Transcript
About H.J. Heinz – Analytical Report
Group 15 Bailey, Kelsey
Gulamaliyev, Rauf Manning, Laura Rustamov, Ferid Shchepilov, Igor January, 2013
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Introduction
Dividend Yield Growth
2012 2013E 206.4% 221.9%
EBITDA Margin Growth
2012 2013E 17.3% 17.9%
H.J. Heinz deal value of
$23.3 billion
Debt-equity ratio
2012 2013E 1.82x 1.55x
ROE Growth 2012 2013E 31.5% 39.2%
ROA Growth 2012 2013E 7.6% 9.5%
Gross Margin Growth
2012 2013E 34.3% 35.8%
Table of Content Pages Part I – Selecting Right Investment Bank 2 Part II – Complementary Features of Banks 3 Part III – IB and Shareholder Activists 5 Part IV – Go-Shop Provision, Role of IB 7 Part V – Valuation of H.J. Heinz 8 Part VI – Method of Payment 14 Part VII – Fairness Opinion 17 Appendix A – LTM Valuation 18 Appendix B – Trading Comparables 19 Appendix C – Transaction Comparables 20 Appendix D – DCF Valuation 21 Disclaimer 2013, Fortrust Global LLC
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Part 1 – Selecting the Right Investment Bank
Criteria
• Relationship Building • Links Among Investment Banks • Sector Specific Expertise • Insurance Premium to be Paid • Volume of Previous Deals • Quality of Services • Costs of Services
Services
• Valuation • Financing • Dealing with Shareholder Activists • Advice on Payment Methods • Due Diligence Process • Fairness Opinion • Assistance During the “Go-Shop” Process • Post Merger Integration
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Part 2.1 – Ranking of Investment Banks in Global M&A and Loans
8.5 7.9
4.8 4.4 4.2 4.2 3.8 3.6 3.2 2.8 2.7 2.6 2.5 2.3 1.9 1.8 1.8 1.6 1.5 1.4
0 1 2 3 4 5 6 7 8 9
Market Share of Investment Banks
Selected Investment Banks for the deal
8.2
6.1 5.8 5.5 4.4 4.3
3.6 3.6 3.3 2.9 2.9 2.4 2.1 1.9 1.5 1.5 1.5 1.5 1.3 1
0 1 2 3 4 5 6 7 8 9
JP Morgan Chase – a large banking conglomerate, i.e. a universal bank with large economies of scope, who offer commercial banking, investment banking and insurance Well Fargo & Co – a specialist bank in commercial and corporate banking Lazard – a pure-‐player advisory investment bank, i.e. a tradiZonal investment bank whose focus is on corporate finance and underwriZng.
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Part 2.2 – The Complementary Investment Banks
Valuation related issues
• As the growth of Heinz is dependent on its progression into emerging markets, employing a bank that is an expert in these countries is paramount
• Lazard has a strong presence in the BRIC countries (except for Russia), which will enable the consortium to accurately value its potential footprint and advise on their future growth strategies in these markets
Financing-related issues
• The bid for Heinz of $28 billion will be funded by cash re-sources and through a bank credit facility. The debt financing would be committed by both J.P. Morgan and Wells Fargo
• Insuring against a default from JP Morgan is more expensive than Wells Fargo but cheaper than for Goldman Sachs so by borrowing from both banks the cost of insurance is reduced as the risk of default is spread
• JP Morgan and Wells Fargo are both within the top ten global investment banks 2012 giving them access to large pools of funds and expertise
Post-merger related issues
• The critical role of Lazard to achieve the growth opportunities in emerging markets and materialize synergies to justify the premium paid
On top of these issues
• J.P. Morgan and Wells Fargo would also assist as advisors to the investment consortium. Considering the company profile of Heinz, J.P. Morgan is an obvious choice as it is not only one of the top global investment banks on M&A and issuing loans but it is also ranked within the top two for consumer staples and consumer products sector
• Berkshire Hathaway Inc. Chairman Mr Buffett, is also Wells Fargo’s biggest shareholder highlighting a strong relationship and an incentive to receive financing from Wells Fargo is the most profitable part of a transaction
• Lazard and JP Morgan worked together recently on advising Danone on the bid for Pfizer’s baby food unit and writing a fairness opinion on the valuation for Skandia Liv, so the banks are already familiar with each other’s work ethic
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Part 3.1 – The Role Played by Shareholder Activist Nelson Peltz
Source Content
H.J. Heinz – Case Study • Mr. Peltz initiated a turnaround after acquiring 5.4% stake • The pressure for turnaround and improvements entailed trimming the
“fat”, shedding non-core assets, launching repurchase plan or selling the entire firm
• Peltz demanded five board seats to add real management oversight to the weakening company, but he was able to secure only two board seats
The Proxy Statement • The overall investment interests of Mr Pelz included: - 3,250 shares held directly by Mr. Peltz, - 3,250 shares held by Trian Fund Management, L.P., where Mr.
