ABC group assignment - Grade: 80~90 PDF

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Table of contents Executive Summary 1 Introduction 2 1. What are the economic rationales behind the acquisition? You should discuss the rationales from the perspectives of both the (i) acquirer and (ii) target company. 2 1 The acquirer (CCA) 3 1 The targeter (SPCA) 3 2. Discuss the background inform...

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Table of contents Executive Summary

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Introduction

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1. What are the economic rationales behind the acquisition? You should discuss the rationales from the perspectives of both the (i) acquirer and (ii) target company. 2 1.1 The acquirer (CCA) 3 1.2 The targeter (SPCA) 3 2. Discuss the background information on the acquisition and your evaluation of the choices made. These include the acquisition method used (e.g., scheme of arrangement, on-market bid, off-market bid), offer price, offer type (cash or shares), premium, regulatory approvals, etc. 2.1 Acquisition data 2.2 Before acquisition 2.3 After acquisition

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3. Why does this acquisition require ACCC approval?

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4. What are the personal incentives of the board of directors of the (i) bidder, and (ii) target if the acquisition is successful? 8 5. Do you support this acquisition if you are a shareholder of the (i) target, and (ii) bidder?

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6. Recently, Coca Cola Amatil has announced its intention to divest the operations of SPC Ardmona. What do you think are the reasons underlying this decision? Can this decision be reconciled with the economic rationales behind the original acquisition in 2005? 13 6.1 Challenges of top-line growth 13 6.2 High cost in manufacturing and labour in Australia 13 6.3 Oversea competitors 14 6.4 Can this decision be reconciled with the economic rationales behind the original acquisition in 2005? 14 Conclusion

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Reference

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Appendixes

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University of Technology Sydney 22320 Accounting for Business Combinations

Executive Summary This report investigated the Coca Cola Amatil’s acquisition of SPC Ardmona Ltd by analysing the economic reasons behind the acquisition as well as the acquisition method and scheme of arrangement. It has explained the duty of ACCC and the reason behind why the acquisition process requires ACCC approval. Examine how the acquisition process affects the personal incentives of the board of directors in the bidder and target company, by analysing personal financial gains, reputation gain and future directorship. Evaluated the overall market performance of the bidder and target company and reviewed the relationship between the market reaction and takeover announcement. Overview the reasoning behind the announcement that the Coca Cola Amatil divest the operations of SPC Ardmona and comparison with the economic rationale behind the original acquisition in 2005.

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University of Technology Sydney 22320 Accounting for Business Combinations Introduction When SPC Ardmona (SPCA) merged into Coca-Cola Amatil (CCA), directors and shareholders of each company expected a positive outcome can be made from a long-term perspective, because the market performance of CCA and SPCA at 2005 was promising. CCA was one of the largest company which manufactures and distributes non-alcoholic beverage in Australia. SPCA was experiencing success and expected to have rapid growth in its fruit pack industry. However, SPCA performance could not meet CCA’s expectation so recently CCA has announced its intention to divest the operation of SPCA. During the acquisition between Coca Cola Amatil and SPC Ardmona, shareholders of SPC was able to earn a premium and favourable incentives from CCA. Even though directors of the target company had to experience turbulence from the acquisition process, were able to gain financial incentives from CCA’s proposal. Market reaction when CCA announced acquisition was favourable to SPC shareholders. After the acquisition process, SPCA seems to bring a positive outcome to CCA, which seems to be value enhancing to both shareholders. But unfortunately, CCA was not able to foresee the consequences that SPCA is falling into the tough competition, as current Australian and international market.

1. What are the economic rationales behind the acquisition? You should discuss the rationales from the perspectives of both the (i) acquirer and (ii) target company. The acquisition of SPC Ardmona (SPCA) by Coca Cola Amatil (CCA) is expected as a successful project that would bring mutual benefit to the parent CCA and subsidiary SPCA. The cooperation of the two companies will also offer greater opportunity for the fruit and vegetable growers in Australia and provide consumers with a wider choice for the products. In this case, the acquisition is the transaction between two firms in the same industry, but not produce the same product or share a producer-supplier relationship (Sydney Morning Herald 2004).

