How attractive to PepsiCo is the proposal to buy 30% of Deltex for 1.1B pesos (US$360M)?
Based on the information in the case, Pepsi could invest US$360 million in exchange for 30% equity of Deltex. So we have to calculate the value of 30% equity of Deltex. First, we calculated the discount factor by using average unlevered beta of US independent bottlers, US 10 year Treasury bond as risk free rate and assuming market risk premium 10%. We came up with 9.83% of WACC. Next, we calculated Deltex free cash flow and terminal value and then converted them into US dollar value. Now with WACC and total cash flow, we had NPV of the company. So we deducted current debt from NPV and came up with the value of US$360M investment equal to 59.99% of Deltex equity. So the proposal to buy 30% of Deltex with US$360M is too expensive to PepsiCo and not attractive to PepsiCo.
If we look at the sensitivity analysis, we find as WACC increases, the percentage of US$360M investment in Deltex also increases. When WACC is 5.8%, the percentage of US$360M investment in Deltex is equal to 30% equity of Deltex.
WACC Percentage of Equity
4% 19.35%
6% 31.35%
8% 45.25%
10% 61.44%
12% 80.39%
14% 102.69%
16% 129.18%
18% 160.96%
6. As Suarez, would you invest in the Sanchez/ Deltex joint venture as proposed in the case? Why or why not? Can you suggest a joint venture arrangement that is more attractive to both PepsiCo and Deltex?
In deciding whether to invest in Deltex, we have to consider some advantages and disadvantages of this deal first.
Advantages and Opportunities for Pepsi
a. Pepsi needed a strong regional partner. Pepsi had been falling behind to Coke in Mexican market. However, changes in the regulatory environment had cut Coke’...
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...nties there would be in the joint venture.
Overall, we think advantages outweigh disadvantage but Sanchez should revise the proposals. First he should raise the equity percentage that Pepsi can receive. Depending on WACC, we propose to increase to 40%. Second, regarding to management, Deltex was long time Pepsi’s bottler and their relationship had worked well in the past years. However, with such big investment, we think Pepsi should take measures to ensure its strategies were taken. Those measures included Deltex should report its operations and strategies to Pepsi on the monthly basis, Pepsi should reserves the right to appoint half of the Deltex board of directors and CFO or other key personnel except operating managers. Also, Pepsi should be given a right of first refusal to any transaction in which Sanchez was to sell his shares as in Gallardo joint venture.
The WACC is basically computed by the sum of multiplying the costs per component to its respective proportional weight (how much that company uses a certain cost of capital) [See Appendix 1]. As financial management is focused on the maximization of the stock price, an optimal structure of costs based on these three factors is needed.
In order to find out what are some of the key drivers’ of the analysis I will further run different sensitivity analysis. I think some of the key drivers of our assumptions could be sales growth, production costs as a percentage of sales, inventories as a percentage of cost of goods sold etc.
The first thing Tremont has to do is to start using a different discount rate. Rather than using the CFO’s suggested cost of debt as the discount rate, it would be more appropriate to use Weighted Average Cost of Capital, as Tremont uses a mix of debt and equity.
At the end of 1991, PepsiCo had EBITDA of $2.1 billion or operating profit margin of 10.8% - down from profit margins of 12.2% and 11.7% in 1990 and 1989, respectively. In addition, net sales only grew by 10.1% in 1991 – considerably low versus growth of 16.8% and 21.6% in 1990 and 1989, respectively. Recent acquisitions of Taco Bell franchises in 1988, bottling operations in 1989, Smiths Crisps Ltd. and Walkers Crisps Holding Ltd. in 1989, and Sabritas S.A. de C.V. in 1990 aided sales in growth in 1989 and 1990. Additionally, a joint venture with the Thomas J. Lipton Co. in 1991 to develop and market new tea-based beverages may lead to greater sales in the future. However, there is some need for an immediate return on its investments in order to sustain historical revenue growth and increase the current profit margins.
The acquisition will not harm SoBe’s performance as long as each company, giant PepsiCo and nicher SoBe, will stick to what they can best; SoBe has to attract the youth, Pepsi the mass. My experience shows that many acquisitions are done quietly; on a ‘hidden level’. This should be very important to hold the young customers of SoBe. If the fickle target group of SoBe not even take in what happened their loyalty is given to a 100%.
