This is a solution of Mergers And Acquisitions And Private Equity Assignment in which we discuss Developing business
Mergers And Acquisitions And Private Equity
|Guidelines||Submissions will be expected to demonstrate the following qualities:|
1. Answering the central focus of the assignment topics.
2. A critical appreciation and application of relevant literature and theories to support argument and substantiate model(s) and other aspects of the assignment.
3. Taking ownership of the content, being prepared to debate and argue a personal position, evidences evaluative skills. A submission made up of extracts from published sources which is descriptive and just theoretical, is not acceptable. Your submission must have interpretation and consideration of the challenges and issues of taking theory into practice (using cases and/or personal experience).
4. Ability to analyse relevant theoretical concepts in a critical manner, evaluation of material.
5. Logical flow of ideas and treatment; imaginative approaches; appropriate selection of real world factors related to the model(s) or specific assignment topic.
6. Evidence of additional personal research project, and the ability to analyse material from a variety of appropriate relevant perspectives. A clear and listing of references using the Harvard referencing method.
7. Presentation, structure, appropriateness of methodology, breaking into section headings/subheadings, tidiness.
8. A strong, robust and supportable conclusion.
On successful completion of this assignment you will be able to:
|1||Identify and critically analyse the relative importance of different types of drivers of M&A and Private Equity.|
|2||Identify value creation and critically assess the success or otherwise of an M&A transaction|
|3||Analyse the current M&A and Private Equity strategies of a selected organisation and critically appraise suggestions for improvement of current practices|
|4||Critically evaluate the relative importance of the key elements in asuccessful M&A and Private Equity transaction|
|5||Understand how to value a target company for an acquisition transaction|
|6||Perform critical analysis of comparative issues in M&A and Private Equity|
|Assignment title||Write an acquisition report|
|Purpose of this assignment|
You work an M&A advisory firm. One of your clients is the Japanese beverages firm Suntory.
Your supervising partner has asked you to write a report analysing the valuation of a small traded wines and spirits company, Distil plc (formerly known as Blavod Wines and Spirits plc) as a potential acquisition for Suntory.
You can access Distill’s annual reports by clicking on the following link: An extract from some recent broker’s reports on the company are attached as further background.
It is important that you refer to the issues mentioned in the learning outcomes of the modules when answering the following tasks;
|TASK 1 – Strategy|
Marks Allocated: 50%
Put together an analysis as to whether Suntory should be interested in acquiring Distil. Consider the pros and cons and possible reasons for such an investment and come to a recommendation.
|TASK 2 – Corporate Valuation|
Marks Allocated: 50%
Calculate the maximum price that Suntory should be prepared to pay, justifying your recommendation with appropriate valuation techniques and quoting appropriate financial ratios.
Suggested Reading: Brokers’ Reports
1) “Blavod Wines & Spirits* (BES) has released an upbeat trading statement – with “trading in line with market expectations” and a “focus on key brands producing increased sales”, whilst a recently implemented new sales order transaction and reporting system “has greatly improved efficiencies in processing orders”.
The company emphasised it “has continued to expand its market coverage with four new export markets for owned brands in North America, Europe and Asia and an additional three markets in mainland Europe becoming active”. Looking forward, it expects to see sales increased in new and existing European markets as a result of a recent distribution agreement with Waldemar Behn GmbH & Co for the production of Blavod Black Vodka in Germany (noted to be “progressing well”) and it has also trademark registered a new premium spiced rum, RedLeg, “in all key markets around the world”. The initial production run of this has been successfully completed and first orders are now being dispatched to customers.
It looks clear that (new Executive Chairman) Don Goulding & co. have already achieved much in strengthening the company’s operations and expanding sales and distribution channels, though additional working capital remains “required to meet the ongoing cash requirements of the business and ultimately to allow the development of the company over the medium term”. On this, the company is again positive – noting “discussions with a number of parties”, that “a further announcement on this matter is expected to be made shortly” and that “once adequately funded, will be in a position to accelerate this growth”.
