EMPRESAS POLAR vs. BAVARIA, S.A.: ACQUISITION OF MINORITY BLOCKS OF BACKUS & JOHNSTON’S VOTING STOCK Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

EMPRESAS POLAR vs. BAVARIA, S.A.: ACQUISITION OF MINORITY BLOCKS OF BACKUS & JOHNSTON’S VOTING STOCK Case Solution

Discounted cash flows of projected results

Following assumptions and projected results are shown in order to know the proper valuation and price of market shares. It would benefit Polar in order to know the expected value of Backus in the coming years as well as it would provide information to Bavaria regarding the future performance, which would increase the profitability ratio in the emerging markets.

Projected Income statement

It has been analyzed that Backus was performing well in the developed economies such as northern America and Europe however, there waslack to control in the emerging countries because of already established local companies, who controlled almost 80% of the market. On the other hand,the historical performance shows that Backus increased its sales volume up to 18% per year and expected to consider this margin in the coming years. However, the emerging market could help it to increase by large volume and provide high returns to its shareholders.

It shows that the sales volume will tend to increase in the same ration throughout the projected years, whereas the cost of goods sold would vary according to the marginal sales volume.An example of this could be that if the sales ratio will decline to the expected value, then the cost associated with it would increase. Therefore,according to the current scenario, the sales areinversely proportional to the cost.

The average expenses in the projected results show that it will be directly proportional to the level of sales,thereforeif the volume of sale will increase then the operating expenses associated with it also tend to increase in the fixed ratio of sale. Thus, it indicates that 37% of average operating expense will incur throughout the selected years.

Depreciation is assumed to be 30% of fixed assets asthe post-acquisition will require heavy investment in the machines within a country and it will likely depreciate in the first three years and then it would purchaseanother fixed assets to expandthe business operations in the last two years.

As far as the developing countries can be subject to high inflation rate, it is assumed that interest rate will be 14%, which can be high enough to reduce the profitability margins due to political intervention or other economic issues in a country.On the other hand,tax is estimated to be 50% of net income because many of the emerging economies imposed high tax margins for the beer industry as compared to the historical tax deduction for different market giants.

The overall projected results shows that revenues will tend to increase unless there will be any threat of inflation rate. Also, after tax value will benefit the shareholders to enjoy high profit margins in the coming period.

Discounted Cash flow

In order to value the company for acquisition in the future, a particular cash flow method has been used for analyzing the expected worth of company in terms of EBITDA and net income multiples. The capital expenditure rate is assumed to be 5% of sales because the company will tend to spend the money in order to purchase machines within a selected country of operations. Therefore, it shows that cash flows will increase throughout the years of projected results.

The terminal value will estimated to be 4% in the end of last year, which will be adjusted in the total worth of the company. Weighted average cost of capital will be considered as 16% of the total company’s value, in which 12% will be the total equity cost. According to the analysis, the total net present value of Backus will be approximately 376 million in the end of the projected year and is subjected to provide information to Polar in order to make sure the company’s worth meet their demand to purchase........................

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EMPRESAS POLAR vs. BAVARIA, S.A.: ACQUISITION OF MINORITY BLOCKS OF BACKUS & JOHNSTON’S VOTING STOCK Harvard Case Solution & Analysis