CHETAN DUDDAGI

2015PGP091

SIMULATION GAME REPORT

 Financial Aspects of Mergers and Acquisitions
A Brief Report on Simulation: M&A in Wine Country
1. State the name of the company assigned to you
Star Shine

2. State the reservation prices submitted by you. Explain the basis

for choosing these reservation prices.

Starshine Belvino
Reservation Price $ 51 $ 38

Starshine reservation price calculations:

Confidential instructions for Starshine:

 New trade-promotion plans for the Private Selection line will boost
domestic revenue by $30 to $35 million per year
 An international wine and spirits distributor that is expected to
increase international sales by $20 to $25 million per year
 Savings in the marketing function of $5 to $8 million.
 Reduction in SG&A costs by approximately $500,000 per year.

Based on the above information, following modifications were done in the

assumptions:

 Increase in Domestic Revenues ($M) = $ 38 ( Synergies after

merger were expected to add another 3 million domestic revenues)
 Increase in International Revenues ($M) = $ 23 (Mid value of the
expected increase in International sales has been considered)
 Reduction in Marketing Costs ($M/year) = $ 7 (Mid value of the
expected reduction in marketing costs have been considered)
 Reduction in Other SG&A ($M/year) = $ 0.5 (Given value)

StarShine capital structure, Debt/Equity = 235/414.1 = 0.567

D/V = 235/ (235+414.1) = 0.362 = 36.2%
Target D/V = 27% (Default value in simulation)
Since target D/V is different from current D/V, we use APV approach for
valuation.
Modifications in Terminal value parameters:
Method used – Perpetuity method (Assuming that the growth rate
remains stable over the coming years)

 Terminal Value Perpetuity Growth Rate = 3% (Assuming

industry growth rate based on analysts calculations)
 Current levered equity beta = 1.32
o Value was obtained from the average of levered equity
beta of comparable companies
  Estimated Unlevered Equity Beta = 0.98
o Value was calculated based on company debt ($
235mn) and equity values ($ 414.1mn), current
levered equity beta (1.32).
Based on all the above modifications, APV approach provided a
value of $ 50.10. Hence, on rounding off the value, $ 51 was
chosen as the reservation price.

Belvino reservation price calculation:

Confidential instructions about Belvino:
 Reduction in Bel Vino's 190-person sales force by 35 positions,
yielding an immediate savings of $4.5 to $6 million per year
 Increase Bel Vino's domestic revenue by $25 to $50 million per year
by selling Bel Vino wines through Starshine's more robust U.S.
distribution network and through application of its superior
marketing capabilities
 Cultural difference between Belvino and Starshine
 Starshine’s management is reluctant to merge with Belvino, since
the former would have to cut down its marketing costs if it accepts
a merger offer from the latter
Based on the above information, following modifications were done in the
assumptions:

 It was clear that merger with Belvino would mean that Starshine has
to change its strategy completely and reduce its marketing costs.
Hence, the reservation price was intended to be quoted less in order
to compensate for the cultural difference.
 Also, since management was also reluctant to merge with Belvino
and the stock price of Belvino was on the downfall, it was assumed
that the merger with Belvino would be considered only if the deal
occurred at a price very close to the current stock price of Belvino
($ 36)
 Increase in Domestic Revenues ($M) = $ 25 ( Lower bound of the
expected range has been considered, as it will reduce Belvino’s
reservation price)
 Reduction in Other SG&A ($M/year) = $ 4.5 (Lower bound of the
expected range has been considered, as it will reduce Belvino’s
reservation price)
Belvino capital structure, Debt/Equity = 301/382 = 0.787
D/V = 301/ (301+382) = 0.44 = 44%
Target D/V = 35% (Default value in simulation)
Since target D/V is different from current D/V, we use APV approach
for valuation.
Modifications in Terminal value parameters:
 Method used – Perpetuity method (Assuming that the growth rate
remains stable over the coming years)

 Terminal Value Perpetuity Growth Rate = 3% (Assuming

industry growth rate based on analysts calculations)
 Current levered equity beta = 1.32
 Value was obtained from the average of levered equity beta
of comparable companies
 Estimated Unlevered Equity Beta = 0.95
o Value was calculated based on company debt ($
301mn) and equity values ($ 382mn), current levered
equity beta (1.32).
Based on all the above modifications, APV approach provided a
value of $ 37.47. Hence, on rounding off the value, $ 37 was
chosen as the reservation price.