2) Drinks brand owner Blavod Wines & Spirits (BES) has announced the acquisition of the Blackwood’s, Jago’s and Diva brands today, upgrading its position from a distributor of the brands to the outright owner. Blavod paid just £1 each for the Diva and Jago’s brands while it parted with £50,000 to acquire the Blackwood’s Brand. Blackwood’s is a Gin and Vodka specialist and its vintage dry gin is sold in a number of UK stores including Sainsbury’s and Tesco. Last year Blackwood’s generated £358k of sales net of duty and £102k of contribution. Diva and Jago are smaller brands which focus on Vodka and Vodka cream liqueur respectively. Furthermore, Blavod revealed that it has signed a three year agreement with Hi-Spirits Ltd for the distribution of its portfolio of owned brands. As a result Blavod will now stop operating its own sales and distribution network, instead focusing on developing its portfolio in a shift which will result in one-off costs being occurred.
The acquisitions are encouraging moves but not, we believe, particularly game-changing ones. Blackwood’s is Blavod’s top profit contributor at present and this acquisition will further help the company to capitalise on the apparent popularity of the Vodka and Gin brand. With the shares flat at 0.9p on the back of the announcement, investors look to be wary of the change of focus and the associated costs. Nevertheless, we view the transition from brand distributor to brand owner as an interesting move, albeit one which could require time to yield benefits. On this basis we retain our “hold” recommendation on the group as it remains to be seen how the company will cope during this period of flux.
3) Drinks brand owner Blavod Wines & Spirits (BES) has announced interims to September, uncharacteristically soon after the period end.
Revenues for the six month period were down by 35% at £1.29 million as the company made the decision to concentrate on its own higher margin owned brands. In this respect gross margins improved from 20.7% to 21.5%. Margins on owned brands rose from 42% to 47% and we expect to see margins rise further as the contribution from wholly owned brands increases in the second half and beyond. Combined with lower advertising and admin costs, operating losses for the period were cut from £479,000 to £212,000.
Encouragingly, there was a net cash inflow from operations for the period of £154,000, mainly due to a decrease in inventories and a fall in trade receivables. Blavod ended the period with cash of £53,000 and had a £162,000 finance facility liability. As we recently commented on, the company has raised £571,300 (£552,000 net) since the period end for use in marketing planning and to promote the re-launch of certain brands.
Highlights of the period include the company’s self developed RedLeg Spiced Rum being distributed in 450 beer, wine & spirit stores and 175 Dan Murphy liquor stores in Australia. Encouragingly, RegLeg is now being promoted to distributors in twelve major US cities after winning a double gold medal in its category at the San Francisco World Spirits Competition. Elsewhere, Blackwoods Gin 40% was re-launched in August, Blackwoods 60% in October, and November will see the re-launch of Blackwoods Botanicals Vodka. In September supermarket giant Tesco increased distribution of Blackwoods Gin from 192 stores to 566 nationwide.
Blavod maintained that it is on target to achieve monthly break-even in the early part of the next financial year.
A good set of results from Blavod, with the positive operational cashflow achieved in the first half being a pleasant surprise. However, with this being achieved by reducing stock levels and debtors we do not expect it to be repeated to the same extent in the second half. Also a pleasant surprise is how soon after the period end the results have been released, which suggests that Blavod is now a much better run operation. Blavod had previously announced its results up to 5 months after the period end – which was not very impressive for a company of its size.
What Blavod needs to do now is show that it can be cashflow positive on a consistent basis. Given the firm’s recent comments it now looks as if that is not too far away, with the new financial year being just 5 months away.
Blavod shares currently trade at 1.2p to capitalise the firm at £4.36 million. We continue to believe that the valuation looks fair given the firm’s disappointing past and current lack of profitability. However, things seem to be moving in the right direction under the leadership of former Managing Director of Diageo, Don Goulding.
We see two potential share price drivers in the coming months. 1) The company confirming that it has moved into a monthly break-even position and 2) further distribution deals being signed for its portfolio of brands. As previously commented, RedLeg rum is now showing itself to be a major asset for Blavod. With the potential to distribute the brand into international markets and get into a major UK pub chain there could be considerable upside here.
As ever, we believe the best outcome for long suffering investors would be for a big name drinks company to take over Blavod. And with deals in the drinks industry often taking place on the basis of sales multiples there could be significant upside. But we believe that further work is needed to be done before the company is considered to be worthy of a purchase by a larger industry player.
4) Drinks brand owner Distil (previously known as Blavod Wines & Spirits) has announced maiden annual results under its new name.
For the year to March 2014 revenues were £2.4 million, down from £3.79 million due to the company’s strategic decision to focus on its own brands and not on third party distribution deals. The operating loss was cut from £619,000 to £367,000, with a 29% cut in administrative expenses being seen.
