Fina 405 case analysis bel vino PDF

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Simulation Analysis : Bel Vino

40087833 Fina 405 BB March 18th 2021

Opportunities for Organic Growth Bel Vino management saw opportunities to reduce costs by 1) trimming days of inventory by 30 days, meaning less costs associated with holding stagnant inventory 2) reducing days of accounts receivable by 15 days, which is beneficial because this would improve the cash cycle and increase reinvestment opportunities, and 3) increasing days payable outstanding (DPO) by 15 days. A higher DPO means more cash on hand to be used for short term investing activities. Another cost saving measure proposed by management is the reduction of SG&A expenses that could save between $2-$4 million. This may be achieved through consolidation of Bel Vino warehouses, and lowering COGS. Additionally, a partnership with International Wine Distributor is currently in the negotiation process, and if successful could provide an additional $10-$20 million in annual sales. This would help resolve one of Bel Vino’s largest issues, a lack of exposure.

Reservation Price The WACC reservation price was set at $50.34/share, and the APV was set at $47.04. I chose to go forward with the higher of the two values to maximize shareholder value in the event of a takeover. This value ($50.34) represented nearly a 40% premium over the starting market price of $36. This was justified due to the numerous organic growth opportunities available, and the potential revenue synergies resulting form increased distribution in event of a takeover form a firm with a stronger distribution network.

Value of Individual Firms and Synergies Looking at Bel Vino’s merger with Starshine, the most important synergy to focus on is distribution. For reference, if Starshine provides distribution channels similar to those offered by International Wine Distributor, with whom Bel Vino are currently in negotiations, $10-$20 million dollars of synergy will be available in the form of revenue enhancements. Cost reduction synergies are also available as Bel Vino has extremely good cost management, and redundant operations can be terminated. It is estimated that Bel Vino’s cost management experience can reduce Starshine’s COGS by $2-$5 million/year with an investment of $2 million dollars for investments in new equipment over the next two

years. R&D expenses are also estimated to be reduced by $1.75 million, days of inventory may be reduced by 10-20 days, and days of accounts receivable may be reduced by 5-10 days. With pessimistic estimations, the value of the cost saving and revenue bearing synergies combined is $13.75 million/year with a sunk cost of $2 million for equipment over the next two years. This does not account for organic growth in Bel Vino or Starshine, and does not account for synergies stemming from the days of inventory and days of accounts receivable improvements. Optimistically, the value of the synergy is $26.75 million/ year with the same sunk cost. Bel Vino’s current Market Value is $498.4 million, and Starshine’s is $458.3 million. With no synergy, the combined firm would be worth $956.7 million. If we use the pessimistic values to calculate the present value of synergy, we first find the weighted WACC between the two companies (8.21%), and use it to discounting the $13.75 million/year. We then subtract the sunk cost of $2 million and the result is $165.48 million in synergies. This brings the value of the combined firm to ~$1.122 billion.

Negotiation Initially, due to International Beverage’s large distribution network and the resulting synergies, we offered them and unofficial price of “just under $60” in order to leave room for negotiations. They countered with a $52 offer. In order to maximize Bel Vino shareholder returns, we were looking to get a number significantly higher than our reservation price, and at $52, it seemed that the ZOPA was rather small. Starshine had already offered a share swap of 1.19, however this did not interest us. They then offered a share swap of 0.90. This was more than International Beverage was willing to offer, and showed that the ZOPA between us and Starshine was likely larger than that between us and IB so we pursued further negotiations with Starshine. We ended up agreeing on a share swap of 0.87 Bel Vino shares for each Starshine share. This valued Bel Vino’s shares at $65.84, nearly doubling its initial market value of $36, and providing a 30.7% premium over the reservation price. Starshine paid a $160 million premium over Bel Vino’s market value, which is just under the $165.48 million value of synergy. In addition, if the organic growth that is expected of Bel Vino occurs, this premium will prove to be worth the cost. We feel that our shareholders will appreciate our decision to go ahead with the merger at this price as it represents a substantial return on investment. We also feel Starshine will earn a positive NPV on this acquisition....