Sterling Case PDF

Preview

Summary

sterling case...

Description

MBAX 6210-001 - Applied Finance Sterling

Overview: From its inception as a manufacturer of laundry products in the early 1920s, Sterling Household Products had successfully expanded into a to a wide variety of consumer household products. Despite producing steady financial returns for years, from 2010 to 2012, Sterling was facing nearly stagnant sales growth at just 4.5%. A majority of this meager growth rate stemmed from price increases, as its unit sales volume was nearly flat at 1% growth year-over-year. Many of Sterling’s mature product lines were also facing pressure from retail customers, who were actively producing private-label substitutes. These flattening trends elevated Sterling’s need to identify and shift into new growth markets. In January of 2013, Sterling’s management identified an opportunity to acquire a germicidal, sanitation, and antiseptic products unit owned and operated by Montagne Medical Instruments. Sterling felt this represented an intriguing opportunity for growth due to a budding trend in household cleaning, disinfecting, and sanitizing products. The acquisition would not only allow Sterling to gain a foothold into new market for a price of $265 million, but would also be a natural extension of their current products. Montagne’s infection-control products unit was for sale for $265M and appeared to make good strategic sense for both parties. Analysis of the Opportunity’s Risk: In our analysis of the business risk of the opportunity, we decided to look at the asset betas of both Chiron and Pathogen because they most clearly mirrored the opportunity with 80% of revenues coming from similar products. While there were six established companies with significant market share, four of them sold a wide variety of medical products (Teological, Labyrinth, Stratus, and Vortex). The two which we selected to use were had 80% of their revenues coming from germicidal, sanitation, and antiseptic products (Chiron and Pathogen). While Chiron and Pathogen’s equity betas were slightly different (.85 versus .9), their asset or ‘unlevered’ betas were identical at .74. Pathogen’s higher equity beta is due to their 25% debt financing, which was close but not exactly the same as the proposed 30% for Sterling’s future investments. However, the calculated asset betas allowed us to compare the volatility of Chiron and Pathogen compared to the volatility of the market overall. At an asset beta less than one, we concluded there is very little business risk associated with the acquisition (assuming all equity financing). Further, because Sterling’s acquisition of Montagne fits within the larger context of their business plan, being a household products brand, we believe the acquisition does little to increase the business risk. Using the asset beta of the competition and Sterling’s proposed capital structure of 30% debt and 70% equity financing, we calculated a levered beta of .95 (still...