The balance sheet had £344,000 of net cash at the period end after the company raised £552,000 net of costs during the period and also fully repaid its invoice discounting finance facility. There was also a £67,000 net inflow from operations, with good working capital management offsetting the operating loss. Crucially, the company commented that it has sufficient cash reserves to meet its needs to move into a break even position.
Operational highlights of the year included sales of Blackwoods Gin up by 36% and RedLeg Spiced Rum up by 37%. The year also saw the launch of Blackwoods Vintage Dry Gin, Blackwoods Limited Edition 60% Gin and Blackwoods Vodka. All three are said to have been well received and are now stocked in a number of UK bars and retail outlets. However, there was a fall in sales of Blavod Black Vodka, which the firm blamed on the lack of a US distributor. The Diva Vodka and Jago brands were re-designed and are nearing re-launch in UK.
In addition, the international business network was increased, with Spanish distributor, The Water Company, appointed for an initial three year term. Elsewhere in Europe, the firm’s agreement with Waldemar Behn for production and distribution of Blavod Black Vodka in Germany is said to be progressing well.
We see these as a slow but steady set of results from Distil, which understandably reflect the changes made to the business model during the year. Highlights for us include the small positive cashflow from operations, the firm becoming debt free and it being implied that break-even remains on track for the early part of this financial year (as previously stated). The firm has also made good progress on cutting operating costs and we note that this year will not see a number of non-recurring expenses associated with the new strategy implementation.
Distil shares have fallen from recent two year highs of 1.925p to the current 1.1p, which capitalises the company at £4 million. We continue to believe that the the current valuation looks about right given the firm’s disappointing past, lack of profitability and slow progress.
However, we see the potential for good long-term prospects, especially for the RedLeg rum brand, which has the potential to be distributed into additional international markets and get into a major UK pub chain. There is also the potential for a larger drinks company to take over Blavod, and with deals in the drinks industry often taking place on the basis of sales multiples there could be significant upside. We believe that the firm still has much work to do however before this could happen.
|Generic skills: communication and presentation.|
|Comprehensive and correctly structured assessment. Style of writing is very fluent and develops a coherent and logical argument. Excellent referencing.||Well structured report which follows appropriate format but some aspects of layout and referencing could be improved. Style of writing is fairly fluent. Good referencing.||Good report in most aspects but suffers from variations in quality and the layout contains some inadequacies. Style of writing is satisfactory. Referencing needs improving.||Very poor report which is incorrectly structured and contains major errors and omissions. Style of writing lacks coherence and fluency. Poor referencing.|
|Knowledge & Understanding||Demonstrates excellent knowledge of theory and provides critical theoretical underpinning. Very good interpretations and summarising of main themes.|
|Wide range of knowledge demonstrated and evidence of good understanding of the topic.|
Ability to interpret and summarise succinctly.
|Good range of knowledge demonstrated but weaknesses in key areas. Some understanding displayed of the topic.|
Summary and interpretation are satisfactory.
|Very poor range of knowledge demonstrated and there are major weaknesses evident in interpretation and understanding.|
No clear interpretation of main themes.
|Analysis||Excellent use of theoretical and conceptual models to guide analysis linked with a critical discussion of main themes.|
Deconstructs the major themes used in the argument.
|Very good use of the theoretical and conceptual models with good critical discussion and application.|
Good evidence of deconstruction.
|Use of theory and concepts limited but relevant. Application could be improved and there is a tendency towards description.|
Must provide more evidence of deconstruction.
|Very poor use of theory and very little application of concepts.|
Very little description with not much evidence of analysis.
|Synthesis/ Creativity/ Application||Logical presentation of themes with appropriate examples being demonstrated. Very good demonstration of synthesis. Models have been clearly applied to the argument.||Very good account of main themes with sound application. Good attempt at applying models to the argument. .Fairly good attempt at synthesising the salient points.||Good account of main themes with some attempt at application. Limited|
evidence of synthesis.
|Very poor account of main themes with little or no application. No links between models and argument.|
|Evaluation||Shows clear evidence of in-depth critical reflection and evaluation of the argument by providing a robust defence of the opinions presented in the assessment.||Shows evidence of critical reflection and evaluation and a fairly cohesive defence of the argument||Shows some evidence of critical reflection but could have been developed.||Shows little or no evidence of critical reflection and needs to be much more developed. There is no defence of the opinions presented.|
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