NiseFood Corporation is analyzing the possibility to acquire KradFood Corp.
Kradfood earnings have been under pressure in recent years, due to the change in consumer preferences. Consumers are now more willing to pay an extra price for healthier food, and are reducing the consumption of fast food.
Nisefood Corp is exposed to the growing segment of the food industry, while Kradfood is focused on un-healthy food.
Nisefood expects to improve Kradfood distribution channel, using its existing distribution network, restructuring production facilities from un-healthy food to healthy food and to reduce operating costs in the process. Nisefood will give Kradfood some machinery that is not in used, but is on sale for 1m eur, which is its fair market price. It will be fully depreciated during the following 4 years XXXXXXXXXXand then sold it’s salvage value of €100,000.
There is enough room to grow the acquired company (Kradfoods) sales by 11% per year during the next 5 years, and then reduce the growth rate to 5.5% per year until year 10. Growth at perpetuity is estimated to be 5%. However, the acquisition will place several outlets for both
ands that are close by in intense competition (derived from Kradfood better competitive capabilities after the acquisition), and Nisefood sales will be reduced by 1% from its actual level XXXXXXXXXXin years 2023, 2024 and 2025. The impact is null from that date onwards.
Managers at Nisefood forecast that the EBITDA Margin will also improve by 2.75% of sales from the level today (12.31%) thanks to the synergies in the distribution channel and the manufacturing operating efficiencies.
The acquirer expects Kradfoods NWK to be reduced by 0.25% of sales (per year) from 2022 level in years 2023 to 2024 and then to grow at 0.05% (per year) as percentage of sales from 2025 onwards (2025 included).
The depreciation expense will be stable as percentage of sales during the forecast period, at a ratio similar to 2022.
Capital Expenditure will increase by 0.35% per year as a percentage of sales during the first three years (2023 to 2026), but will come back to the 2021 level as a percentage of sales from 2027 onwards.
The tax rate is expected to be 21%
Please find the P&L and Balance Sheet of Kradfoods Corp in the Excel attached, save time and use that information for your calculations.
Nisefoods Corp will change the leverage of the acquired company.
The new capital structure will be 40% debt to total debt plus equity (D/V)
Please find the relevant information to calculate the discount rate (WACC):
Kradfoods Corp is placing a bond today in the market at a price of €100.15, and a coupon of 5.46% annual, maturity ten years (end XXXXXXXXXXAssume that the YTM of its debt in the 40% D/V ratio is going to be the same than that of this bond. The risk free rate (German Govt 10 years) yield to maturity is 1,78%.
The levered beta of Kradfoods Corp is not known but we have data from a universe of “comparable companies “ shown in the Excel.
The Equity Risk Premium is 4.29%
Nisefoods Dividend Payout ratio is 45%. Management expects to increase the payout ratio to 55% after the acquisition. Nisefoods Inc business size (sales) are similar to Kradfoods Corp, but more profitable. It has grown in the past through debt issuance and retained earnings. Nisefoods Balance Sheet leverage is in line with the target D/V that it is proposing Kradfoods Corp BS.
Nicefoods management owns 20% of the company, and has an incentive program linked to economic value creation during long term periods (6 years). The stock options, if granted, would increase their stake to 25% of the company in 5 years.
Using the information given above please:
1- Calculate the projected FCF . Please explain why you include or not the use of excess capacity, cannibalization expenses. If included please show the impact at a different line .
2- Value KradFoods Corp using a DCF analysis (WACC). What is its’ EV? What is the Value of its’ Equity?
3- Please also value KradFoods Corp using for the terminal value a Market Multiple EV/EBIT 17.5x. (use the Ebit in the TV year to derive the EV)
4- Explain why the valuation using DFC (WACC) and DCF (WACC) & EV/EBIT is different. When would you use the valuation using the “exit multiple” EV/EBIT? When would you use the WACC for the derivation of the TV?
5- Please describe the impact of the change in the dividend policy from the point of view of signaling and agency problem. Make any assumptions you need to make to support your comment. Would you recommend then a different dividend policy? Why?
Please work all your calculations in the Excel given, and answer the questions above both quantitatively and qualitatively (if you think there is room to make comments).
P&L
KradFoods Corp P&L Statement EXHIBIT 1
(million euros)
2020 2021 2022
Sales Net sales $6,545 $6,728 $7,001
Initial Inventory Beginning inventory 850 865 922
Purchases Purchases 3,338 3,431 3,571
Final Inventory Ending inventory 865 922 975
COGS Total cost of goods sold $3,323 $3,374 $3,518
Gross Margin GROSS PROFIT $3,222 $3,354 $3,483
Operating Expenses 2,114 2,363 2,621
EBITDA Operating expense (b) 1,108 991 862 XXXXXXXXXX
Depreciation 192 187 180
EBIT 916 804 682
Interest Expense Interest expense 121 133 142
Profit Before Tax (PBT) Net income before taxes $795 $671 $540
Tax (30%) Provision for income taxes 239 201 162
Net Income Net income $557 $470 $378
Dividends Paid 334.03 281.70 227.01 60%
Retained Earnings 222.684 187.80 151.34 40%
Purchases as % sales 51.0% 51.0% 51.0%
Operating Expenses % sales 32.3% 35.1% 37.4%
EBITDA Margin 16.9% 14.7% 12.3%
EBIT Margin 14.0% 11.9% 9.7%
Net Income Margin 8.5% 7.0% 5.4%
Capital expenditure 201 192 187
Capital expenditure as % sales 3.1% 2.9% 2.7%
Nisefood Corp P&L Statement EXHIBIT 1
(million euros)
2022
Sales Net sales $8,000
&A
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Balancesheet
KradFoods Corp Balance Sheet
(M euros)
2020 2021 2022
Cash 584 634 773
Acc. Receivable 3,928 4,453 4,600
Inventory 865 922 975
Cu
ent Assets 5,377 6,009 6,348
Fixed Assets 1,870 1,805 1,741
Total Assets 7,247 7,814 8,089
Banks (debt) 2,027 2,436 2,741
Acc. Payable 992 951 749
Defe
ed Taxes 40 20 9
Cu
ent Liabilities 3,059 3,407 3,499
Long Term Debt 2,010 2,041 2,072
Total Liabilities 5,069 5,448 5,571
Shareholders equity 2,178 2,366 2,517
Total Liabilities & Net Worth 7,247 7,814 8,089
4,825
XXXXXXXXXX
&A
Page &P
Comparable Cos
Universe of Comparable Companies in the Food Industry
% Sales in Industry Book Value Equity Market Capitalization Debt EV EBITDA Net Income Levered Beta
Burger Corp 82.00% 10,080 25,200 4,800 30,000 3,650 2,016 1.25
Small Mac Co 65.00% 10,667 32,000 8,000 40,000 4,050 1,920 1.67
Fingers Corp 67.00% 10,641 18,090 - 0 18,090 1,990 2,714 2.30
Shrimper Corp 81.00% 1,752 3,680 370 4,050 920 800 2.70
Clairon Corp 10.00% 2,667 7,200 3,800 11,000 1,200 864 2.00
Cod Corp 87.00% 5,538 7,200 6,800 14,000 925 1,152 1.40
Myfish Corp 78.00% 9,429 6,600 6,400 13,000 1,100 201 1.87
Azuzena Corp 56.00% 10,818 11,900 3,590 15,490 1,700 1,599 1.67