Peltz is a founding partner and CEO - 100,000 shares owned by funds and accounts managed by Trian
Fund Management, L.P.
The ground research • Mr. Peltz had a reputation as a value unlocking activist shareholder by reinforcing fundamental restructuring and attacking margins
• Initiatives of Mr. Peltz have paved foundation for a potential sale of the company in the future • Indeed, the process has sparked the interests of Lemann and Buffett, who believed into
continued global growth in emerging markets
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Part 3.2 – Role of Advisors in Defending Against Activist Shareholders
Identify needs of activist shareholders Peltz demanded that the company either be sold, or shed non-
core assets, aggressively repurchase stock; Peltz requested that he receive 5 board seats to add real management oversight
Activists will only be successful with the support of the larger shareholders. Investment banks are needed to formulate an advisory team made up of financial, legal and public relations specialists. Relations with shareholder activists can help the advisory team to stay ahead of the activists threats
Determine strategy to deal with activist shareholders.
Advisors assist the Board in focusing its shareholder communication strategy to ensure that all shareholders fully
understand the merits of the company’s current strategy and the implied risks in any proposed alternative strategies
Defend interests of Heinz’s Directors and Executive Officers in the
acquisition
Golden parachute compensation scheme was elaborated. Also pension plan has been approved. The amount of compensation was based on service credit benefits under Heinz’s supplemental
retirement plans, as of August 1, 2013
The role of investment bank In the case of H.J. Heinz
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Part 4 – The “Go-Shop” Provision and the Role of Advisors
Terms of the provision Implications of the process “No-shop” clause? The role of IB in “go-shop”
• The acquisition with a “go-shop” provision per-mitted Heinz to solicit alternative proposals for a period after signing the merger agreement and to pay a termination fee of $750 million if it termi-nated the merger agre-ement to enter into an alternative transaction so-licited during that period.
• The provision locks in the first offer price as the floor on the value of the firm
• The break-even price that Heinz would be indifferent between the initial and other bidders will be $74.84 per share1
• The proposal made by the first bidder creates new data and may be used as a waypoint for other possible bidders, making the target firm more attractive and liquid
• The target firm managers may have an incentive to sell the company to a specific bidder only, making the provision a “window dressing” practice
• Go-shop periods may be too short for potential bidders to conduct proper due diligence
• Go-shop provisions can come with conditions that limit certain buyers from entering bids or make the first bidder matching rights
• Conducts “go-shop” process to solicit additional bids for the target company
• Acts as an emissary between target and acquirer, i.e. intro-duce to potential bidders
• Provides particularized know-ledge about challenges and opportunities available in a given industry and recom-mends on strategic alternatives
• The size of the termination fees, and whether they should be included at all, is often a contentious issue when negotiating a deal and is usually deterrent to accepting alternative proposals during the “go-shop” process. Forward and reverse termination fees serve different functions and should be analyzed accordingly. Target termination fees have the potential to foreclose a competitive bidding process, against the interests of shareholders of the target, by making acquisitions prohibitively expensive for bidders late to approach the target2. Reverse termination fees, by contrast, raise no such obvious concerns because they do not increase the cost of a bidding contest for later bidders.