1.1 The acquirer (CCA) The fundamental reason for CCA to acquiring SPCA is that the CCA estimates that 2

University of Technology Sydney 22320 Accounting for Business Combinations acquisition provides an opportunity for CCA to complement its existing beverage business by acquiring leading brands in the ready to eat packaged fruit sector. In other words, by successfully implement the takeover, CCA can further expand its product portfolio, lead the group to enter a new business sector with less risk and high return (Coca Cola Amatil 2005). In fact, new strategies and long-term directions are applied into SPCA by CCA very successful leading to the rise in profit of $45.7 million EBIT accounting for 10.1% increase in total EBIT after 10 months under CCA ownership (CCA annual report 2015). The directors of CCA recognised the growth potential of the resealable fridge fruit pack and single-serve fruit snack pack by identifying moving consumer trend. The SPCA's innovative ready-to-consume fruit have increased 20 percent in small period (Sydney morning herald 2004). Therefore, the director’s decision that acquiring SPC Ardmona, can be considered as reasonable at that period, especially when the high potential of the business sector has been expected and forecasted. The acquisition will strengthen CCA's market position and solidify the relationship with customers in Australia because SPCA is one of the leading brands which contributes a lot to the country’s economy and provides jobs for local workers. Reg Weine, the managing director of SPC, said, “SPC is the second largest employer in the Goulburn Valley and Shepparton”.

1.2 The targeter (SPCA) CCA improves SPCA’s manufacturing and distribution potential by restructuring management and distribution process, which allows SPCA to save the source of direct material. (Coca Cola Amatil 2005 p. 10). Furthermore, the extra volume could be made by combining CCA and SPCA distribution route, and it would give CCA fewer customers with a more significant amount of deliveries and larger drop sizes (Coca Cola Amatil 2005). In specific, Coca Cola could connect SPCA’s product to the grocery store, supermarket and petrol stations.

The acquisition will bring in more funds and technology into the company, providing an opportunity to accelerate the innovation capability for product and package of SPC Ardmona to continue to be the leading brand in Australia (Sydney Morning Herald 2005). 94% of the shareholder of SPCA agrees to an acquisition proposition from CCA (Sydney Morning 3

University of Technology Sydney 22320 Accounting for Business Combinations Herald 2005). The reasons for the agreement of the acquisition of SPC’s shareholder perspective are related to the expectation of growth opportunities in revenue and share price.

As for SPC Ardmona Ltd, it was experiencing success in Australia, Netherlands, and the United Kingdom, while seeking for a corporation to expand the business into other fields or other countries. There are many opportunities for SPCA to export their products overseas by the support of CCA. CCA will support SPC with funding, exporting experience and oversea relationship. Which allows SPCA to pursue enormous revenue goal and elevate the brand’s reputation to a new level.

2. Discuss the background information on the acquisition and your evaluation of the choices made. These include the acquisition method used (e.g., scheme of arrangement, on-market bid, off-market bid), offer price, offer type (cash or shares), premium, regulatory approvals, etc.

Around the time of the acquisition, CCA had a competitive advantage in the field of snack foods and packaged drinks. Besides, the manufacturing system (like the self-owned bottlers) and the logistics chain management including the relationship with big chained restaurants and supermarkets both add to its potential for stable growth. However, due to the fierce price competition in the market of soft drinks, Coca Cola Amatil was kind of stagnated during the years in the early 21st century with the price of its stock fluctuating around 2 to 4 dollars as is shown in the Appendix 1.

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University of Technology Sydney 22320 Accounting for Business Combinations 2.1 Acquisition data Scheme of arrangement refers to a procedure under Corporations Act (2001) which allows companies to rebuild their capitals, assets or liabilities with the consent of the shareholders and Court. This method is the most efficient way for this acquisition because it makes easier to acquire ownership of the target company which only requires 75% shareholders’ approval and has more flexibilities (Gajic & Scarf, 2018). The offer price is $500 million, equates to $2.12 per SPC Ardmona share. The takeover method can be used to effect the same outcome as a takeover offer by transferring the majority or all shares in the target to the offeror in return for consideration paid by the offeror to the target shareholders. As for the scheme of arrangement in the transaction between Coca Cola Amatil and SPC Ardmona, shareholders of SPC will receive a payment of $2.05 per share, and the share price of SPC on the announcement day was $1.78. Meanwhile, the shareholders of SPC will retain a fully franked dividend or three cents cash per share from SPC. Alternatively, the shareholders of SPC can also choose to receive all or part of their considerations as new shares of Coca Cola Amatil, subject to a possible scale back.

