Team Skunkworks

Ashish Dwivedi | Kundan Mohapatra | Swagat Acharya

 Executive Summary

Market Analysis Strategic Assessment Financial Assessment Acquisition & Valuation Operational Assessment

Market Size & Comparison of Valuation

Segment Characteristics Operating Margin Operational Considerations
Segmentation Methods
Considerations for Profitability Analysis by Supply Base and Supply
Beer Market Growth Enterprise Value of BeerCo
Acquisition Product Line Chain Dynamics
Craft Beer Segment Levers for Profitability Considerations Impacting In-house vs External
Potential Synergies
Attractiveness Enhancement Price Production of Beer Cans

Above Avg. Profits

Valuation of BeerCo
Synergy Benefits

Operational Gains
Superior Growth

CAGR of 7.63% for Operating margin BeerCos Operating Enterprise Value of Production facility
Craft Beer which is post synergy to rise Margin of 20.72% is BeerCo stands at for beer cans if
highest amongst all to 22.76% which is higher than Craft $2.73 billion based setup now would
segments. Craft higher than both Beer segments on comparable enhance operational
Beers share will rise BevCo & BeerCos average of 20%. recent M&As in the leverage of BeerCo.
to 7.26% in the current operating Higher margins from alcoholic beverage
alcoholic beverage margin. Ales and Stouts industry.
market by 2019. compared to Lager.
 Strategic Financial Acquisition & Operational
Market Analysis
Assessment Assessment Valuation Assessment

US Alcoholic Beverage Market Size US Beer Market Segmentation by Revenue ($ mn)

$9.5 bn $11.61 bn
16% 17% -1.83%

-1.34%
+2.48%
55% 49%
29% 34% +7.63%

+1.22%
$32.6 bn $23.22 bn
$17.2 bn $33.47bn

Craft beer Segments Attractiveness : **2014 Year in Beer(US)

CAGR comparison (2014-19)
Alcoholic Beverages
Beer
Craft beers growth
= 15 times Overall beer
market growth & 2.63 times
2.90% entire alcoholic beverage
market growth
0.52%

Craft Beer 7.63%

**Source : US Brewers Association press release 2014

 Strategic Financial Acquisition & Operational
Market Analysis
Assessment Assessment Valuation Assessment
Craft Beer Segment Operating Margin
The Craft Beer is the only beer segment which has low 20.72%
competition, high margins (20%) and high market growth
(7.63%). 20.8%

20.6%

20.4%
BeerCos Financials 20%
20.2%
BeerCos operating margins (20.72%) are higher then the 20.0%
craft beer industry average of 20%. Also BeerCo has a
healthy EBITDA of $ 260 million and an operating income of 19.8%
$230 million.
19.6%
Industry BeerCo

Potential Synergies Revenue & Cost Synergies

5% revenue growth and 10% total cost reduction through
BeerCos acquisition (based on 2014 financials) BevCo
Executive
Post Synergy Operating Margins
BeerCo owns 6 of the top 20 craft beer brands in
US.
Craft Beers are priced higher and are profitable
and will help generate additional revenues
BevCo can leverage BeerCos sales & distribution
network.

SG&A and overheads will decrease post

High Medium Low
acquisition which will reduce total cost of
operations.
BevCos Considerations for Acquisition
BevCo considers profitability and investment as most important
Assumptions
factors followed by market competition and growth rate. Assuming that the SG&A reduces post synergy and
not the production cost (COGS remains same) as
Competition in craft beer segment is low and the market growth is BevCo and BeerCo have different production
high. processes and raw material requirements.
 Strategic Financial Acquisition & Operational
Market Analysis
Assessment Assessment Valuation Assessment
Craft Beer Industry Average
BeerCos Operating Margin %
20.72% 20.00% Operating Margin %

Profitability Analysis

Comparison of the three product lines of BeerCo

reveals that Lager has the lowest Gross Profit Market
as well as Operating Margin and hence offers maximum
scope for profitability improvement.

Although profitability of Ale and Stout could also

be improved.