1$750 million of termination fee divided by the number of common shares outstanding will yield a fee stake of $2.34 per share price offered, a total of $74.84 per common stock 2J.P. Morgan Chase & Co website: www.jpmorgan.com, accessed on: June 3, 2015
LTM trading range 1
EV/EBITDA 2
P/E 2
P/Sales
12% - 27% Premium
To current share price
EV/EBITDA LTM 3
Stand-alone 4
Stand-alone + synergies 4
Tra
ding
co
mpa
rabl
es
Tra
nsac
tion
co
mpa
rabl
es
Price 40$ 80$ 60$ Implied EV/EBITDA 50$ 70$
56.91 67.61
51.65 59.86 -‐ -‐ -‐ -‐
-‐ -‐
9.8x 11.0x
10.6x 12.3x
10.0x 11.3x
12.0x 13.4x
12.1x 13.3x
53.10 61.59
65.97 74.80
66.60 74.30
Current Price = $58.90
-‐
10.1x 12.4x
DC
F
11.3x 12.4x 61.64 68.35
53.56 68.24
-‐
11.9x 13.8x 65.61 77.21
Part 5.1 – Indicative Valuation of Heinz
1Appendix A 3Appendix C 2Appendix B 4Appendix D
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$57 $62 $67 $75
Stand-alone value Value with synergies
Price
10.8x 11.6x 12.4x 13.6x Implied EV/EBITDA
Stand-alone value Value with synergies
Part 5.2 - Stand Alone Valuation vs. Valuation with Synergies
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Financial data – April 28, 2013 • Market to book ratio 6.6x • Leverage (debt-equity) 1.55x • Revenue growth 1.9% • Return on assets, ROA 9.5% • Gross profit margin 35.8% • EBITDA margin 17.9% • EBIT $1,708 • Book equity value $2,849 • Enterprise value $22,419
H.J. Heinz Company • Industry Food Processing • Sector Consumer Goods • Markets US (60% of sales), outside the US • Type Public (listed on NYSE) • Number of 32,200
employees • CEO William Johnson • Product Condiments, frozen food, soups,
portfolio infant nutrition
Part 5.3 – Choosing Comparable Firms
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- Food processing - Worldwide - Frozen food, refrigerated products etc. - Growth company - 18.8% - 47.9% - 6.54x - 1.7% - 8.3%
Nestlé S.A.
- Food processing - Worldwide - Cereals, snacks, soups, vegetables etc. - Growth company - 19.9% - 36.2% - 1.39x - 3.2% - 8.3%
General Mills
- Food processing - Worldwide - Early life nutrition, dairy products etc. - Growth company - 16.4% - 49.8% - 2.68x - 3.3% - 5.2%
Groupe Danone
- Food processing - Worldwide - Cereals, pastries, vegetarian foods etc. - Growth company - 17.8% - 38.6% - 0.60x - 4.5% - 8.9%
Kellogg
- Consumer goods - Worldwide - Food, beverages, ready meal etc. - Growth company - 16.6% - 42.8% - 2.45x - 1.2% - 10.2%
Unilever
- Food processing - Worldwide - Natural foods, beverages etc. - Growth company - 21.6% - 36.4% - 3.57x - (0.5%) - 6.7%
Smucker
Part 5.4 – Trading Comparable Firms
- Industry - Markets - Product portfolio - Stage of growth - EBITDA margin - Gross PM - Debt-equity - Revenue growth - ROA
MARKET DATA
- Industry - Markets - Product portfolio - Stage of growth - EBITDA margin - Gross PM - Debt-equity - Revenue growth - ROA
MARKET DATA
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Part 5.5 – Choosing the Right Multiples
The EBITDA multiple ignores fluctuations in Dep, Capex and ∆NWC and smoothens out effects on value estimates. Cash flows have been volatile and are predicted to remain so given the expansion into emerging markets.
EV/EBITDA multiple
The earnings multiple can be misleading across firms with vary-ing leverage, but our comparable firms have relatively similar leve-rage measured by the debt-equity ratio. The earnings multiple also measures market’s expecta-tions, hence assisting with valuation.
P/E multiple
The sales multiple is representa-tive for Heinz and our comparable firms given that the relative and absolute revenue and revenue growth measures are similar. Also, the sales figure is subject to the least potential accounting manipu-lation as it is a top line item in I/S.
P/Sales multiple
The DCF valuation of Heinz as a standalone company shows their current “fair” value. This valuation is critical given that both sides have repeatedly stressed the future independence of Heinz as part of the bidders’ portfolios. We use stand-alone DCF along with other trading multiples to assess the validity of our assumptions and the reliability of our results. The DCF including synergies is on par with our transaction comparables and thus validates the reliability of the DCF stand-alone with synergies approach.
