
the case of Autopista Central, Exhibit 15 provides a list of the betas of comparable firms. The
median beta from this list is 0.85 which we recommend adjusting according to the Morgan Stanley
beta adjustment method which incorporates mean reversion to the beta of the market (i.e., 1).
The Morgan Stanley adjusting formula is the following:
= [Estimate x (2/3)] + [ 1 x (1/3)]
Where:
:
Beta of project
Estimate: Estimated beta of project from comparables or other method (e.g., OLS regression)
Upon doing so, we arrive at a project beta of 0.90. Nevertheless, based on the analysis
of the factors that affect the project, we believe that the beta should be even closer to that of the
market (i.e., closer to one). As a result, we used a beta range between 0.90 and 1.10 in both the
Damodaran Modified World CAPM and the EHV cost of capital calculator which, together with
the other inputs, yields different costs of equity.
The factors that we analyzed for the beta were the following.
i.
Business: in terms of business risk, it has a medium level because of the following
factors.
Stage Risk: The toll road is in its post-completion stage, the toll road has been
completely operational since 2006.
Revenue Risk: The implementation and use of an electronic payment system has
been done successfully. Thus, Revenue Risk is expected to be low.
Traffic Risk:
5
TEACHING NOTE - Autopista Central, SA: The Valuation of a Toll Road Project in Chile
FUQ-04-2010
Operating Leverage: The project has high fixed costs compared to variable costs and
thus represents a higher operational risk. The major costs are depreciation and
administrative expenses which is normal in the public infrastructure sector.
iii.
Financial Leverage: The project has a highly leveraged structure which increases the
risk. The book value of interest bearing liabilities divided by the Stockholders Equity
between 2006 and 2007 has been higher than 4 (4.9 and 4.2 respectively).
2. Cost of Debt
The cost of the firms debt was assumed to be reasonably captured by the stated coupon rates of
Autopista Centrals outstanding debt. The companys debt as of November 2007 was the
following:
Bonds
US $
UF
Related Companies
Total
127,732,638
255,790,065
63,053,323
446,576,026
28.6%
57.3%
14.1%
100.0%
The coupon rates of the above referenced bonds are the following:
The USD bonds have a coupon rate of 6.223% which was assumed to be the cost of
debt in USD. To transform the USD interest rate to Chilean Pesos we used the PPP
rule which requires adjusting the rate according to difference in the inflation of the
United States1 and the inflation of Chile2.
TEACHING NOTE - Autopista Central, SA: The Valuation of a Toll Road Project in Chile
FUQ-04-2010
The simplified Power Purchase Parity (PPP) formula assumes that difference in interest
rates between countries can be explained by differences in each countrys respective
inflation. The PPP formula that was used is the following:
(1+iUS) / (1+InflationUS) = (1+iChile) / (1+InflationChile)
Where:
iUS:
InflationUS:
iChile:
InflationUS:
Upon applying the PPP formula, we calculated the adjusted interest rate in Chilean Pesos
to be 6.540%.
Bonds in Unidades de Fomento have an interest rate of 5.300% which was assumed to be
the cost of the firms debt in said currency.
The interest expense of the obligations with related companies is at the cost of equity, which is
what we estimated previously.
