Corporate Saints_Case 1

IIM INDORE

Team – Corporate Saints

Executive Summary

Market Analysis

• Growth rate of Beer market and Individual segments

• Market attractiveness for various segments of Beer Industry

Target Analysis

• Evaluating the Criteria for Acquisition of BeerCo and Entry into the Craft Beer Market

• What the Acquisition means? Growth in Revenue and Cost Synergy for BevCo

Strategic Assessment

• Analysis of BeerCo and its product lines

• Discussion on which can be the most profitable product among BeerCo’s Line

Financial Assessment

• Methods of Valuation and their Pros & Cons

• Assessing the Purchase Price for BeerCo and factors that can affect it

Operational Assessment

• Things BevCo should consider before entering the Beer Market

• Should BevCo setup a new facility for making cans or maintain the Status Quo

2014 Values in USD Billion

2019 (E) Values in USD Billion

Beer 32.6 33.5

Craft Beer 3.4 5.0

Market Value Average Annual Growth Rate

S No Parameter (Scale 0-10) Craft Beer Segment

Other Segments

Total Beer Market

1 Urgency 9 6 7

2 Market Size 9 8 8

3 Pricing Potential 9 7 7

4 Cost of Customer Acquisition 9 6 6

5 Cost of Value Delivery 8 8 8

6 Uniqueness of Offer 8 7 7

7 Speed to Market 9 8 8

8 Up-front Investment 5 5 5

9 Up-sell potential 9 7 7

10 Evergreen Potential 9 8 8

Total 84 70 71

Market Attractiveness

Not Attractive

Moderately Attractive

Very Attractive

Investment Required

Revenue Enhancement

Strategic Benefits

Market Competition

Cost Reduction

Product Line Enhancement

• From Growth rate of US Beer market, it can be seen that it has a sub-par growth (0.52%) as compared to the GDP growth which is

forecasted to be over 3%. Hence, it is not an attractive market based on only growth rate.

• Looking at the Growth rates for all Beer segments, it is clear that Craft Beer segment is the most promising among all.

• However, it should also be noted that Super Premium & Imported Beer segments are also expected to do well and validate the

concerns of BevCo about the changing dynamics in the Beverages market.

Potential Revenues after Acquisition

• Launch of BeerCo’s complete product line in other markets of

BevCo at 200 million units per year

• GTM strategy for Craft and Super Premium beers in the Premium

Customer Segment

• Diversified portfolio bringing robustness and stability

• Knowledge gain into the Beer Industry

• Opportunity to sell the low performing premium and sub premium

beer categories in the emerging markets

• Offering BeerCo products under BevCo brand name in new

markets, thereby lowering the entry barrier.

• Lowering of cost due to economies of scale

• Cross marketing and Co-branding strategy reducing the total marketing costs

• Sharing of Resources like outlets, manpower, supply chain and distribution networks

• Up selling opportunity and a diverse product portfolio

• Capitalizing the existing customer base for Wine & Spirits and across Beer segments.

USD Billions BevCo BeerCo Post

Acquisition

Estimated increase

in Revenue

Remarks by

BevCo Exec

Revenue 3.35B 1.11B 4.81B 7% Growth 5% Growth

COGS 2.18B 669M 2.56B 10% Reduction 10% Reduction

SG&A 652.6M 201M 767.7M 10% Reduction 10% Reduction

Operating Income 517.4M 240M 1.48B 1.35B

Operating Margin 15.4% 21.6% 30.8% 28.9%

BeerCo USD Billions

Revenue 1.11B

COGS 669M

SG&A 201M

Operating Income 240M

Operating Margin 21.6%

Industry Average 20.5%

BevCo’s Op Margin 15.4%

Remarks – Operating Margin of BeerCo is higher than

Industry average as well as that of BevCo.

BeerCo Product Line

Lager

7 Varieties

Ale

3 Varieties

Stout

5 Varieties

65%

21%

14%

Revenue Breakup of BeerCo (Cr)

Lager (719 Cr)

Ale (228 Cr)

Stout (158 Cr)Lager Ale Stout

15% 33% 32%

Remarks – It can be observed that Lager has the least operating margin (in %) among the three.

• Correct the inefficiencies and minimize Cost of Goods sold thereby improving operating margin.

• Customer retention along with customer growth

• Efficient product packaging and supply chain optimization

• Product development to cater to evolving markets.