Discounted Cash Flow method (standalone and with synergies)
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Part 5.6 – Criteria for Choosing Transaction Comparable Firms
- Industry - Markets - Enterprise Value - Deal Date - Payment Method
ABOUT THE DEAL
- Industry - Markets - Enterprise Value - Deal Date - Payment Method
ABOUT THE DEAL
- Food processing - Worldwide - $6.78 bn - Nov. 2012 - All-cash transaction
ConAgra Foods, Inc. acquired Ralcorp Holdings, Inc.
- Food processing - Worldwide - $2.70 bn - Feb. 2012 - All-cash transaction
Kellogg Company acquired Pringles Business of P&G
- Food processing - Worldwide - $3.70 bn - Jan. 2010 - All-cash transaction
Nestle S.A. acquired N.A. Frozen Pizza Business of Kraft
- Consumer goods - Worldwide - $21.40 bn - Sept. 2009 - Hybrid transaction
Kraft Foods Inc. acquired Cadbury
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Would you accept all-cash, all-stock or a hybrid? Ramifications for the shareholders of both sides…
Part 6.1 – Acquisition Currency: Cash vs. Stock
“In a cash deal, the roles of the two parties are clear-cut, and the exchange of money for shares completes a simple transfer of ownership, but in a stock deal, it’s less clear who is the buyer and who is the seller. … Companies that pay for their acquisitions with stock share both the value and the risks of the transaction with the shareholders of the company they acquire. The decision to use stock instead of cash can also affect shareholder returns … shareholders of acquiring companies fare worse in stock transactions than they do in cash transactions [and] … early performance differences between cash and stock transactions become greater—much greater—over time.”
Cash vs. Stock Trade-Offs… “In cash transactions, acquiring shareholders bore the entire risk that the expected synergy value embedded in the acquisition premium will not materialize. In stock transactions, that risk is shared with selling shareholders.”
Rappaport, A. and Sirower, M. L. (1999) Stock or Cash?: The Trade-Offs for Buyers and Sellers in Mergers and Acquisitions.
Harvard Business Review, NY
Target Acquirer Payment method (cash, stock or hybrid)
Share price (ann. date)
Share price (3 month later)
Share price (6 month later)
Share price (12 month later)
Ralcorp Holdings, Inc ConAgra Foods, Inc Cash deal $28.29 $33.82 19.55% $34.73 22.76% $34.91 23.40%
Pringles Business of P&G Kellogg Company Cash deal $50.30 $55.98 11.29% $56.97 13.26% $59.77 18.83%
The Quaker Oats Company Pepsi Co, Inc Stock deal $49.75 $43.08 13.41% $43.41 12.74% $45.67 8.20%
The Pillsbury Company General Mills, Inc Hybrid deal $21.93 $24.34 10.99% $24.52 11.81% $20.51 6.48%
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Part 6.2 – Pros and Cons of an All-Cash Payment Method
+ Neutral or slightly positive returns to acquiring firm’s shareholders
+ Efficiency and transparency of transaction for both sides
+ Immediate recognition of cash gains and ability to reallocate
them
PROS
- Tax consequences on realized capital gains, if any, for target
shareholders - Potential downgrade in credit
rating of acquiring company as a result of dip into its corporate
coffers
CONS
But, despite the type of the buyer:
Would a strategic buyer pay 100% cash for the acquisition?
It will depend on spectrum of factors:
ü Excess cash levels ü Leverage on balance sheet ü Future cash requirements ü High/low trading stock premium ü Current credit rating and financials ü Value of financial flexibility
“A really confident acquirer would be expected to pay for the acquisition with cash”
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BU
Y-S
IDE
A
DV
ISO
RS
• Helps to raise additional debt if acquirer has insufficient cash to complete the deal.
• Estimates the value of tax savings from the re-valuation of assets and thereby increasing the tax-deductible depreciation expense.
• Examines post-closing liquidity, probability of financial distress and potential downgrade in credit rating.
• Assists the valuation of acquirer’s equity to assess the extent of market over/underpricing of stocks.
• Integrates the results of valuation into the decision-making process of issuing a fixed number of shares or a fixed value of shares as means of payment.
