H.J. Heinz M&A Case Solution
1.What was the market reaction to the acquisition announcement and what do you conclude from it regarding the fairness of the deal?
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.
2.Should financial acquirers (as opposed to strategic acquirers) been considered as prospective buyers?
The total deal shows that there was a less amount of debt involved during the acquisition. Therefore, any financial institution would avail the opportunity to lend the debt amount for expansion of operations. This would allow acquiring the majority of shares within the company and could consider taking decision about the future benefits.
In this case, both acquirers of Heinz had investment bankers, who advised to either merge or reject the deal. Therefore, the bankers had the opportunity to purchase the majority of stocks through lending money into the operations. This would allow them to increase the level of liquidation within Heinz, reduce the risk occurred in the go-shop process and to retain the shareholders benefits for the future dividends by reducing the level of tax obligations in order to increase the profitability ratio.
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 using the following:
| WACC calculation | |
| Risk free rate | 1.80% |
| Beta | 0.72 |
| Market risk premium | 6.00% |
| Cost of Equity | 6.12% |
| Cost of Debt | 4.70% |
| Weight of debt | 67.84% |
| Weight of equity | 32.16% |
| Tax | 35.00% |
| WACC | 4.04% |
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 weightages 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:
WACC = Cost of Equity * Weight of Equity + Cost of Debt * Weight of Debt * (1- Tax)
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.
Free cash flows of the company are calculated using the formula:
FCF = NOPAT + DEPRECIATION – CAPITAL EXPENDITURE – CHANGES IN NET WORKING CAPITAL
| FCFF | Years | |||||
| Particulars | 2014 | 2015 | 2016 | 2017 | 2018 | |
| Sales | $ 12,141 | $ 12,657 | $ 13,112 | $ 13,744 | $ 14,446 | |
| Cost of products sold | $ 7,892 | $ 8,227 | $ 8,523 | $ 8,934 | $ 9,390 | |
| Gross profit | $ 4,249 | $ 4,430 | $ 4,589 | $ 4,810 | $ 5,056 | |
| SG&A | $ 2,635 | $ 2,747 | $ 2,846 | $ 2,983 | $ 3,135 | |
| Depreciation & Amortization | $ 452 | $ 412 | $ 375 | $ 342 | $ 313 | |
| EBIT | $ 1,162 | $ 1,272 | $ 1,368 | $ 1,485 | $ 1,608 | |
| EBIT(1-Tax) | $ 756 | $ 826 | $ 889 | $ 965 | $ 1,045 | |
| Add back: Depreciation | $ 324 | $ 310 | $ 295 | $ 280 | $ 266 | |
| Add back: Amortization | $ 47 | $ 47 | $ 47 | $ 47 | $ 47 | |
| CAPEX | $ 405 | $ 365 | $ 328 | $ 295 | $ 266 | |
| Changes in WC | $ (20) | $ - | $ - | $ - | $ - | |
| Free cash flows | $ 702 | $ 819 | $ 904 | $ 998 | $ 1,092 | |
| Terminal Value | $ 27,746 | |||||
| Net FCFF | $ 702 | $ 819 | $ 904 | $ 998 | $ 28,838 | |
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.
| Enterprise Value | $26,741.12 | |
| Cash | $2,477 | |
| Firm Value | $29,217.81 | |
| Debt | 6,009 | |
| Equity Value | $23,209.08 | |
| Outstanding Shares | 321 | |
| Per Share Value | $72.38 | |
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.
| Per Share value | 1% | 2% | 3% | 4% | 5% | 6% | 7% | 8% | 9% | 10% |
| 0.1% | $ 363 | $ 165 | $ 103 | $ 73 | $ 56 | $ 44 | $ 36 | $ 29 | $ 25 | $ 21 |
| 0.2% | $ 408 | $ 174 | $ 107 | $ 75 | $ 57 | $ 45 | $ 36 | $ 30 | $ 25 | $ 21 |
| 0.3% | $ 467 | $ 184 | $ 111 | $ 77 | $ 58 | $ 45 | $ 37 | $ 30 | $ 25 | $ 21 |
| 0.4% | $ 544 | $ 196 | $ 115 | $ 79 | $ 59 | $ 46 | $ 37 | $ 31 | $ 26 | $ 22 |
| 0.5% | $ 653 | $ 209 | $ 120 | $ 82 | $ 61 | $ 47 | $ 38 | $ 31 | $ 26 | $ 22 |
| 0.6% | $ 817 | $ 224 | $ 125 | $ 84 | $ 62 | $ 48 | $ 38 | $ 32 | $ 26 | $ 22 |
| 0.7% | $ 1,089 | $ 241 | $ 130 | $ 87 | $ 63 | $ 49 | $ 39 | $ 32 | $ 27 | $ 22 |
| 0.8% | $ 1,634 | $ 261 | $ 136 | $ 90 | $ 65 | $ 50 | $ 40 | $ 32 | $ 27 | $ 23 |
| 0.9% | $ 3,269 | $ 285 | $ 143 | $ 92 | $ 67 | $ 51 | $ 40 | $ 33 | $ 27 | $ 23 |
| 1.0% | #DIV/0! | $ 313 | $ 150 | $ 96 | $ 68 | $ 52 | $ 41 | $ 33 | $ 28 | $ 23 |
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.
| EV/EBITDA | ENTERPRISE VALUE | Equity Value | Price Per Share | |||||||
| Upper Boundary | 13.3x | 27358 | $23,826 | $74.30 | ||||||
| Lower Boundary | 11.1x | 22833 | $19,301 | $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, Groupe Danone, 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.
| EV/EBITDA | ENTERPRISE VALUE | Equity Value | Price Per Share | |||||||
| Upper Boundary | 12.3x | 25212 | $21,680 | $67.61 | ||||||
| Lower Boundary | 10.6x | 21781 | $18,249 | $56.91 | ||||||
| P/E | Equity Value | Per Share Price | Enterprise Value | EV/EBITDA | |||||||
| Upper Boundary | 19.2x | 19773 | $62 | $23,305.29 | 11.33 | ||||||
| Lower Boundary | 16.6x | 17047 | $53 | $20,578.71 | 10.00 | ||||||
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
Acquisition premium for the deal
As far as the deal was focusing on the zero synergies, the acquisition premium would be equal to zero because the 3M Company and Berkshire offered the same price as compared to the stock shares price of Heinz. The deal was only fair for expanding the business into different parts of the world. However, no prior decision was made with regards to the region in which acquirers wanted to operate.
Heinz’ main focus was to overcome the losses it incurred in the past. Therefore, it would benefit the company to reduce the risk of business loss. However, the deal was fair to both the shareholders since this acquisition was expected to bring high yields......................
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