IIM INDORE

Team Corporate Saints

Executive Summary

Market
Analysis

Target
Analysis

Strategic
Assessment

Financial
Assessment

Growth rate of Beer market and Individual segments

Market attractiveness for various segments of Beer Industry

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

Analysis of BeerCo and its product lines

Discussion on which can be the most profitable product among BeerCos Line

Methods of Valuation and their Pros & Cons

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

Things BevCo should consider before entering the Beer Market

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

Market Value

Average Annual Growth Rate

2014

2019 (E)

Values in USD Billion

Values in USD Billion

Beer

32.6

33.5

Craft Beer

3.4

5.0

S No Parameter (Scale 0-10)

Craft Beer
Segment

Other
Segments

Total Beer
Market

Urgency

Market Size

Pricing Potential

Market Attractiveness
Not Attractive

Cost of Customer Acquisition

Cost of Value Delivery

Uniqueness of Offer

Speed to Market

Up-front Investment

Up-sell potential

10

Evergreen Potential

Total

84

70

71

Moderately Attractive

Very Attractive

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.

Investment Required

Potential Revenues after Acquisition

Launch of BeerCos 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.

Revenue Enhancement
Strategic Benefits
Market Competition
Cost Reduction
Product Line Enhancement

Estimated increase
in Revenue

Remarks by
BevCo Exec

4.81B

7% Growth

5% Growth

669M

2.56B

10% Reduction

10% Reduction

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%

USD Billions

BevCo

BeerCo

Revenue

3.35B

1.11B

COGS

2.18B

SG&A

Post
Acquisition

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.

BeerCo

USD Billions

Revenue

1.11B

COGS

669M

SG&A

201M

Operating Income

240M

Operating Margin

21.6%

Industry Average

20.5%

BevCos Op Margin

15.4%

BeerCo
Product Line

Lager

Ale

7 Varieties

Stout

3 Varieties

5 Varieties

Revenue Breakup of BeerCo (Cr)

Remarks Operating Margin of BeerCo is higher than

Industry average as well as that of BevCo.

14%
Lager (719 Cr)
21%

Lager

Ale

Stout

15%

33%

32%

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

Ale (228 Cr)

65%

Stout (158 Cr)

 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.

30
20

20

25

23

22

15

10
0
2013

2014

2015
Lager

Ale

2016
Stout

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.

2017

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.

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?

Market Valuation
Method

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.

As we have adopted the ME method for valuation of BeerCo, the M&A data provided by BevCos 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.

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.

Volume
(in Millions)

Investment
(in USD Millions)

Cum. Investment
(in USD Millions)

Variable
Total VC
Total Cost
Cost
(in USD Millions) (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.

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