Valuing a Specialty Steel Acquisition in a Cyclical Market

Tushar worked on a valuation engagement at EY for a significant M&A transaction in India's metals and mining sector. A listed metal and mining company was acquiring a private specialty steel player, and the engagement involved valuing the target company to support the transaction.

The standard approach for comparable company multiples in this context presented a problem. Steel is a cyclical industry, and applying a spot EBITDA multiple to a cyclical business would produce a valuation that swung dramatically depending on where the industry was in its cycle. Tushar and the director he worked with developed a different approach.

Rather than using current EBITDA multiples, they calculated a long-term EBITDA per ton for comparable steel companies, normalizing for the cycle. They then estimated what EBITDA the target company could generate by applying that long-term EBITDA per ton figure to the target's production capacity. A long-term EV/EBITDA multiple was applied to arrive at an enterprise value. This gave a cycle-adjusted view of the company's worth rather than a point-in-time snapshot.

The DCF, built on the client's own projections, was used to validate the comparable company analysis. The two approaches converged on a consistent range, which gave the board confidence in the number.

Tushar worked directly with the director on the engagement and was present in the board meeting where the transaction was being finalized, supporting the presentation of the valuation findings. The transaction was a large-scale deal in the metals and mining space.