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Adjustments to Multiples Valuation: the Case of Russia

Student: Ekaterina Kireeva

Supervisor: Elena Rogova

Faculty: St.Petersburg School of Economics and Management

Educational Programme: Finance (Master)

Year of Graduation: 2020

Multiples valuation of Russian companies was always a tricky question for both business and theory. With information asymmetry, developing financial market, non-transparent corporate and ownership structure, and lack of direct local peers, multiples valuation on the basis of local comparables is complicated to perform. Instead of this, foreign multiples from developed countries are used with specific adjustments for selected developing market: direct use without corrections will produce bias in multiples and overestimate the enterprise value of targets. Common sense states that multiples in emerging markets are lower than in developed countries due to extra risks – political, economic, and corporate risks – and require a corresponding discount. The adjustment factor equals to the ratio between parameters of developed and emerging markets and is to be defined on the basis of theoretical and practical evidence. In this master thesis, I compare and test the methods of multiples adjustments by the example of the USA and Russia. I compile and analyze Russian and American data from 2014 to 2018. Through all mentioned methods, I modeled equity and enterprise values of Russian companies using American multiples. The average adjustment coefficient fluctuates from 37.7% to 46.2% depending on multiple. Modeled and actual values of Russian firms were compared and, based on the lower difference between these two numbers, the best methods for multiples adjustments were identified. RMSE and standard deviation are the lowest for EV/SALES, EV/EBITDA and P/E multiples in regression approach. For P/B multiple, RMSE is the lowest according to market multiples method, while these estimates are approximate to regression approach ones. Based on calculated estimates, the regression approach could be defined as the most appropriate for adjustments of American multiples to Russian financials for systematic risks. The method of market multiples showed good significance, which is, however, lower than accuracy of regression approach. Appraiser should better use regression approach firstly, and, then, further calculation of valuation range should include estimate of unsystematic risks via discount rates ratio method, performed on a sample of direct peers. Author wants to conclude, that final valuation range should be calculated on the basis of regression and discount rates ratio methods, which allow to capture both systematic and unsystematic risks.

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