3. State and justify the choice of comparable companies (Hint. Refer

the foreground reading).
Belvino and Starshine:

Comparable companies for Belvino and Starshine: Belvino, Starshine

and Bellini

Reasons for selecting Belvino, Starshine and Bellini:

 All are mid-size companies with comparable revenues
o Belvino - $ 370mn, Starshine - $ 525mn, Bellini - $ 500mn
 All these companies into exclusive winery business

Reasons for NOT SELECTING other companies:

 International Beverage Corporation (IB)

o Mismatch in product portfolio. Companies selected are
exclusively into winery business. Whereas, IB has broad
portfolio across wine, imported beer, and soft drinks
o Incomparable revenues. IB annual net sales are just over $3
billion
 Power Beverage
o Mismatch in product portfolio. Companies selected are
exclusively into winery business. Whereas, Power Beverage is
an international brewer, bottler, and marketer of beer and
soft drinks
o Incomparable revenues. over $6 billion in annual revenues
 Blanc Vin Winery
o The company’s sales are only $25 million, which is less than
1/10th of the sales of the companies selected
 Le Dutrec Enterprises
o LDE is a quite diversified company
o Over $20 billion in annual revenues
o Products are vastly different compared to Belvino and
Starshine. Of its revenues, 20% come from an upscale Paris
 department store chain, 30% from fashion clothing and
expensive leather luggage, and another 30% from cosmetics
and perfumes
4a. How many offers / counter-offers were made by you? Did
you withdraw any bid? Provide all the details and give your
explanations/justifications.
Offers made to Belvino:
First offer: $ 37
Second offer: $ 37.5
The two offers made were through the chat discussions. Belvino didn’t
agree with value in both the cases claiming that the offer was much
below their expectation. The reason for offering the two prices was that
the calculated reservation price was $ 38 and the stock price of Belvino at
that instant was $ 36. So I chose the offer values which lied between the
stock price and the reservation price.
Belvino was facing sluggish performance, conflict in the senior
management ranks. Also, the confidential information provided informed
that Starshine management was reluctant for a merger owing to the
culture difference. This led to the reduction in synergy benefits and
hence resulted in the lower reservation price.
4b. How many offers / counter-offers were made for your
company? Provide the details, and justify your response. Did a
counterparty withdraw a bid made for you? What was the
eventual outcome of the game?
IB was the only company which made offers for acquisition. Again, the
discussion on the offer prices were made through the chat option
available in the simulation game. IB initiated the discussion asking me to
quote my offer price.
First offer: $ 65
IB response: Did not agree. He said he was getting a better deal with
Belvino. Price offered by IB $ 55
My response: Second offer $ 63
IB response: Did not agree again. Second offer - $ 58
My response: Third offer - $ 62
IB response: Did not agree. Tried to negotiate for $ 59
My response: Told $ 60 would be the final offer price.
Deal made.
The reason was negotiating the price from $ 65 to $ 60 is that the
calculated reservation price for Starshine was around $ 51 and the
eventual deal price was higher than this. Also, synergies in terms of
distribution networks (IB was well known in the industry as a preferred
partner for distributors because of its ability to quickly and efficiently
restock wholesalers with product), and access to distribution channels
abroad implied that the deal would benefit Starshine
Outcome:
Stock price Starshine: Increased by 4.57% to $ 60.
Stock price of Belvino: Decreased by 23.31% to $34
Stock price of IB: Increased by 3.57% to $67