The Business of Value Investing.pdf

More Than One Way to Find Value 209

output to 15 million tons. The deal was closed a few months later,

and in December, Ternium struck a deal with Australia ’ s Bluescope

Steel to sell off IMSA ’ s U.S. assets for $ 730 million, allowing

Ternium to focus on the steel industry in Latin America.

Valuation

According to the International Iron & Steel Institute, steel demand

in Central and South America is expected to grow at a 4 percent

clip for the next several years. In Mexico, the steel market was grow-

ing by over 6 percent. Only Asia is consuming steel at a higher rate

than Latin America. The threat of cheap Chinese steel imports was

minimal at best. The costs of shipping a ton of steel to Central and

South America would make the steel more expensive. And because

Ternium ran a very tight ship (no pun intended) with regard to

operating costs, Chinese steel imports did not represent a meaning-

ful threat.

At the time, Ternium had an enterprise value of $ 9.5 billion.

Enterprise value is the sum of the company ’ s market value on the

stock exchange and the net debt (total debt minus cash). When

looking at the numbers for the fi rst nine months of 2007, Ternium

generated nearly $ 700 million in free cash fl ow. This fi gure

included a $ 300 million one - time income tax payment made as a

result of the IMSA acquisition. Because Ternium will be able to use

this payment as tax credits in the future, true free cash fl ow from

operations was really close to $ 1 billion. As a result of the IMSA

acquisition, Ternium assumed some $ 3.6 billion in debt, implying a

$ 10 billion enterprise value. The proceeds of the sale of IMSA ’ s U.S.

assets were being used to pay off some of this debt. Actual free cash

fl ow, adjusting for the one - time tax charge, was over $ 1 billion for

the fi rst nine months of 2007. EBITDA over the same time period

was $ 1.7 billion.

If $ 1 billion in free cash fl ow and $ 1.7 billion in EBITDA over

the fi rst nine months of 2007 were normalized for the year, the

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