This analysis will identify the current value of the company at a stand-alone value and explain why Nestle Food would want to buy this company and the synergies involved for their reasoning. We will also discuss who will benefit if Reynolds Metals were to sell to Nestle or were to create an IPO. Finally we will provide a recommendation for Reynolds Metals that will be most beneficial to the company financial needs.
Nike’s weighted average cost of capital. Obviously, this case aims to evaluate Joanna’s analysis. Throughout the analysis, we will estimate the cost of debt, cost of equity, and cost of capital through different financial analysis models. WACC Approach WACC is the weighted average return on capital that includes both cost of debt and equity, whereby we discount total cash flows by the appropriate discount rates By using the Capital Asset Pricing Model (CAPM), Cohen calculated a Weighted Average Cost of Capital (WACC) of 8.4%. I do not agree with Joanna’s approach for the following reasons.
The Beverage Industry is a highly competitive one and tends to be dominated by a few major actors. The two biggest worldwide known and most influential companies are Coca-Cola and Pepsi. The limited growth opportunities make this competition very intense, requiring companies to follow the trends and be always aware of the competitors' progress. However, the demand for the products depends a lot on the economic conditions within the society. Those few big players enjoy the benefits of the strong loyal customer base during the growth and stability stage in the economy, whereas in times of economic difficulties customers turn to cheaper substitutes. Thus, although the key feature of the industry is that it is very difficult for a new unknown company to enter the market and compete with well-known long-established businesses, the companies should pay significant attention to the new entrants, especially in times of economic instability. Consumer tastes are also seasonal, meaning that the demand for the carbonated beverages is higher during the hot months of the year. Shifting consumer preferences bring the concern of operating uncertainty, which greatly affects pricing strategies. The large companies pay reliable dividends...
1) With which of the international competitors listed in the case is it most interesting to compare Inditex’s financial results? Why? What do comparisons indicate about Inditex’s relative operating economics? Its relative capital efficiency? Note that while the electronic version of Exhibit 6 automates some of the comparisons, you will probably want to dig further into them?
During the last few years, Harry Davis Industries has been too constrained by the high cost of capital to make many capital investments. Recently, though, capital costs have been declining, and the company has decided to look seriously at a major expansion program that had been proposed by the marketing department. Assume that you are an assistant to Leigh Jones, the financial vice president. Your first task is to estimate Harry Davis’s cost of capital. Jones has provided you with the following data, which she believes may be relevant to your task.
BR was sold to Delta Foods in 1996 for US $2 billion. At this time, it was one of the largest fast-food chains in the world generating sales of US $6.8 billion. DF purchase of BR brought in a new cultural paradigm. DF is an individualistic, aggressive growth company with brands they believe are strong enough to support entry into new overseas markets without the need for local partnership. The DF strategy is one of direct acquisition and JV’s were not part of their strong suit. DF strategic implementation is based on hiring local managers directly or transferring seasoned managers from their soft drink and snack food divisions. The DF disdain for JVs is clearly reflected by their participation in only those JVs where local partnering was mandatory (e.g. China) to overcome regulatory barriers to entry. JVs had been the predominant strategy for BR which was unlike the DF outlook. Terralumen’s strategy was misaligned and out of sync with the DF strategy. This was unlike the complementarity that existed with BR’s strategy. This misalignment began to affect the JV relationship that had worked well with BR in the initial years. The failure of Terralumen and DF to recognize this fundamental cultural difference between their operational strategy styles i.e. Individualistic and Collectivism leads to their inability to proactively create steps for better alignment in the early period after acquisition, creating uncertainties and difficulties for both corporations. There is a lack of communication and virtually absence of trust between two new partners. DF appeared to be flexing its muscles in the relationship and using a more masculine approach compared to Terralumen’s more feminine approach. Both the corporations are strategically involved in a complex situation where they appear reluctant to address the issues at stake and move ahead together. The DF strategy of
There are many different alternative ideas available to help Pepsi through this process. They should use input from their sales team, customers, and suppliers to help with new product ideas.
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