H.J. Heinz M&A Case Study Solution
Question-5: Complete a valuation of Heinz for this acquisition based on the financial information provided in the case. Develop a “football field” valuation analysis to provide a visualization of the variousvaluation techniques. In support of this analysis, provide your rationale for why you chose certaincompanies to include in your comparable companies and comparable transaction analysis.
Heinz Valuation
The fairness of the deal was checked through the application of various different tools of valuation of the company including the discounting cash flow method, valuation of the company through different multiples including the enterprise value/ EBITDA, price earnings ratio, price sales ratio, and sum of the parts analysis.
From this overall analysis, the cash share price offered in this deal by the prospective buyers is fair from a financial perspective.Since, it is close to the calculated cash share price.
Discounting Cash Flow Method:
In order to perform the DCF calculation of the company, the discount rate is calculated. For the calculation of weighted average cost of capital; the risk free rate as well as the market risk premium was given in the case. The beta for the company was calculated by using the debt over equity ratio of the year 2013. The weight ages of equity as well as debt is calculated from the balance sheet analysis of the company in the year 2013. The tax rate is 35% given in the case. The weighted average cost of capital is calculated using the formula for WACC.
The discount rate for the company is calculated to be 4.04%. In order to calculate the free cash flows for the projected years from 2014 to 2018, the revenues have already been calculated. The cost of goods sold as well as selling general and administrative costs are calculated from the historical trend analysis and the depreciation and amortization is calculated from the given assumption. The overall calculation provides the value of earnings before interest and taxes.
Terminal value of the company is calculated using the terminal growth rate of 0.1%. All the values of net free cash flows are discounted back to its present value using the discount rate of 4.04% to come up with the value of enterprise. The firm value is calculated by adding the available cash in hand by the company. The equity value is calculated by subtracting the value of debt.From that value, the outstanding shares is divided by the outstanding shares of 321, which derives the value of $ 72.38.This is a favorable value for Heinz in terms of the offer made by the prospective buyers.
Sensitivity Analysis
By performing the sensitivity analysis, the values of per share is calculated by considering the different WACCs and the growth rates, which derive the maximum per share value for the football field analysis.
Comparable Transaction Analysis
In order to perform the comparable transaction analysis, the most important thing is to analyze the appropriate transaction in relation to the current company. From the overall data, the comparable transactions are Ralcorp Holding, Inc, Pringles Business of P&G, N.A. frozen pizza business of Kraft, and Cadbury plc. The values of minimum as well as maximum of their EV/EBITDA are taken in order to make the football field analysis. The maximum value calculated with this multiple is $ 74.30, whereas the minimum value is $ 60.19.
Comparable Valuation Analysis
Similar to the upper analysis, this also requires selection of appropriate company.. Here, the comparable analysis is of General Mills, GroupeDanone, Kellogg, Nestle S.A., Unilever, and Smuker. By taking the minimum as well as maximum of the multiple, the valuation of per share price is calculated for the Heinz, which can be seen quite comparable to each other.Overall, the values taken from all the different valuation techniques are showing a similar amount, which are in the best interest of Heinz.
Football Field Analysis
Question-6: Why did this transaction propose zero synergies? Discuss and quantify the potential synergies that could be realized. Consider and rationalize (i) the source of the synergy (ii) the period of time over which the synergy could be realized and (iii) the impact on enterprise value (provide quantified estimate).
The purpose of the acquisition was for the zero-synergies because the company was only focusing on recovering potential losses. If we look at the potential level of synergies after acquisition, then they would vary according to the different cultures where they would like to operate. For example, the consumer markets of healthcare products is high in France and other parts of Europe, this would increase the level of synergy if the company would acquire a local brand of the country.
As far as the consumer market is good in the emerging countries, excluding the level of synergy; 3M Company and Berkshire would have the opportunity to increase the level of shares prices by allowing Heinz to operate strongly in the selected area.
Evaluation of Synergies
Despite the complimentary portfolio companies with Berkshire owing See’s Candies, The Pampered Chef, Mars Inc., and Dairy Queen, and the 3G Capital owing Burger King Holdings, the buyers have zero synergies in Heinz’ acquisition as Heinz would operate independently even after the acquisition. Heinz would remain to be an independent portfolio company.
There appears to be zero synergy as Heinz will operate as an independent company;whereas synergy translates toa win-win situation for both the companies. Operating as an independent company will prevent the organization from gaining synergies as synergy refers to the sharing of strengths and weaknesses, merger of respective values and performance, leading towards an increase in the value and performance of the overall organization. Working together will decrease the cost for the organizations, as there wouldn’t be any duplication of resources.
Moreover, financial synergy is achieved in the merger and acquisitions, as the company’s cash flow position has increased due to an additional finance contributed by the acquisition. As both the companies will operate independently, additional value will not be generated as each company will be responsible for its own performance. In addition to this, duplication of resources will be made as each organization will be responsible for its own cost and investment decisions.
Question-7: What is the market reaction to the acquisition announcement? Consider both the equity price and analysts’ commentary.
After the announcement of acquisition, the market reaction in Pittsburgh was negatively affected by the citizens because they were quite nervous about the possibility of relocation of business into other parts of the world.
The reaction from shareholders was quite favorable to the company because they were aware of the company’s current position of and of a potential benefit from the acquisition.However, they were not satisfied with the go-shop strategy implemented by the company.
The competitors within the industry were quite nervous about the potential threat imposed by the acquisition from 3M Company and Berkshire, as it could give Heinz a competitive advantage. They were eager to close this process in order to maintain their strong position.
Nevertheless, the deal was quite acceptable for the company as well as its shareholders because it would benefit the entire operations through recapitalization and increase the stock price level in order to provide additional benefits to its shareholders.
Question-8: What is the reason for an all-cash transaction? Critique the advantages and disadvantages of anall-cash deal compared to a deal that relies on some or all common shares. Determine and evaluate the primary risks and benefits of the transaction to Berkshire Hathaway and 3G.
The reason for all cash deal is that it helps in raising the additional amount of debt when buyers lack the required amount of cash to close the deal. Moreover, this deal could examine the liquidity position as well as the potential rating on credit ratings.
This could be done from the slight positive returns to acquire the shareholders of other company. The deal could provide transparency as well efficiency for both sides of the transaction. In addition to this, it could also help in analyzing immediate gain or loss from the deal.
However, this type of deal could also create some issues in terms of tax consequences for the target shareholders. Moreover, it could also result in the downgrading of the company on major credit ratings. These risk and benefits should be considered by 3M and Berkshire Hathaway in order to close the deal with the company.
As opposed to the cash deal, all stock deal estimates the market risk and fixes it in the price of the deal through the shares. Moreover, it calculates the ownership percentage and the optimal swap ratio for the deal. In addition to this, it has a higher termination fees when compared with the all cash-deal
All Cash Transaction
The advantages and disadvantages in relation to financing the deal with all cash, are mentioned below:
Advantages:
- The liquidity position of the company will deteriorate as significant cash will be paid for acquiring the company.
- Managing day to day operations might be difficult for the organization due to the lack of cash.
- Dividends might need to be downsized, thus, leading towards low confidence on investors and decrease in the company’s share price due to the rumors in the stock market regarding the financial sustainability and ongoing concern of the company.
- Profitable opportunities might not be seized due to the lack of cash required to fund the investment projects.....................
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