Tuesday, 11 December 2012

TAP: post-scriptum

I am glad and grateful that Exame Expresso and Jornal de Negócios yesterday followed up on the issue of TAP’s valuation in Gérman Efromvich's offer. They did the public interest a huge service. Mr. Efromvich’s bid was greedy, but he is pragmatic. He knows that if there is a second competitive sale process he is very unlikely to win the prize (TAP) even if he bids €2bn-€3bn and he would have to wait perhaps a year.  

He now faces a dilemma:
·         He may well try to “get the deal clinched” and “everybody happy” by offering anywhere from €500mn to €1bn (rather than €20mn). But he knows this will leave the sell side feeling like fools;
·         He may lobby in the expectation that the government powers ahead with the current offer – a real possibility with this government - , but this likely is, from his perspective, too risky a gamble;
·         He could, of course, walk away,   … but ...
·         He could also bid €2bn-€3bn and argue that the government would not get more if it decides to reopen the sale process.

So, how will this saga play out?

For the record, in my view, given the role of TAP to Portugal’s export sector, the government shouldn’t sell TAP at this point. 


  1. Dear Ricardo,

    Please stop going over this...

    Unfortunately, I need to be pragmatic here because there is no other way to put it: your math is PLAIN WRONG from any financial modeling point of view, and really there is no space for discussion on that.

    We all make mistakes (I've probably made a few hundred just this month) but insisting on this with a new post glorifying the press response to your previous entry, and that after so many people called your attention in the comments section to your error, namely in failing to distinguish between EV (before debt) and Equity (after debt), is just shameful.

    I'm sure any of your colleagues at the University with a Finance valuation background (and probably many of your fellow commentators in this blog, one of which was among my favourite professors) can clarify this in person much better than I can do here.

    I hope that after so much insistence on the topic from your part, you now have the courage to come out and recognize the mistake, and hopefully Negocios and Exame Expresso will follow with an apology too.


  2. I completely agree with Frederico. Those who quoted you assumed that this was a complete academic exercise (which it was not, as you stated in your comments to the post). Just for this reason (if for nothing else) you should at least contact those newspapers and ask them not to treat this exercise as something it is not.

    Furthermore, you should publish on the blog some of the answers to your original blog post. Even though the majority is incomplete, one could get a pretty accurate view of what's behind the 20M€ offer from those answers.

  3. Ricardo's analysis is clearly wrong by confusing EV with equity as you have explained. But your analysis is incomplete. I am not a valuation expert but I think the right tool to analyze an insolvent firm like TAP is option theory. I will probably oversimplify this but let me give it a try.

    A firm's equity is equivalent to a call option on the firm's assets where the strike price is the face value of the debt. So we can use the Black Scholes formula to evaluate the deal. Let's take the best case scenario Frederico calculated in the other thread and say that TAP's assets are worth 500 million. The debt's face value is 1.2 billion, with an average maturity of 3 years according to TAP's annual report, page 107. Let's also assume a risk free rate of 5%.
    The key parameter to evaluate the 20 million offer is the volatility of the value of the assets. I have no idea what an appropriate value is. What we can say is that the implied volatility to justify a price of 20 million is 33.4%. This seems high to me. It means that the standard deviation of the value of TAP's assets is 1/3 of the assets' value. Since the valuation increases with volatility, this suggests the offer could actually be quite good.

    I would be interested in hearing from someone with a more solid background in valuation and better information on what the correct asset volatility might be.