3. Calculating the Cost of Equity Capital with the Damodaran Modified World CAPM
The calculation of the Damodaran Modified World CAPM (MW-CAPM) is fairly
straightforward given that 100% of the revenues of Autopista Central are derived in Chile. That is,
the calculation of the Lambda weight that the student is to weight Chiles Country Risk Premium
(CRP) by is:
Calculation of Lambda
% of Revenues Derived Locally
100%
Lambda = ------------------------------------- = --------------=
Ave. % of Revenues Derived
100%
Locally for Similar Project
1.00
By using the CRP of Chile that was given in the case (2.10%), the resulting costs of equity
capital with this Lambda weighting for the three different project Betas calculated above is:
100% Weighting of Country Equity Risk Premium (Lambda = 1.00)
Project Beta
0.90
Rf
4.91%
Equity Risk Premium
4.58%
Lambda
1.00
Country Equity Risk Premium
2.10%
Modified World CAPM Cost of Equity Capital (USD)
11.13%
1.00
4.91%
4.58%
1.00
2.10%
11.59%
1.10
4.91%
4.58%
1.00
2.10%
12.05%
TEACHING NOTE - Autopista Central, SA: The Valuation of a Toll Road Project in Chile
FUQ-04-2010
The resulting costs of equity capital in USD are then translated into costs of equity capital in
CLP using the PPP formula described above to obtain the following rates:
Cost of Equity (in Chilean pesos)
Project Beta
11.70%
0.90
12.18%
1.00
12.66%
1.10
TEACHING NOTE - Autopista Central, SA: The Valuation of a Toll Road Project in Chile
FUQ-04-2010
Once the class is in general agreement about the initial inputs, the instructor should move
onto to the discussion of the project risk mitigating factors of the EHV calculator. In this part of the
spreadsheet the student must assign a score to each of 11 factors that can increase or reduce the
country risk premium that was calculated in the first section of the calculator. Here the conversation
should be geared toward incorporating the information given in the section of the case entitled
Qualitative and Quantitative Inputs for the Erb-Harvey-Viskanta Cost of Capital Model. The instructor should
walk through all eleven factors with the students and try get a consensus for the values to be
assigned. Our inputs and corresponding values were the following:
PROJECT RISK MITIGATION
(-10 to 10; where 10=risk completely eliminated, 0=average for country)
Impact on
Country
Weights
Score
Premium
Sovereign
0.40
0.10
0.15
0.05
0.05
0.05
0.05
5.00
10.00
8.00
9.00
-10.00
-2.50
-8.00
-2.06
-1.03
-1.24
-0.46
0.51
0.13
0.41
Operating
0.05
0.03
8.00
10.00
-0.41
-0.26
Resource risk
Technology risk
Financial
0.05
0.03
1.00
9.00
0.00
-0.46
0.00
Probability of Default
Political Risk Insurance
Sum of weights (make sure = 1.00)
Remind the class of the discussion of the beta that was had earlier and show them in the
spreadsheet how a change in this input can change the output of the model.
With the risk inputs above, the EHV cost of capital calculator produces rates in USD for the
three different project betas mentioned above. Again, these rates are then translated into costs of
equity capital in CLP using the PPP formula described above to obtain the following rates:
Cost of Equity (in Chilean pesos)
Beta
Cost of Equity (in US $)
15.20%
0.90
14.463%
15.68%
1.00
14.921%
16.16%
1.10
15.379%
TEACHING NOTE - Autopista Central, SA: The Valuation of a Toll Road Project in Chile
FUQ-04-2010
c) Invested Capital
Debt (interest bearing liabilities)
Equity
Total Invested Capital
6.74%
11.70%
20.8%
5.4%
79.2%
6.89%
12.18%
20.8%
5.5%
79.2%
7.03%
12.66%
20.8%
5.6%
79.2%
11.70%
0.90
11.132%
12.18%
1.00
11.590%
12.66%
1.10
12.048%
5.44%
17.0%
6.558%
5.50%
17.0%
6.626%
5.56%
17.0%
6.694%
6.540%
5.300%
11.699%
6.540%
5.300%
12.180%
6.540%
5.300%
12.662%
28.6%
57.3%
14.1%
100.0%
28.6%
57.3%
14.1%
100.0%
28.6%
57.3%
14.1%
100.0%
446,576,026
116,978,326
563,554,352
446,576,026
116,978,326
563,554,352
446,576,026
116,978,326
563,554,352
7.400%
2.190%
127,732,638
255,790,065
63,053,323
446,576,026
10