• Assesses the risk of materialization of the expected synergies needed to pay for acquisition premium.
• Negotiates the forward termination fee, which is usually higher in stock purchase agreements.
• Values the target as an independent company and compares it against the cash price offered.
• Estimates potential synergies at post-closing for target management, who could hold out for higher price.
• Examines the liquidity headroom of target firm to assess its value to the bidder and advice on the hold out decision for a higher price. The ultimate purpose is to split the future value from debt capacity between the buyer and seller shareholders.
• Estimates the pre-closing market risk and post-closing operating risk under either fixed-share or fixed-value deals.
• Calculates the expected and the actual percentage of ownership.
• Assists the valuation of acquirer’s equity to accept or reject the swap ratio by the bidder.
• Negotiates the reverse termination fee, which is usually higher in stock purchase agreements compared to cash payments.
ALL-CASH PAYMENTS ALL-STOCK PAYMENTS
SEL
L-S
IDE
A
DV
ISO
RS
Part 6.3 – The Role of Investment Banks in All-Cash and All-Stock Deals
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Part 7 – Our “Fairness Opinion” on the Offer
Introduction Description of the takeover bid and the scope of the fairness opinion provider. Outline of approach and the basis of the valuation.
Profile (target company)
Information on the target company’s market, strategy and business model, and an assessment of its historical financial performance
Valuation analysis* Description of assumptions, parameters and valuation methods used
Conclusion** Overall assessment on the reasonableness of the offer prices from a financial perspective
Source: KPMG (2013) Fairness Opinion: Decisions With Confidence in the Transaction Space
*Valuation Approaches Proxy Statement Date
January 13, 2013
Comparable Public Companies
Enterprise value/EBITDA
Price earnings ratio
Price sales ratio
Precedent Transactions Enterprise value/EBITDA LTM
Discounted Guidant Cash Flow
DCF and DCF with synergies on two forecasts
Acquirer Analysis “Sum of the parts” analysis of Acquirer using P/E ration on 14 companies
**Based on the overall assessment and valuation analysis1, it is our opinion that, as of the date hereof, cash per share price offered to the Merger Agreement is fair from a financial point of view to the holders of the H.J. Heinz’s Common Stock. 1Please refer to Appendices for valuation calculations
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Appendix A – LTM Valuation
To calculate price range within last twelve month data from 14.01.2012 to 14.01.2013 period has been taken. Upper boundary is the highest share price, while Bottom boundary is the lowest share price within the same period. Total debt was calculated as a sum of Long-Term Debt and Short-Term Debt taken from Heinz Balance Sheet. Net Debt is represented as a Total Debt excluding cash. To calculate Earnings per Share (EPS), Net Income was divided by the Number of Shares (Basic). Enterprise Value is a sum of Equity Value and Net Debt.
Last Twelve Month (LTM)
Share Price Equity Value Net Debt Enterprise Value EV/EBITDA
Upper boundary $75.00 24,050 3,532 27,582 13.4
BoLom boundary $67.00 21,484 3,532 25,016 12.2
Current price on 14-‐Jan-‐13 $58.90 18,887 3,532 22,419 10.9
2013 (E)
EBITDA 2,057
Net Income 1,027
Total Debt 6,009
Short-‐Term Debt 2,160
Cash 2,477
Sales 11,675
Number of Shares 321
Earnings per Share (EPS) 3.20
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Appendix B – Trading Comparables
The lowest EV/EBITDA is the Bottom boundary and the highest EV/EBITDA is the Upper boundary. To calculate Enterprise value, EV/EBITDA was multiplied by EBITDA. Then Equity Value was calculated as Enterprise Value excluding Net Debt. Price per Share is Equity Value divided by Number of Shares. The same calculations was implemented with regard to P/E multiple. P/E multiple was multiplied by EPS and this number was divided by number of shares to get Share Price. Enterprise Value is a sum of Equity Value and Net Debt.