Projected Gross Profit Margin (%)

46%
Levers to Improve Profitability
46%

For Lager For Lager For Ale & Stout

Increase Price
Craft beers command a premium price
in the market but Lager is priced at a
medium price point which is adversely
affecting its margins and needs to be
priced at a higher price point to improve
margins and in turn profitability.
Premium Positioning
The product life of Lager is more and it
has higher verity compared to the
other product lines (7 varieties as
compared to 3 of Ale & Stout). For the
above stated reasons it should be
positioned as a premium product.
Can Packaging 36%
Ale and Stout should be packaged in
cans which according to research is Profitability opportunity in Lager
greener than glass bottles and is more
sustainable. This will help create a
brand image of the company as an
environment friendly firm.

Year
 Strategic Financial Acquisition & Operational
Market Analysis
Assessment Assessment Valuation Assessment
Valuations Method Description Pros Cons
For BeerCo, we will utilize the
Discount future FCF of the firm using the Relies on future profits as an indicator of Does not consider strategic Comparable Transactions
Discounted Cash Flow Analysis WACC of the firm to arrive at the Present firm value which implies a profitable firm importance of a firm and only looks Method based on available
Value of the firm. is likely to be more valuable. at profit.
data.

Is based on market forces and their

Market Valuation
Comparable Transactions
Method using Multiples
Utilize the market Capitalization of the firm and
add a premium or a discount based on
perception of the value of the firm. This Firms might be overvalued at certain BeerCo P&L Statement 2014
provides a price based on multiple periods in the capital market. (All values in millions of dollars)
perceived value of the firm.
perspectives.
Revenue 1110
COGS 669
Look at comparable transactions in that
SGA 201
Considers recent comparable M&A
industry paralleled to a business with a similar
moves in the industry to gauge the value
May not take into account individual EBITDA 260
model and then compare them by the relevant differences within the firm.
of a firm vis--vis similar firms. Operating Income 240
ratios and multiples.
Operating Margin % 20.72

Comparison of Available Multiples

EV/EBIDTA vs EV/REVENUE
While both the multiples are available to us from the recent M&A data, we will use
EV/EBIDTA as BeerCo has a higher EBIDTA margin of 23.42% than mean value of
17.71% for recent M&As in the alcoholic beverages sector.

Therefore revenue multiplier from comparable transactions would undervalue the firm.

Based on our analysis, Craftbevco and Mark North are most comparable to BeerCo.
 Strategic Financial Acquisition & Operational
Market Analysis
Assessment Assessment Valuation Assessment

Considerations Impacting Purchase

Valuation of BeerCo EV/EBIDTA = (12.3+8.7)/2 = 10.5 Price beyond Synergy
Recent merger data maybe utilized for relative valuation of 1. The operational and financial leverage of the firm.
BeerCo.
2. Purchase deal type and structure.
Based on our analysis, Craftbev Co and Marth Norths
acquisition seem most comparable to the current scenario. 3. Tax benefits if any.
Enterprise Value of BeerCo
The valuation multiple for BeerCo maybe obtained as an average of
(using EBIDTA) = 10.5 X 260 4. Possible exit strategy.

these 2 firms.
= US$2.73 billion 5.

6.
Credit rating of the firm.

Impact on capital structure post merger.

Analyzing Relevance of Recent M&As for Valuation of BeerCo

Comparability of firm by Comparability of firm by

Target's Target Rev. Target EBITDA Transac. Rev. Transac. EBITDA
Target Acq. Price Revenue and EBITDA with Product Segment with
Segment ($M) ($M) Multiple Multiple
BeerCo BeerCo

On the Rocks 1,000 Margarita 641 103 1.6x 9.8x Comparable Not Comparable
Craftbev Co 990 Craft beer 510 80 1.9x 12.3x Comparable Comparable
Park Ave. 112 Beer 17 4 6.5x 25.9x Not Comparable Comparable
Mark North 1,380 Beer 836 159 1.7x 8.7x Comparable Comparable
Epic MJ 270 Craft beer 156 26 1.7x 10.4x Not Comparable Comparable
Won Winery 130 Wine 96 13 1.4x 10.1x Not Comparable Not Comparable
Jane Co. 280 Spirits 175 34 1.6x 8.1x Not Comparable Not Comparable

