PwC Main Round Case

I.

Strategic Rationale for the Client

Despite a slowdown in 2015, the Philippines positions on the crossover of affluence

and prosperity, with numerous opportunities to effect lasting reforms. The countrys
economy has remained resilient, cushioned by local consumer market, continued
foreign investment, and sound performance in key growth industries. The growth
prospects for the Philippines remain strong. In fact, the International Monetary Fund
(IMF) believes that the country would continue to have the fastest GDP growth
among the biggest economies in the Southeast Asian region. IMF perceives a 6%
growth for the Philippines in 2016, compared to 4.9% for Indonesia, 4.4% for
Malaysia, 3% for Thailand, and 1.8% for Singapore. The Philippines manufacturing
sector has, for the immediate past years, shown signs of renewed and continued
strength. From 2010 to 2015, the sector expanded at a CAGR of 6.8% in real valueadded terms. Outlook for automotive manufacturing is bullish on account of rollout
of infrastructure projects with the present administrations plan to accelerate annual
infrastructure spending to account for 5% of GDP, with Public-Private Partnership
playing a key role. The country has also allocated a budget of $6.4 Billion for its
Manufacturing Resurgence Program (MRP), a long-term, three-phased effort to
improve the manufacturing sectors competitiveness and spur its transition to
higher value added activities, with the end goal of mounting the country into a
recognized manufacturing hub in the areas of automotive, electronics, machinery,
garments, and foods. One of the ticket projects of MRP is the Comprehensive
Automotive Resurgence Strategy (CARS) Program, which will give $593.4 million
worth of inducements available to car manufacturers who will commit to produce
200,000 units of a single model over a six-year period.
The country continues to be an attractive investment target for automotive
manufacturers, this can be attributed to its increasing middle class, proximity to
fast-growing markets in Asia, and young, highly literate population. Furthermore,
cost of labor remains competitive. The average monthly minimum wage in the

Philippines was at $215 compared to $613 in China. Daily minimum wages across
regions also vary from as low as $5.61, this gives investors flexibility in deciding
where to establish its business location.
On the other hand, the increased incentives provided by regulatory bodies for
automotive manufacturers, eg. CARS Program, has amplified the merger and
acquisition activities in the Philippine financial sector. Furthermore, the Banko
Sentral ng Pilipinas (BSP) has further enhanced the incentive system for mergers
and acquisitions. The BSP believes that M&A activities will effect in stronger players
in the market that will help stabilize the financial industry of the country.
Mergers and acquisition activities in the country are expected to heave on the back
of the countrys rapid economic growth. The positive condition of the economy and
the market would not change soon, and the doors of opportunities are expected to
remain open for the next few years. With the ASEAN integration and the Philippine
growth story as milieu, now is the ideal time for Philippine companies to expand and
look for growth opportunities.
However, as with the case of most companies seeking to grow through acquisition,
Wealth Industries Inc. position is no exception. Key risks involved in the planned
acquisition activity of Wealth Industries are the following:

The ability to negotiate favorable financial and other terms given the close
structural ownership of the target company

There may be unanticipated costs in the operations and systems of the target
company

Return on investment or projected level of sales may not be generated

Higher capital expenditures may be necessary than estimated

Wealth Industries Inc. may take on too much debt of the target company

II.

Fair Valuation of the Target

a. DCF Method (refer to Excel file)

note: done

Assumptions
Explanations
b. Comparable Company Analysis (refer to Excel file) note: in process
Assumptions
Explanations

III.

Benefits & Limitations of various methodologies used in

IV.

valuing the target

Identification & Assessment of Special Items

SPECIAL ITEMS

TRUST RECEIPTS AND IMPORT BILLS PAYABLE

The following are the terms and conditions of the agreements with local banks on the
availment of its credit facilities:
i) No material change in the financial condition or business of the Company which may have
a material adverse effect on its capacity to perform its obligation under such credit
agreement;
ii) Proceeds from the availment shall be used exclusively to secure the importation of vehicle
units and spare parts.
TREATMENT: The Company recognizes the liability upon receipt of the proceeds and any
violation to the conditions attached to the agreement thereto shall mean an automatic
disqualification from the availment of the Companys credit facility from one of its creditor
banks and thus subsequently necessitates the derecognition of the liability.

RELATED PARTIES
(a) Cash advances to related parties
The Company provides cash advances for operating expenses and working capital
requirements of Companies under common key management personnel.
The receivables from related parties have no definite term of payments.
(a) Cash advances to related parties
The stockholder provides cash advances for operating expenses and working capital
requirements of the Company. Likewise, the Company provides cash advances to its
stockholder.

TREATMENT: The Company classifies the related asset as noncurrent and generally has no
definite terms of payment. There have been no guarantees provided or received for any
related party receivables and payables. However, settlement of related party transactions
normally occurs in cash throughout the financial year.

NON-RECURRING ITEMS
Installment Contract Payable
On November 3, 2008, the Company and its related parties, Columbian Motors Corporation
(CMC) and and Asian Carmakers Corporation (ACC) (Columbian Group) entered into a Deed
of Conditional Sale Agreement with Philippine National Bank (PNB) for the purchase of three
(3) parcels of commercial land situated at Paranaque City for a total consideration of P500
million. The said agreement is in concurrence with the compromise agreement executed
between the parties.
TREATMENT: Under the terms and conditions of the agreement, the Company shall pay an
initial down payment of P50 million and the balance is payable in thirty (30) monthly
installments starting January 2010 up to April 2017 after which the transfer of legal title and
ownership will be made upon execution of a deed of absolute sale. The related franchise fee
payables is presented under the current and noncurrent section of the Companys liabilities.
Deposit for Future Stock Subscriptions
TREATMENT: Funds received from stockholder for the purpose of stock subscriptions is
temporarily recorded as deposits for future stock subscription.

IDENTIFICATION OF NON-OPERATING ASSETS

Non-operating assets presented in the Companys balance sheet include, but may not be
limited to the following: (1) Cash; (2) Prepaid Expenses; (3) Due from related parties; (4)
Intangible asset; and (5) Deferred tax assets.

Fair Valuation
The latest financial statements available of Columbian Autocar
Corporation is for the year ended December 31, 2014. The 2016 Statement
of Financial Position of the company was projected in order to provide a basis
for the fair valuation of the entitys net identifiable assets, including the
Goodwill.