TEACHING NOTE - Autopista Central, SA: The Valuation of a Toll Road Project in Chile
FUQ-04-2010
c) Invested Capital
Debt (interest bearing liabilities)
Equity
Total Invested Capital
7.79%
15.20%
20.8%
5.9%
79.2%
7.94%
15.68%
20.8%
5.9%
79.2%
8.08%
16.16%
20.8%
6.0%
79.2%
15.20%
0.90
14.463%
15.68%
1.00
14.921%
16.16%
1.10
15.379%
5.85%
17.0%
7.053%
5.91%
17.0%
7.121%
5.97%
17.0%
7.189%
6.540%
5.300%
15.200%
6.540%
5.300%
15.682%
6.540%
5.300%
16.163%
28.6%
57.3%
14.1%
100.0%
28.6%
57.3%
14.1%
100.0%
28.6%
57.3%
14.1%
100.0%
446,576,026
116,978,326
563,554,352
446,576,026
116,978,326
563,554,352
446,576,026
116,978,326
563,554,352
7.400%
2.190%
127,732,638
255,790,065
63,053,323
446,576,026
11
TEACHING NOTE - Autopista Central, SA: The Valuation of a Toll Road Project in Chile
FUQ-04-2010
Valuation Results
By using the financial statements included in Exhibit 16 and their accompanying
assumptions in Exhibit 17, the students should be able to roughly estimate the unlevered free cash
flows of the project. These cash flows, which do not have a terminal value (when the project ends
any remaining owners equity is dividend back to the owner), are the cash flows that are to be
discounted by the WACC derived above. The following graph shows how the Sales, EBITDA, and
Unlevered Free Cash Flows of Autopista Central change over the life of the project.
Autopista Central
Key Financial Metrics
$450,000,000
$400,000,000
Thousands of CLP
$350,000,000
$300,000,000
$250,000,000
$200,000,000
$150,000,000
$100,000,000
$50,000,000
$0
2005
2007
2009
2011
Sales
2013
2015
EBITDA
2017
2019
2021
2023
2025
2027
2029
Upon discounting the projects unlevered free cash flows in a manner that accounts for the
changing capital structure, we obtained a range of values for the 48% common equity stake of ACS
in Autopista Central that went from $524 to 556 million under the Damodaran Modified World
CAPM approach and $647 to 684 million using the EHV approach. The following graph shows
how the equity value of ACS interest in Autopista Central changes with changes in the project beta
used in both the Damodaran Modified World CAPM and EHV methods.
ACS' Equity Value's Sensitivity to Changes in Assumed Project Beta
ACS Equity Value (USD Mln)
$800,000
$684,702
$700,000
$600,000
$555,763
$665,693
$539,627
$647,111
$523,845
$500,000
$400,000
$300,000
$200,000
$100,000
$0
0.90
1.00
1.10
Project Beta
EHV
12
TEACHING NOTE - Autopista Central, SA: The Valuation of a Toll Road Project in Chile
FUQ-04-2010
13
TEACHING NOTE - Autopista Central, SA: The Valuation of a Toll Road Project in Chile
FUQ-04-2010
What Happened?
In December 2007 ACS agreed to sell both its 48% stake in Autopista Central as well as its
50% ownership in another Chilean toll road to a consortium owned 57.7% by Abertis and 42.3% by
Santander (with the goal of Santander being to pass its investment over to the S2 infrastructure fund
once said fund had been closed). In addition, the consortium purchased another 2% of Autopista
Centrals equity from one of the minority Chilean shareholders. The remaining Chilean minority
shareholder sold his 2% stake to Skanska at the same time. As part of the deal Abertis took over
operational control of the day to day activities of Autopista Central.
In total, Abertis and Santander paid $1.08 billion ( 728 million) for the 50% stake in
Autopista Central (48% stake from ACS and 2% stake from minority shareholder) and the 50% stake
that ACS controlled in the additional toll road. The firms, however, did not disclose the exact
amount of the total purchase price that was allocated to each equity purchase. Nevertheless, based
on an Abertis shareholders presentation that was issued to announce the deal in December 2007, we
estimate that the ACS stake in Autopista Central was valued at just over $620 million. If accurate, this
sale price is the falls roughly between the ranges offered by the Damodaran Modified World CAPM
and EHV valuation approaches.
14