m&a in wine country - imperialbusiness.school · this pattern often emerges, but not in our...

M&A in wine country

Introduction to the simulation

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Overview of the simulation

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Imperial means Intelligent Business Imperial College Business School 3

Player objectives: Bel Vino

Bel vino (BV):

•You are the CEO. The CEO has authority from his board to

negotiate possible business combinations.

•The objective is to maximize value for BV shareholders.

• Two possibilities available:

•Stock merger with Starshine.

•Acquisition for cash by International Beverage.


Player objectives: Starshine

Starshine (SS):



•The objective is to maximize value for SS shareholders.

• Two possibilities available:

•Stock merger with Bel Vino.

•Acquisition for cash by International Beverage.


Player objectives: International Beverage

International Beverage (IB):



•The objective is to maximize value for IB shareholders.

• The sole choice is an all cash acquisition of either BV or SS,

but not both.

•IB is never a target but only a bidder


Simulation Structure

•Round 1: Preparation

•Read preparatory manual.

•Undertake valuation of both BV and SS.

•Enter a reservation price (private!) . The reservation

price can be used as reference value during

negotiation.

•Round 2: Interactive Game Play

• The three roles participate in open bidding and

negotiation

•Simulation ends when two companies strike a deal or

time runs out!

The wine industry

An overview

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The U.S. Wine industry

• Us in 2012 is the world third largest wine market.

• Consumption growth at compound annual rate of 4%. LT

growth (expected) 3% max.

• Three segments:

• Basic (50%) buy on price

• Popular Premium (35%) price and brand

• Ultra-Premium (25%) brand and quality

• Wine making K intensive:

• Land acquisition\ Vineyard development \

Investments in inventory


The U.S. Wine industry

• Producer-Wholesaler-Retailer Chain

• Distributions channels become more concentrated due to

consolidation.

• Sales and marketing cost vary in the industry:

• Larger Wineries: spend heavily on adv and

promotion.

• Smaller wineries: marketing efforts at the distributor

level.


Meet the players:International Beverage

• Leading international producer with a broad portfolio

• Owns vineyard, bottling capacity and selected distribution

channels in US and abroad.

• Revenues’ growth driven by acquisition based strategy:

• Buy small producers: cost cutting, increasing sales

(distribution network + marketing).

• WS critical of rollup strategy: acquisition overpaid? Not

enough value generated?

• Management is under scrutiny!


Meet the players: Bel Vino

• High end California Winery.

• Annual sales have lagged behind competitors:

• No satisfactory relations with international distributors

• No growth in the US market (heightened competition

for attention from national distributors)

• Conflicts in the higher management rank.

• Different possible views of company future: Management:

protect prestigious brand vs Outsiders: enter midrange wine

segment.

• High financial discipline (control of costs, strong in contract

negotiations…)


Meet the players: Starshine

• Midsize wine producer

• Has acquired few midrange labels

• Successful network of national distributors VS increasing

pressure from low cost imports.

• Criticized for inattention to cost control, especially in sales

and marketing.

• Executives praised as market savvy and creative. Credited

with marketing innovations.

• JV with international wine producers.


Does M&A Make Sense in this industry?

• Traditionally fragmented industry

• Distributors in the U.S. have recently become larger, more

powerful

• Large producers can negotiate favorable terms with

distributors, or established their own distributors.

• Small producers can market and sell directly to specialty

retailers, restaurants, and consumers.

• Medium-size producers can do neither economically

– Bel Vino and Starshine both have a version of this problem

– International Beverage is large and covers international

markets


A deal between BV and SS?

Some Ideas:

• Value creation through:

• Better distribution: they can negotiate better terms with

distributors.

• BV strong name but lacks growth

• SS creative management but not savvy on cost control

• Further value creation opportunities in your confidential

information!


What about IB?

Large player. How can he benefit small companies?

Some Ideas:

• Strong distribution: national ad international channels

But what about BV and SS?

• BV perhaps proud of its history and SS independent and

creative?

• What would create an incentive for the two companies to

accept an offer from IB? Good price? More growth? Quicker

growth?

The simulation steps

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The valuation exercise


The valuation exercise

• You have 3 templates:

• Generate forecasts for the period 2009-13

• Set up DCF valuation

• Calculate the WACC


The simulation Round 1

Reservation prices

• The valuation exercise gives us standalone prices.