Comparable companies EV/EBITDA P/E
General Mills 10.8 17.5
Groupe Danone 10.7 16.6
Kellogg 11.2 16.6
Nestle S.A. 12.3 17.7
Unilever 11.4 18.7
Smucker 10.6 19.2
Min 10.6 16.6
Max 12.3 19.2
EV/EBITDA EV Net Debt Equity Value Price per share Implied EV/EBITDA
Upper boundary 12.3 25,212 3,532 21,680 67.61 12.3
BoLom boundary 10.6 21,781 3,532 18,249 56.91 10.6
P/E Equity Value Price per share Net Debt EV Implied EV/EBITDA
Upper boundary 19.2 19,749 61.59 3,532 23,281 11.3
BoLom boundary 16.6 17,026 53.10 3,532 20,558 10.0
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Appendix C – Transaction Comparables
Transaction comparables have been chosen in accordance with industry, enterprise value of deals, the date of transaction and payment method. It was decided to take four transactions because they are the closest to Heinz deal considering the factors mentioned earlier. The lowest and the highest value of EV/EBITDA multiple was chosen to determine the bottom and upper boundaries respectively. Then these numbers were multiplied by Heinz EBITDA to get Enterprise Value. Equity Value was calculated as a difference between Enterprise Value and Net Debt. This number was divided by the number of shares to get a Share Price.
EV/EBITDA EV Net Debt Equity Value Price per share Implied EV/EBITDA
Upper Boundary 13.3 27,358 3,532 23,826 74.30 13.3
Bottom Boundary 12.1 24,890 3,532 21,358 66.60 12.1
Date Target Acquiror
Nov. 2012 Ralcorp Holdings, Inc. ConAgra Foods, Inc.
Feb. 2012 Pringles Business of P&G Kellogg Company
Jan. 2010 N.A. Frozen Pizza Business of Krad Nestlé S.A.
Sept. 2009 Cadbury plc Krad Foods Inc.
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Inputs to WACC Target H.J. Heinz Bond RaZng (Moody's) B1 Yield to Maturity of Bonds -‐ kd 4.70% Tax Rate 35% Ader-‐tax Cost of Debt -‐ kd(1-‐t) 3.06% Relevered Beta (see calcs) 0.72 Cost of Equity -‐ ke 6.09% Debt as % of Capital -‐ Wd 67.83% Equity as % of Capital -‐ We 32.17% 10 Year Treasury Bond Yield 1.80% Market Risk Premium 6% WACC 4.03%
Appendix D1 – Inputs to Discounted Cash Flow Approach Inputs to Relevering Beta Levered Beta Debt-‐equity Unlevered Beta
General Mills 0.69 1.39 0.36 Groupe Danone 0.74 2.68 0.27 Kellogg 0.67 0.60 0.48 Nestle S.A. 0.82 6.54 0.16 Unilever 0.77 2.45 0.30 Smucker 0.82 3.57 0.25 Average 0.75 0.30
Heinz 0.65 0.72
CAPM 6.09%
Addi]onal Inputs
Equity 2,849 Debt 6,008 Debt-‐equity 2.11
1. During the merger Moody’s has downgraded the credit rating of Heinz to B1, however our calculations used weighted average cost of long term current debts for cost of debt, which we believe is an appropriate measure and is more representative of company’s fair valuation. We adjust for after tax cost of debt using a tax rate of 35%.
2. Cost of equity calculations involve a selection of pure plays, which has been displayed above for the purposes of identifying appropriate beta that reflects that reflects the post transaction leverage.
3. We selected 10 Yr government bond with 1.8% yield, which is assumed to be the risk free rate, and a market risk premium spread of 6% has been calculated.
