The private equity dilemma of holding a distressed firm

: a valuation analysis

Abstract

In 2010, ABC Capital, a private equity firm specialized in investing in distressed companies, acquired PTO, a Portuguese producer of cork floating floors and walls. Two years after the initial investment, despite the upturn registered in the cork and in the construction industries, PTO is not giving signs of recovery. The aim of this thesis is to help ABC Capital solving the following dilemma: should they keep investing in the company and perform a turnaround versus disinvesting by liquidating the company. In order to do so, this thesis combines a valuation approach with an extensive analysis of the company, its competitors and the industry. Moreover, the relevant literature was reviewed and applied, supporting all the analyses conducted. We conclude that ABC Capital should maintain PTO in its portfolio and perform a turnaround strategy, since this choice delivers more value to the shareholders of the firm. More precisely, we recommend that PTO management should follow a Mix Strategy, where the company simultaneously should increase sales and reduces its costs. Finally, we also recommend that PTO, after stabilizing and becoming again profitable, should pursue a more aggressive sales strategy, as sales are the major cause of value generation.

Date of Award	2012
Original language	English
Awarding Institution	Universidade Católica Portuguesa
Supervisor	Francesco Castellaneta (Supervisor)