• But what if a firm is acquired? Say SS?

• Improved distributions, better margins…

• How do we include such aspects in our valuation?

• We review projections. But how?

• Real world: expertise, due diligence, knowledge of

the industry…

• Simulation: Private information!


How much is a company worth? This is state contingent.

The simulation Round 1

NO DEAL DEAL

STANDALONE PRICE:

We use valuation methods

REVISITED PRICE:

We include the effects of the Deal.

But how much do we want to pay?

Implied stock price

Zero NPV transaction


Reservation prices

What is the reservation price?

• If you are a bidder: It is the highest price you are willing

to pay for your target.

• If you are a target: It is the lowest price at which you are

willing to be acquired.


What now? The next steps!

• You are assigned a role.

•You receive confidential information.

•You form a reservation price and submit it. Eg: if you are BV :

•Reservation price on SS: max you are willing to pay.

•Reservation price on BV: min you are willing to accept.

•Once you all input your reservation prices, you proceed to

Round 2.

•In round 2: negotiate and bid! Do good deals to maximize

value rather than do a deal for the sake of it: NO DEAL is an

acceptable outcome!


How do we take this forward?

• Next week you submit your outcomes.

•Include:

•Reservation prices

•Opening moves

•Stock price reactions: what happened when a bid was done? Only the

bidder target prices were affected? Did you notice any specific pattern?

•Feel free to include any other element you find of interest.

•Next week, a few days after I receive your slides, I put them together and send

you back an overview!

•I hope you enjoy this simulation!

Simulation Debrief

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Debrief: submitted reservation prices

The Simulation computes its own “Objective Reservation

Prices” by target and role, based on:

•Standalone values for each target.

•Confidential information by target and role, incorporated

into a DCF valuation of each target.

•Let’s take a look at your submitted prices, by bidder and

target: Mean, Max, and Min

•Then we’ll compare your mean reservation prices to the

objective prices


Debrief: submitted reservation prices, SS


Debrief: submitted reservation prices, BV



•As you can see there is variation in reservation prices.

•Consider the prices submitted by same players in different

groups on the same company (say IB on BV, last slide), you

can see they differ, although they have the same information.

Why?

•Different interpretation of info.

•Different valuation methods.

•Additional factors you take into consideration.

•Think about the winner’s curse in real life auctions…



•In this data you don’t see any own firm bias.

•The own firm bias would be present if each firm has a

higher reservation price for itself than the objective one.

This pattern often emerges, but not in our case!


Debrief: Zone of Possible Agreement (ZOPA) Team 4

•ZOPA represents the overlap if any between two partners

reservation prices. Any deal in the ZOPA is viewed

positively by both parties.

•Let’s look at what happened by team:

There is no ZOPA: min

BV> max SS

There is ZOPA, but

narrow: min BV=49<

max SS=53

ZOPA=4



•As you can see the deal takes place in the ZOPA.

•SS is offered 5$ more that its min.

•BV pays 13$ less than its max.

There is ZOPA: min

SS=48< max IB=76

ZOPA=28

There is ZOPA: min

SS=48< max BV=66

ZOPA=18



•Only room for an agreement between SS and IB.

There is ZOPA: min

SS=48< max IB=76

ZOPA=28



•Very small room for an offer from SS to BV.


Debrief: Stock price thorough negotiation Team 2

•Very small room for an agreement for an offer from SS to

BV.

Overall IB does not have large

price volatility.

Notice that from H onwards

you have a clear downward

path for BV and upward path

for SS.

Up to H, SS and BV are

negotiating. When any of the

companies make an offer the

prices of the 3 companies

react. For example in

In H, BV rejects SS offer. SS

price drops.

In I SS rejects IB offer, but IB

continues submitting offers to

SS till they acquire the

company. SS price keeps

increasing.

In this time frame, BV stock

price keep slowly decreasing

IB price does not drop at the

deal: they are not overpaying.



•You can have a look at the stock price reaction for team 4.

•Does the stock price of a company increases after an

offer? If so how much?

•Does the price of the company left out of a potential deal

decrease?

•Does an offer reveal information to the market?

•You can consider various points…

m&a in wine country - imperialbusiness.school · this pattern often emerges, but not in our...

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