2.2 Before acquisition On 9 November 2004, the five-day volume weighted average price for Coca Cola Amatil is $7.46 per share. If shareholders elect to receive 100% scrip would receive shares between $2.12 and $2.19 per share, with three-cent dividend per share to be received as well. Ultimately, the acquisition is approved by shareholders of SPC and the Court, with the entire transaction to be finalised on 25 February 2005 (Sydney Morning Herald 2004). Based on the implied value of $2.17 per SPC Ardmona share on December 13, 2004, the implied historical EBITDA of CCA's proposed consideration is 11.3 times. This is above the recent average EBITDA multiple of 9.5 times for Australian branded food transactions. Particularly, the implied historical EBITDA acquisition multiple of 11.3 times CCA paid for the proposed acquisition compared with S.P.C. Limited when it acquired Ardmona Foods in January 2002 (7.0 times historical EBITDA) and when SPC Ardmona acquired Henry Jones IXL in June 2004 (8.4 times historical EBITDA). (SPC Ardmona Explanatory Booklet, 2004, Section 4) The consideration to be accepted by SPC Ardmona shareholders under all three alternatives

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University of Technology Sydney 22320 Accounting for Business Combinations (100% Cash Consideration, 100% Scrip Consideration or a combination of the two ways above). Based on the volume weighted average price (VWAP) prices and the market share price of SPC Ardmona before 8 October 2004, it stands for a significant premium that is between 27.6% to 51.2%. Nick Navarra (2017) states that the premiums historically paid for control rights in Australia listed corporations vary greatly but are normally in the range of 20% to 40% of the pre-bid price. The detailed information depends on the time structure before the related announcement of the transaction and the premiums contain the level of synergy value as well. For the takeover transaction, an attractive premium has been delivered to shareholders of SPCA since the share price was only $1.78 per share at the date of the announcement. As a result of the announcement of the takeover, the share price of CCA was down 21 cents to $7.27, while the share price of SPCA has increased by 36 cents to $2.14, which indicates that the takeover will be beneficial for SPCA for future development. Since the closing price of SPC Ardmona before the announcement of the acquisition was 1.63 dollars per share, the cash consideration of 2.05 dollars represented a premium of 26%. In addition, compared with the three-month volume weighted average price before the acquisition, it was equal to a premium of more than 39% (the dividend was excluded from the calculation). For this takeover scheme, Coca Cola Amatil has proposed a takeover method with a combination of exchange of stocks and cash payment. By proceeding the transaction with exchanging of stocks, it will allow the share and balance the risks between two parties, but the acquisition requires the company to have a solid balance sheet and good stock as shown in the Coca Cola Amatil’s case. While the transaction with cash payment is with the advantage of clean, instantaneous and are not limited to high-level of management. However, risks may occur, and risks can hardly be shared between the two involved parties. In this case, Coca Cola Amatil will be required to take all responsibility and consequences for the takeover (Schenone 2018).

2.3 After acquisition Ultimately, the takeover had been approved. It took several months for the acquisition to 6

University of Technology Sydney 22320 Accounting for Business Combinations proceed. A vote was held on February 3rd, 2005 to gain the shareholders’ support of the acquisition plan from SPC Ardmona Ltd. And after the agreement between Coca Cola Amatil and the shareholders of SPC Ardmona Ltd was reached, a court hearing was arranged on February 11th, 2005 for the Supreme Court of Victoria to approve the acquisition scheme and the compensation plan to the current investors of SPC Ardmona Ltd. The deal was finalised at March 2005 with Coca Cola Amatil announcing to issue 34 million fully paid shares to meet the consideration plan of the acquisition (Internet Archive, 2016). The impact of the acquisition was promising. As was estimated by a Steering Committee formed by Coca Cola Amatil, while the cash flow, debt servicing, EBIT, and dividends of the parent company would not be influenced, the expected profit of the company in 2005 was supposed to increase as a result of expanded and deepened market penetration with the acquisition.

3. Why does this acquisition require ACCC approval? As an independent Australian institution established in 1995, the ACCC was merged by the Australian Trade Practices Commission (TPC) and the Price Surveillance Authority to administer the Trade Practices Act 1974 (TPA). The ACCC is responsible for managing competition and consumer bills such as preventing illegal anti-competitive behaviour to protect consumer rights, commercial powers and obligations, and implementing industry regulation and price monitoring (ACCC 2019).

