Valuing Lanka Glove Manufacturing for a Private Equity Exit
Lanka Glove Manufacturing is a family-owned producer of industrial gloves. Revenue is LKR 5.2bn, EBITDA LKR 780m, depreciation LKR 170m, and capital expenditure LKR 210m. Working capital investment is LKR 55m a year. The corporate tax rate is 30% and net debt is LKR 1.1bn. Free cash flow is expected to grow at 4% a year in perpetuity. The family believes the business is worth at least LKR 5bn on an equity basis. A private equity buyer has offered 6.2x EV/EBITDA, a multiple derived from recent regional transactions, but wants a 20% minority discount because the family will retain 20% and the shares are unlisted. A Colombo Stock Exchange IPO is an alternative; comparable listed companies trade at 7.0x EV/EBITDA but IPO costs and underpricing would be about 8% of gross proceeds. The company's WACC is 12.5%. The family also worries about employee reaction to cost cuts proposed by the PE buyer.
1. Value the equity using the FCFF constant-growth model and compare it with the PE offer before and after the minority discount.
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EBIT = EBITDA − depreciation = 780 − 170 = LKR 610m. NOPAT = 610 × (1 − 0.30) = LKR 427m. FCFF = NOPAT + depreciation − capex − working capital investment = 427 + 170 − 210 − 55 = LKR 332m.
With g = 4% and WACC = 12.5%: EV = 332 × 1.04 / (0.125 − 0.04) = 345.3 / 0.085 = LKR 4,062m. Equity value = 4,062 − 1,100 = LKR 2,962m. That is about 5.2× EBITDA and about 0.57× revenue.
The PE offer at 6.2× gives EV = 6.2 × 780 = LKR 4,836m and equity before discount = 4,836 − 1,100 = LKR 3,736m. Applying a 20% minority/marketability discount gives 3,736 × 0.80 = LKR 2,989m, almost identical to the DCF value. So the PE price is not obviously low; the DCF and the discounted PE offer point to broadly the same range. The family's LKR 5bn equity expectation is not supported by either method unless it can justify a much higher growth rate or lower WACC.
2. Assess the minority discount and the IPO alternative. Recommend a course of action, taking stakeholder objectives into account.
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The minority discount should reflect the family's inability to control cash flows, lack of marketability and the shareholder agreement. Applying 20% to the whole equity is a negotiating position; applying it only to the family's retained 20% would produce a different split. The family should ask for the discount to be justified by specific factors, not treated as automatic.
The IPO multiple looks higher: 7.0× gives EV of LKR 5,460m and equity of LKR 4,360m. But this is gross before 8% costs and underpricing, which could reduce net proceeds to around LKR 4,011m; CSE liquidity, lock-ups, disclosure costs and market timing also matter. An IPO may not be feasible at this size without a substantial free float.
A dual-track process is sensible: prepare IPO documentation to create tension, while negotiating with the PE buyer on price, governance, employee protections and an earn-out. Stakeholder analysis: the family wants liquidity and legacy; employees fear cost cuts; the PE wants an exit; lenders want lower leverage. Recommendation: accept a PE deal only if the effective price is at least the DCF value plus a control premium, with employee protections; otherwise pursue an IPO only if the company can bear the costs and the owner is prepared for public scrutiny.