Corporate Finance Case Study

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Axel Springer M&A Case Study

Christian Kremer

Axel Springer has been approached by an investment bank regarding the potential acquisition of a minority stake of 30% in an e-commerce company named Pramana, headquartered in Rio de Janeiro, Brazil. For the avoidance of doubt: Pramana is purely fictional and does not exist in any form in real life.

Do you think this opportunity is a good fit for Axel Springer in any of its business pillars and what are the reasons for your conclusion?

Axel Springer’s three pillars are given as “AI-based journalism, expanding media marketing platforms, and developing new growth areas, that build on Axel Springer’s main competencies: content, subscription, advertising, mass markets, and technology.” One might consider Pramana to be a growth opportunity connected to advertising, mass markets and technology. Idealo is probably the best match in the current portfolio. The acquisition of parts of Pramana specifically conflicts more drastically with Axel Springer’s M&A principles. 30% of the company is not a majority and does not provide a path to control. Furthermore, Pramana is not profitable, which not only means it would be a cost center in at least the near future, it also calls into question product-market fit. Prior revenue and growth might be artifacts of giving away goods at subsidized prices. Overall, I do not believe this is a great opportunity for Axel Springer.

Even if the prior question was a “no”: please determine the purchase price for the offered equity stake in the company you would deem to be appropriate.

Please assess the provided business plan with regards to its soundness and reasonableness. Are the forecasted revenues and the related cost development reasonable? What about the profitability? What investments will be needed to scale the business and what does that mean from a liquidity perspective? Would you adjust any of the assumptions or is the business plan as it is a meaningful basis for a valuation as-is?

The revenue forecast shows explosive growth far above what is expected for the segment as a whole. This implies increasing the market share dramatically. Both prognoses for revenue growth and TAM-growth should be contextualized given the high inflation expectations in Brazil. Still, revenue growth prognoses are in the high double digits until 2033 where the forecast ends, which is ambitious, especially towards the end of that timeframe where the base has already expanded. Direct costs are expected to grow below top-line revenue rate, which might be possible through benefits of scale, but is nevertheless quite the optimistic assumption. I will not dispute the values on slide 19 directly, but show that even in this favourable forecast, the business case is quite limited once discounted properly. I will on the other hand not assume gains from synergy and (still optimistically) assume a 2% real growth rate on the terminal value. Pramana will need liquidity during the next two years of scaling according to the given numbers with a cash burn of roughly 17 million BRL.

Please calculate the company’s equity value from your point of view, taking into account any adjustments you may have applied under #1. Please use the discounted cash flow method based on the appropriate discount rate (i.e. the weighted average cost of capital).

I valued Pramana using a BRL-denominated DCF, discounting unlevered free cash flows from 2026 to 2033 at a BRL WACC of approximately 17.6%. The WACC was built from a peer-group unlevered beta re-levered to Pramana’s capital structure (β ≈ 1.22), an EUR-anchored CAPM with the 3.06% Brazilian country risk premium, and Fisher-translated to BRL using my forecast inflation path. The terminal value applies Gordon growth with a perpetual nominal BRL rate of about 6.1% (2% real plus a 4% long-run BRL inflation anchor), and the resulting equity value is converted to EUR at the spot rate of 6.22. The equity value I calculated is 19.2 million EUR, implying a fair value of circa 5.8 million EUR for the 30% equity stake. You can find my detailed calculations in the excel file attached above. This is mostly due to a high WACC and initial losses. More than 80% of the equity value stems from its terminal value which underlines the optimistic character of my 2% real growth assumption.

Which purchase price offer for the 30% stake would you submit to the seller? In our case, the seller has asked for an offer in EUR. Note that the company’s financials are in local currency and hence you somehow need to factor the different currency schemes into your work.

Considering the result from the prior exercise the optimistic case would yield a value of circa 5.8 million EUR. Considering fees for the investment bank, future expenditure for future contracts, the expected workload of Axel Springer management to oversee the investment, including meetings, likely board duty, notary costs, additional strain on accounting, controlling, etc. are all non-trivial expenses when compared to a >6 million euro deal value, and the optimism implicit in all assumptions, as well as considering a minority discount, I would offer 3 million EUR for a 30% stake.

When presented with multiple offers, which factors have to be taken into consideration by the seller when choosing a potential buyer? Is price the only variable or are there other dimensions that can be important (and that might even justify selling to a buyer who has not offered the highest valuation)?

In most countries the management of the company is required to act in the best interest of the shareholder (fiduciary duty). In most cases this means assessing the purchase price, but other factors like probability the deal will be consummated (or maybe blocked by FTC or similar regulator), the type of payment (shares versus cash), contractual covenants (break-up fee) etc. might also play a role.