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University of Technology Sydney 22320 Accounting for Business Combinations The ACCC's objective is to achieve a competitive market without any human intervention. Once a business action has an anti-competitive effect on the market, the ACCC will not allow the business to act in the corresponding commercial transaction. Therefore, any merger in the industry which affects the current state of the industry, the acquisition will seek permission from the ACCC to show that the acquisition will not have an anti-competitive impact on the entire market.

In the acquisition of SPC Ardmona by Coca-Cola Amatil (CCA), CCA is one of the largest non-alcoholic beverage manufacturers in the Asia-Pacific region and one of the world's five major Coca-Cola bottlers. Faced with such an industry giant, the acquisition is likely to have a huge impact on the industry in which SPC is located. In order to this acquisition to proceed smoothly, the ACCC's approval at the beginning of the acquisition is necessary for CCA to avoid wasted time and possible fines for future investigations.

After review by the ACCC, it shows that although CCA is a very influential multinational company, its business does not overlap with the acquired company SPC and CCA has indicated to ACCC and growers that The Grower Liaison Committee continued to be maintained after the acquisition. Thus, this acquisition is unlikely to significantly reduce the competition for canned fruit and canned tomatoes industry. Therefore, the ACCC approved the acquisition.

4. What are the personal incentives of the board of directors of the (i) bidder, and (ii) target if the acquisition is successful?

This part will analyse how the acquisition process affects the personal incentives of the board of directors in bidder company (Coca-Cola Amatil) and the target company (SPC Ardmona). It will be focused on changes in the director’s wealth, future board seats and future directorship. According to Harford (2003), target company directors are most likely to lose their directorship after the acquisition process. Especially, non-executive directors in the target company tend to experience a negative impact after a merge. As shown in Appendix 3, the 8

University of Technology Sydney 22320 Accounting for Business Combinations majority of SPC Ardmona (SPCA) directors has lost their position after the acquisition process (DatAnalysis Premium 2019). However, SPCA directors were able to gain benefits from the announcement of the takeover. The share price of SPCA has increased from $1.78 to $2.14. Also, the implied value of the CCA Acquisition Proposal (including the SPCA Ardmona dividend of $0.03 cash per share) is $2.17 per SPCA share (Thomson Reuters 2019). Therefore, each director of SPCA has gained financial benefits depends on the number of SPCA shares held. Field and Mkrtchyan (2017) state that when firms recruit the directors, their experience is a major factor regardless of the quality of the previous directorship. When CCA is acquiring SPC, former SPCA chairman David Edward Meiklejohn has appointed as an independent non-executive director in CCA. It is due to CCA is expecting Meiklejohn's directorship experience in other business such as ANZ and WMC Resources will be advantageous to CCA. Furthermore, as Harford (2003) states that demand in director market is driven by experience and reputation, CCA’s appointment will be beneficial to Meiklejohn’s future directorship. Nigel David Garrard was a non-executive director in SPCA during an acquisition. In remuneration report section of CCA Annual report (2005, p. 52) states that CCA and Garrard made a contract that if Garrard to maintain his directorship in SPCA with acceptable performance for two years from the DOA, CCA will pay him a completion bonus of $250,000 before tax. If Garrard leaves after one year from DOA but before the two years, CCA will pay him $125,000 before tax. On March 2007, as Mr Garrard was an employee on the two years from the acquisition date, CCA paid him a completion bonus of $250,000 before tax (CCA annual report 2007, p. 35). Harford and Schonlau (2013) provide evidence that acquisition experience is valued in the director marketplace. Terry James Davis was Group Managing Director of CCA since 12 November 2001. Directors report of CCA annual report (2004, p. 32) shows evidence that Davis is most responsible for SPCA acquisition. Davis served as Director of St.George Bank Limited (Bloomberg 2019), Managing Director at Beringer Blass Wines Estates Ltd, Managing Director at Cellarmaster Wines Pty Ltd. and Council Member at The University of New South Wales(Market Screener 2019). Currently, he is a non-executive director at Seven Group Holding Limited since 1 June 2010 (Morningstar 2019). Davis's career verifies that he 9

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