Loblaw Companies Limited: Acquiring Shoppers Drug Mart Case Study Solution
Recommendation
After taking into consideration the valuation of the company, it is to recommend that the company should buy stock of the Shoppers Drug Mart at the calculated share price. Also the enterprise value is one of the useful tool that tend to measures the theoretical purchase price of the company.
There are various primary benefits for shoppers and Loblaw; by bulking up and joining forces, shoppers and Loblaw would likely strengthen their position and they would improve their capability to compete with the international players as well as domestic players in Canada that are growing in size.
The companies believe that they would fund efficiencies in their business operations that is one of the common claim when the mergers are proposed. For shoppers and Loblaw, these efficiencies would happen via bulky purchasing and more efficient supply network to service their various locations.
Shortly, the acquisition would likely strengthens Shoppers Drug Mart and Loblaw Companies Limited in the competitive marketplace, it would deliver more value, and choice and convenience in order to help the people in Canada live life well. These companies would be a perfect partner, it would drive the profitability and growth through unmatched mix of the products, store formats and offerings. The acquisition would bring altogether two iconic brands of Canada and harnesses the complementary strength of the number one grocery retailer and pharmacy and beauty retailer of the nation. It would strengthen the competitiveness of both companies in an evolving retail landscape, hence to create the growth opportunities for the shareholders.
Conclusion
To sum up, it is to conclude that Loblaw Companies LTD should acquire Shoppers Drug Mart by purchasing the stock at the purchase price of $64.40. These companies would capitalize on the consumer trends, and would create the compelling new blueprints for profitability and growth in future. There would be an opportunities for the synergy between Loblaw and Shoppers Drug Mart because these brands have been perceived as very different sector. This in turn might offer opportunities for the combined companies to do something that are quite creative, in the future.
Appendix
| Valuation - DCF method | |||||||
| Actual | Forecasted | ||||||
| FY 2011 | FY 2012 | FY 2013 | FY 2014 | FY 2015 | FY 2016 | FY 2017 | |
| Sales | 31250 | 31604 | 32014.852 | 32431.05 | 32949.94 | 33510.09 | 34180.29 |
| % growth | 1.1% | 1.3% | 1.3% | 1.6% | 1.7% | 2.00% | |
| COGS | -23894 | -24185 | -25394.25 | -26664 | -27997.2 | -29397 | -30866.9 |
| Gross profit | 7356 | 7419 | 6620.602 | 5767.083 | 4952.781 | 4113.072 | 3313.423 |
| EBIT | 1384 | 1195 | 1399 | 1499 | 1635 | 1782 | 1937 |
| % margin | 4.4% | 3.8% | 4.4% | 4.6% | 5.0% | 5.3% | 5.7% |
| Tax | 288 | 210 | 448 | 480 | 524 | 571 | 621 |
| 32.05% | 32.05% | 32.05% | 32.05% | 32.05% | |||
| NOPAT | 1096 | 985 | 951 | 1019 | 1111 | 1211 | 1316 |
| Add: depreciation & amortization | 245 | 248 | 252.96 | 258.0192 | 263.1796 | 268.4432 | 273.812 |
| Capex | 240 | 252 | 264.6 | 277.83 | 291.7215 | 306.3076 | 321.623 |
| Working capital | 8 | 8 | 8 | 7 | 6 | 9 | 9 |
| Free cash flows | 1093 | 973 | 931 | 992 | 1076 | 1164 | 1259 |
| Terminal value | 19666 | ||||||
| Discount period | 0 | 1 | 2 | 3 | 4 | 5 | 6 |
| Discount factor | 1.0000 | 0.92592593 | 0.85733882 | 0.793832 | 0.73503 | 0.680583 | 0.63017 |
| Discounted free cash flows | 1093 | 901 | 798 | 787 | 791 | 792 | 794 |
| Discounted terminal value | 12392.73453 | ||||||
| Net Present Value / Enterprise value | 18349.15834 | ||||||
| Terminal growth rate (given) | 1.50% |
| Weighted average cost of capital (assumed) | 8% |
| Share price calculations | |
| Total enterprise value | 18349.158 |
| Total debt | 3150 |
| Equity value | 15199.158 |
| Multiples | FY 2011 | FY 2012 | FY 2013 | FY 2014 | FY 2015 | FY 2016 | FY 2017 |
| EBIT/ EV | 8% | 7% | 8% | 8% | 9% | 10% | 11% |
| Price earnings ratio | 28.8803647 | ||||||
In equity kicker, the lenders of the Boston Company would provide credit at a low rate of interest and in exchange it would most likely received the equity position in the congoluem company. The company offers with the intent of attracting the potential investors who would not be interested in lending to the company.
The equity stripping would be designed for the purpose of reducing the overall equity in a property. The role of the strip financing is inevitable because it repackage different forms of obligations such as preferred stock, debt and common stock into one security, the idea is to ease the interest conflicts and cost of agency between holders of bond, initial components and stockholders............
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