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BscB 6. SemesterDepartment of EconomicsThe First of May, 2013Authors:Peter FeddersExamination Number: 301668Rasmus VilladsenExamination Number: 301667Advisor: Baran SiyahhanCharacters: 135853Bachelor ThesisLEGO GROUP------------------------------------------A STRATEGIC AND VALUATIONANALYSISAarhus UniversityBusiness and Social SciencesSpring 2013
1. Abstract:The purpose of this thesis is to quantify and estimate the value of Danish toy manufacturerLEGO. Thus the external and internal environment in conjunction with recent years financialstatements, will assess the hypothetical value associated with the projections and assetsrelated to said company.LEGO operates in a market, which has seen interesting developments within the past decade.During this period LEGO managed to recover from the severe difficulties they faced at thebeginning of the second millennium. With impressive recent growth rates, exceeding 25 % in2012, the thesis set about valuation whether this could be sustained.To arrive at a concrete firm value, future revenue steams was estimated and evaluated basedon strategic performance along with historical financial ratios. Within the strategic analysisseveral leavers was identified, providing LEGO with competitive advantages. Among othersthese advantages included the successful use of licenses from well-known franchises andskillful handling of their operating processes. In addition areas of opportunity such as blueocean markets and widening of the product portfolio was argued to help sustain growth,whilst threats from entrants to the market and price competition constituted futureuncertainties.Given the inflow of additional competitors on the construction toy market, and as the currentmarket structure changes from a dominant firm and oligopolistic competition structure, to amore balanced competitive market, lead us to conclusion that future revenue growthseventually in the year 2019 will growth in line with the overall market.Through enterprise discounted cash flow, together with estimations regarding weightedaverage cost of capital, future free cash flows has been discounted back to the present value.This discount rate is based on a fixed capital structure, using 10-year government bonds alongwith a synthetic company specific beta and market return estimations. Through theseestimations a total weighted average cost of capital (WACC) was estimated at 6.61 %. Giventhis discount rate, a total firm value of roughly 140 billion DKK was estimated, based on aseven-year explicit period.Page 1 of 84
Contents1.ABSTRACT:. 12. INTRODUCTION . 42.1 LIMITATIONS: . 52.2 LEGO COMPANY PROFILE: . 63. THEORY . 73.1 PHILOSOPHICAL FOUNDATIONS . 73.2 STRATEGIC PART. 83.2.1 Porter’s Value chain . 83.2.2 Porter’s five forces . 93.2.3 PEST . 103.2.3 SWOT . 103.3 VALUATION PART: . 114. STRATEGIC ANALYSIS . 134.1 VALUE CHAIN ANALYSIS. 134.1.1 Primary activities . 144.1.1.2 Inbound logistic . 144.1.1.3 Operations . 144.1.1.4 Outbound logistic . 154.1.1.5 Marketing and Sale . 164.1.1.6 Service . 184.1.2 Support Activities: . 194.1.2.1 Firm infrastructure . 194.1.2.2 Human resources management . 194.1.2.3 Technology development . 204.1.2.4 Procurement . 214.2 PORTERS FIVE FORCES . 224.2.1 Bargaining power of suppliers: . 234.2.2 Buying power of consumers: . 244.2.3 Threat of new competition . 254.2.4 Threat for substitutions . 264.2.5 Rivalry . 274.3 PEST FRAMEWORK . 294.3.1 Political . 294.3.2 Economic . 314.3.3 Societal factors . 344.3.4 Technological . 364.4 SWOT ANALYSIS . 375. VALUATION ANALYSIS . 395.1 REFORMULATION ANNUAL REPORTS. 395.1.1 Reformulation of balance sheet . 395.1.2 Reformulation of income statement . 415.2 HISTORICAL ANALYSIS . 415.2.1 Return on Invested Capital . 415.2.2 Invested capital . 435.2.3 Net operating profit less adjusted taxes . 445.2.4 Free cash flow. 465.2.6 Efficiency analysis . 475.3 FORECAST . 475.3.1 Competitor growth comparison . 48Page 2 of 84
5.3.2 Revenue growth in explicit period . 495.3.3 Explicit period ratios. 505.3.3.1 Explicit period: NOPLAT . 515.3.3.2 Explicit period: Invested capital . 525.3.3.4 Explicit period: Free cash flow . 525.4 COST OF CAPITAL. 535.4.1 Capital structure . 535.4.2 Cost of debt . 545.4.2.1 Company Spread: . 555.4.2.3 Risk Free Rate . 565.4.3 Cost of Equity . 575.4.3.1 Market Risk Premium: .
on strategic performance along with historical financial ratios. Within the strategic analysis several leavers was identified, providing LEGO with competitive advantages. Among others these advantages included the successful use of licenses from well-known franchises and skillful handling of their operating processes. In addition areas of opportunity such as blue