4. We identified a WACC range of 4%-4.8% and 3.85%-4.38% for stand-alone and stand-alone plus synergies price ranges in the football field
Debt and equity inputs have been taken from the balance sheet expected values for 2013. The debt component includes short-term debt, current portion of long-term debt and long term debt, while the equity part includes non-controlling interest, additional capital, retained earnings, treasury shares at cost and ac-cumulated other comprehensive loss. There are no preference shares to be included as part of the WACC calculations
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Appendix D2 – DCF Valuation of H.J. Heinz as a Stand-alone Unit 2013E 2014P 2015P 2016P 2017P 2018P Revenues 11,675 12,141 12,657 13,112 13,744 14,446 COGS 7,892 8,227 8,523 8,934 9,390 Gross Profit 4,249 4,430 4,589 4,810 5,056 SG&A 2,671 2,785 2,885 3,024 3,178 AmorZzaZon 47 47 47 47 47 DepreciaZon 324 310 295 280 266 EBIT 1,207 1,289 1,362 1,459 1,565 Taxes 423 451 477 511 548 NOPAT 785 838 886 949 1,017
0 1 2 3 4 5 Add: DepreciaZon 324 310 295 280 266 Less: Capital Expenditures 405 365 328 295 266 Less: Increase in NWC -‐20 -‐ -‐ -‐ -‐ =Free Cash Flow 724 783 853 934 1,017 1,018.44 Terminal value 25,903 Free Cash Flows + Terminal Value 724 783 853 934 26,921 Discounted Cash Flow 696 723 757 797 22,093
Enterprise value 25,067
Equity Value 21,536
Share Price 67.16
DepreciaZon 338 324 310 295 280 266 as % of CAPEX 75% 80% 85% 90% 95% 100% CAPEX 450 405 365 328 295 266 Net Working Capital 50 30 30 30 30 30
Addi]onal assump]ons
1. CAPEX to increase to $450M in 2013, then decline by 10% per year unZl 2018
2. DepreciaZon expense to grow from 75% of Capex in 2013 to 100% of it in 2018
3. AmorZzaZon to remain at $47M per year
4. NWC needed to fund growth will be $50M in 2013, then $30M per year unZl 2018
5. Tax rates remain constant at 35%
DCF standalone assumtpions Tax rate 35% Terminal Growth rate 0.10% WACC (range 4%-‐4.8%) 4.03% Debt 6,008 Cash 2,477 Number of shares outstanding (basic) 321 CAPEX decline rate 10%
All data is given in US$ millions, except per share data, unless otherwise specified. Revenue forecast over next five years reflects the expansion into emerging markets, while the terminal growth rate of 0.1% has been identi-fied to mirror the maturity of consumer products sector. Capex decline rate results from falling growth rate. The WACC range has been used for football field calculations.
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Appendix D3 – DCF Valuation of H.J. Heinz with synergies DCF standalone assumtpions
Tax rate 35% Terminal Growth rate 0.20% WACC (range 3.85%-‐4.38%) 4.03% Debt 6,008 Cash 2,477 Number of shares outstanding (basic) 321 CAPEX decline rate 16%
Addi]onal assump]ons
1. CAPEX to increase to $450M in 2013, then decline by 16% per year unZl 2018
2. DepreciaZon expense to grow from 75% of Capex in 2013 to 100% of it in 2018
3. AmorZzaZon to remain at $47M per year
4. NWC needed to fund growth will be $50M in 2013, then $30M per year unZl 2018
5. Tax rates remain constant at 35%
All data is given in US$ millions, except per share data, unless otherwise specified. Cost cutting efforts will not be huge to affect the terminal growth rate dramatically, but it will boost it up to 0.20% driven by economies of scales and scope, and bargaining power over the supply chain stores. In the post merger state, companies will also enjoy a further CAPEX decline driven by synergy effect.
2013E 2014P 2015P 2016P 2017P 2018P Revenues 11,675 12,141 12,657 13,112 13,744 14,446 COGS 7,892 8,227 8,523 8,934 9,390 Gross Profit 4,249 4,430 4,589 4,810 5,056 SG&A 2,671 2,785 2,885 3,024 3,178 AmorZzaZon 47 47 47 47 47 DepreciaZon 302 270 240 213 188 EBIT 1,229 1,329 1,418 1,527 1,643 Taxes 430 465 496 534 575 NOPAT 799 864 921 992 1,068
0 1 2 3 4 5 Add: DepreciaZon 302 270 240 213 188 Less: Capital Expenditures 378 318 267 224 188 Less: Increase in NWC -‐20 -‐ -‐ -‐ -‐ =Free Cash Flow 743 816 895 981 1,068 1,069.95 Terminal value 27,923 Free Cash Flows + Terminal Value 743 816 895 981 28,991 Discounted Cash Flow 714 754 795 838 23,792
Enterprise value 26,893
Equity Value 23,362
Share Price 72.86
DepreciaZon 338 302 270 240 213 188 as % of CAPEX 75% 80% 85% 90% 95% 100% CAPEX 450 378 318 267 224 188 Net Working Capital 50 30 30 30 30 30
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