15 20 22 23 25

0

10

20

30

2013 2014 2015 2016 2017

Lager Ale Stout

• Lager has average annual growth rate of 29.2% from 2014 to 2017 whereas it is 7.1% for Ale and 7.11% for Stout.

• Since it is profitable in 2014 and with no foreseeable threat in future, it can reap in a lot of profits.

Method

Discounted Cash Flows Method

Pros DCF analysis can help investors identify where the company's value is coming from and whether or

not its current share price is justified.

It produces the closest thing to an intrinsic stock value.

Cons The DCF model is only as good as its input assumptions.

If any time expectations change, the fair value will change.

Comparable Transaction Method

Pros Valuation based on similar transactions in industry.

Cons The number of comparable transactions is less than the number of comparable companies.

Multiples Method Pros They are relatively easy to use, are based on actual market transactions and can provide a useful

ballpark for estimating value.

Cons Difficulty in finding comparable and timely comparisons.

One needs to make subjective adjustments recognizing differences between the firm of interest and

the comparison set.

Market Valuation Method

Pros The market approach of business valuation ascertains the value of a firm by performing a

comparison between the firms concerned with organization in similar location, of equal volume or

operating in similar sector.

Straightforward, simple calculations

Uses real, public data

Does not rely on subjective forecasts

Cons Difficulty in identifying comparable companies or transactions

Lack of sufficient number of comparable companies or transactions

Raises the questions – How much data is there? How good is the data?

.

• As we have adopted the ME method for valuation of BeerCo, the M&A data provided by BevCo’s Bank gives us a lot of clear

insights into the correct valuation as per the current market trends.

• As can be seen from the Bank detail, the Transaction Revenue Multiple for several comparable acquisitions is between 1.7x

to1.9x, so we can put a valuation of 2.0x times on the revenue of BeerCo, which comes out to be 2.22 USD Billions.

• The quantum of future cash flows predicted from the organization impacts its valuation to a great extent.

• The reputation of the firm being acquired has a major role in determining the valuation. Generally, firms with good reputation

tend to have a higher valuation.

• Economic conditions - The state of the economy prevalent at the time of acquisition also has an impact on the enterprise value.

• Market valuation of the competitors of the firm being acquired also needs to be considered while arriving at the final purchase

value.

Market Valuation Method is the best method due to the following –

• We have a data of 7 companies that have been recently acquired by BevCo

• The details given for these companies are equivalent to the details we have for BeerCo and so an ‘Apple to Apple’

comparison can be made.

• Since the data is recent and has Beer, Wine & Craft Beer companies together, the data is plausible.

Volume (in Millions)

Investment (in USD Millions)

Cum. Investment (in USD Millions)

Variable Cost

Total VC (in USD Millions)

Total Cost (in USD Millions)

Total Cost per unit

500 100 100 0.05 25 125 0.25

700 25 125 0.05 35 160 0.23

900 75 175 0.05 45 220 0.24

1100 100 200 0.05 55 255 0.23

1300 150 250 0.05 65 315 0.24

1500 200 300 0.05 75 375 0.25

1700 225 325 0.05 85 410 0.24

1900 275 375 0.05 95 470 0.25

• The table above depicts the cost per unit of can in case BevCo sets up its own production unit.

• As can be observed from the above table , the Total Cost Per unit always lies around $0.25, and the supplier supplies at $0.15. So, it is

always beneficial to buy the cans from the supplier.

Product Leadership: Strive to dominate their markets by continuously offering the best and most innovative products or services in their industry. Display the ability and determination to make products that customers consider superior products . Sales Leadership: It is more strategic and comes as a result of a sales leader setting the vision and strategy as well as about defining the culture of the sales organization. This comes as a result of setting goals, objectives and top priorities for the sales organization and then empowering the sales managers and sales reps to succeed. Thought Leadership: Establishing a relationship with and delivering something of value to your stakeholders and customers that aligns with your company value. In the process you go well beyond merely selling a product or service and establish your company as the expert in that field and differentiate yourself from your competitors.

References -

• Personal MBA by John Kauffman

• Corporate Finance by Stephen A. Ross, Randolph Westerfield, Jeffrey F. Jaffe & Ram Kumar Kakani

• www.investopedia.com

• www.mergerprof.com

• Industryweek.com

• Vlerick.com

• Insightsquared.com