It is November 2019 and Won Feng is worried about the task he was carrying out. He worked for an

outstanding Private Bank in China as advisor of CCG, one of the biggest Chinese construction companies. His

Client had been looking for a western medium size construction company for executing an acquisition that

allows CCG to grow in European and Latin-American markets, and, as second stage, enter in Anglo-Saxon

markets.

CCG tried to acquire a listed European or Canadian company in the past, but they couldnt get clearance from

competency authorities. Hence, CCG thought that the bought of a medium size, non-listed company shouldnt

be stopped by competency matters.

After a thorough search, they had found SCC, a Spanish Construction Company with a solid presence in

Mxico, Spain and Poland and starting up in other markets such us Finland, Hungary, Check Republic, and

Paraguay.

2019 - Revenues - EBITDA

Spain - 32.0% - 35.0%

Mexico - 53.0% - 61.0%

Poland - 10.0% - 2.0%

Others - 5.0% - 2.0%

SCC debt was mainly formed by a long-term bond. This bond was issued in Europe, and therefore, its interests

were paid and deductible in Europe. On the other hand, the most of SCCs earnings came from Mexico, and

tax shield from interests couldnt be assigned to Mexican earnings.

CCG had tried to win public contracts in the countries where SCC was already working and they didnt success,

probably because of the cultural differences, so they thought SCC could be a great opportunity.

The stand-alone scenario

Won had been working with the advisors of SCC, another important Private Bank, checking the financial

statements of SCC and he thought that a reasonable forecast of CF for the next years could be those shown in

Exhibit 1.

His assumptions for SCCs stand-alone scenario had been:

- 2019 seemed to be an especially bad year and the EBITDA margin had been very low (4% vs more

than 6% in past years). Nevertheless, he thought that the company would still have a low margin

during 2020, due to the slowdown of Mexican and Spanish economy (both with political periods of

uncertainty), with few public tenders, and high level of competency.

- Construction companies usually creates working capital when they increase their revenues. It is true

that it depends of the kind of contracts, i.e. contracts in Mexico have an advance payment of around

15-20%; on the other hand, other kind of contracts reduce working capital. Anyway, Won felt that a

value of 10% of revenues increase for calculating working capital changes wasnt that aggressive.

Besides, he decided to start with more conservative percentages for the first few years.

- Main part of financial result were due interests of a long-term bond. Won assumed the bond would

be reissued, and the financial costs would not vary.

Acquisition

Won worked hardly with CCG to build a forecast of SCC as a subsidiary of CCG. As CCG wanted to close the

deal before the end if the year, they decide to delay the study of a better capital structure for SCC.

Furthermore, CCG wanted SCC to continue working as an independent company, so they only projected an

strong increase in revenues due to the jointly participation of SCC and CCG in public contracts. Those joint ventures or consortia would allow SCC to have a stake in bigger contracts (and increase its revenues), and CCG

to use SCC local management teams as salesforce. They also expected to make SCC to reach to a better margin.

There were few competitors for big construction projects, and therefore, they concur in the fact of projecting

an expected margin similar to the historic margin of SCC.

The acquisition scenario is shown in Exhibit 2.

Peers

Spanish listed construction companies were important players in worlds stage. They were present in many

markets including the ones where SCC were present, but they had also a strong presence in other markets

such us U.S., UK or other EU countries. Additionally, the Spanish companies were diversified in construction,

services, concessions and RE activities.

Wong also made an analysis of Mexican Peers, those peers were almost totally local, and therefore, their

entire revenues came of activities in Mxico. Listed Mexican companies got a high percentage of their

revenues from infrastructure concessions and construction.

Additionally, Wong gathered information about Chinese construction groups. All the information about

construction players is shown in Exhibit 3. All the data are referenced to the local market of each company.

Market

Won gathered the main data of Spanish, Polish, Mexican and Chinese markets and economies, including credit

rates, CDS, MRP, inflation rates and government bonds yields (Exhibit 4).

Country - Moodys - S&P - Fitch - 10-Yr-Bond Yield - Inflat. rate FC2019 - MRP - CDS 5yr1

Spain - Baa1 - A A- 0.38% 1.10% 8.0% 41.70

Poland - A2 A- A- 2.07% 1.80% 9.2% 75.52

Mexico A3 BBB+ BBB 6.92% 3.00% 9.7% 54.10

China A1 A+ A+ 3.19% 3.20% 8.8% 33.07

Additionally, all the analysts' projections for inflation rates concurred in a stable 1% inflation rate for Spain

and 3% for Mxico within the next 5 years. The spot exchange rate at the end of November 2019 was 1 =

21.12 MXN.

Decisions

Wong knew he had all the data necessary to find out the valuation of SCC. However, he saw that, depending

on the way he performed the valuation, the result could vary very much.

He wonder if it would be better to spilt CFs of SCC in two, one part for Mexico, and other for Spain, Poland

and the rest of the countries and make a separate valuation for each part, adding the net present value of

both parts. If so, Wong should calculate one discount rate for Mexican CF and other different discount rate

for the rest of the countries.

On the other hand, Wong wondered if discounting consolidated CFs using a discount rate based on Spanish

peers' data would be accurate enough.

In any case, Wong would had to perform an interactive process, assuming an initial E/V ratio, and, after making

the initial valuation, make the adjustments.

Objectives and questions

Main objective/question #1: Stand-alone valuation of SCCs Enterprise Value in .

Main objective/question #2: Enterprise value of SCC in if it were acquired by CCG.

Main objective/question #3: Would you advise CCG to submit an initial offer close to stand-alone scenario

valuation or to the one with synergies? Why?

Main objective/question #4: What issues would you ask CCG advisors to check during the DD taking in account

the information of the case and the activity that SCC performs?

Main objective/question #5: Being CCG a Chinese company, Should CCGs advisors make any additional

analysis once the get the values of questions #1 and #2?

Intermediate questions that should be answered to solve the case

1. Do you think is it necessary to split the CF projections between Mexico and the other Countries?

Why?

2. If you think so, please develop the CF for both parts of the company.

3. What discount rate would you use for discount the cash flows?

a. If you think that CF shouldnt be split:

i. What initial assumption of E/V would you use and why?

ii. Calculate b and ERe, explaining what values for RF and MRP you used

iii. Calculate TV, making a reasonable assumption of the perpetual growth rate

b. If you think that It is needed to make a separate valuation of Mexican CF and CF of the rest

of the markets, please:

i. What initial assumption of E/V would you use and why?

ii. For Mexico, calculate b and ERe, explaining which values for RF and MRP you used

iii. For the rest of the markets, calculate b and ERe, explaining what values for RF and

MRP you used

iv. Calculate TV for both parts of SCC, making a reasonable assumption of the

perpetual growth rates.

4. What do you think about the results of stand-alone scenario in comparison with EV/EBITDA multiple

of peers and market?