Market Analysis
BeerCo as BevCos new Business Unit : Operational Considerations
Operational Consideration
In house Production process than
outsourcing for aluminum cans
Building New Facility (for cans
production/packaging)
Optimization of core operations of
BeerCo and Supply chain analysis
Adapting Can revolution
BeerCos Supply Base & Craft Beer Supply Chain dynamics
Long term and direct
supplier relationship
DIRECT CLOSE relation is a must
else BeerCo might fail shortage of
supplies
Strategic Financial Acquisition &
Assessment Assessment Valuation
Industry Reasoning - Craft Beer Segment Future Strategic Advantage
Cost Effectiveness in craft brewing
Production and quality control
in the long run
Operational leverage during
expansionary US economy
Net Present Value of Investment positive
Economies of Scale and Scope
Supply Chain evaluation of BeerCo provides insights about long Cost Advantage and strategic long
term supplier relationships term relationships
Can is superior rand sustainable and less expensive to produce Sustainable , Cost Effective and
than glass bottles preserves beer flavor and shelf life Green brewing + US environment
conscious consumers prefer green
( BeerCo already partners with a supplier at $ 0.15 per can ) brewing
Critical and time bound Delivery of Raw Suppliers in craft beer (even in overall
materials beer segment )assist in brewing
BeerCos Wide variety of premium craft beer process , technical knowhow and
flavors with requires Seasonal issues resolution
ingredients - derived demand critical
Operational
Assessment
Risk Mitigation
Hedging risk against delay in value chain activities in
brewing.
Protection against rise in prices of glass or cans during
expansionary phase
Avoiding supplier switching costs and ingredients shortage
for Craft beers
Consolidated market growth by market share demand
outpace supply very quickly supplier intimacy critical
Preserve the taste of beer
Weather, alternative fuels and
government policy affects price of
Wheat, corn, soya bean and barley
Ethanol prices implies COGS
 Strategic Financial Acquisition & Operational
Market Analysis
Assessment Assessment Valuation Assessment

Post Acquisition : In-house Can production vs. External sourcing Operational Integration
BevCo & BeerCo
903
767 783.41
Costs incurred were discounted to 2014
using a discount rate of 4.7% (Capital
Cost of BeerCo. in 2014)
767
2015 Do financial statement and asset
integration but leave management of BeerCo
643 run it as a separate SBU
583 Net present value of Investment in a
Approach with Caution to merge BeerCo to
facility
538 Least in 2014 = **$538 mn
avoid attrition of the talent pool

Followed by 2015 =**$ 583 mn

Post 2-3 years perform next round of
operational integration outside the assets
integration -

1. distribution operations,
2. network optimization,
3. materials sourcing,
4. and supply chain management

Analysis of the NPV of investment costs
indicates that BeerCo. Should begin in-
house can production now.
( Low NPV means start now Gain in
Long run
(Avoid sudden disruption in the operations
of BeerCo Gradual integration of its entire
value chain)

**Based on the year in which Can Production Facility is setup, compute the total
discounted costs of setting up the facility and production of the cans, along with
Year in which in-house can production is initiated (every year considered) the outsourcing costs of the cans for the years prior to the setting up of the facility.
Recommendations

Synergy
Resulting synergies
from the acquisition
BeerCo Financials will result in
BeerCos financials significantly higher
Premium Segment are sound and on top revenues and
of that it owns 6 of reduced costs for
Craft Beers are the top 20 craft beer BevCo.
premium segment brands hence an
Diversification beers and command acquisition would
Diversifying its a high margin. This give BevCo a head
revenue streams into would help BevCo start in the Beer
Craft Beer Growth improve its
the Craft Beer Market Market.
The Craft Beer will ensure growth profitability in the
Segment is growing and reduce the risk of long run.
Consumer Taste at a 15 times the avg. stagnating in a
Premium alcoholic CAGR of the beer mature market.
beverages are industry. Right time
growing in popularity to enter the Craft
specially Craft Beer. Beer Market.
 Appendix
References
US Brewers Association https://www.brewersassociation.org/statistics/national-beer-sales-production-data/

Technomic's "2014 Special Trends in US Adult Beverage Report: State of the Industry report :
https://www.technomic.com/Reports_and_Newsletters/Industry_Reports/dyn_PubLoad_v2.php?pID=135

Supplier support: Building strong relationships is key to brewery success/ CRAFT BREWING BUSINESS
http://www.craftbrewingbusiness.com/tag/craft-brewers-conference-brewexpo-america-2014/

http://www.forbes.com/sites/larryolmsted/2013/05/01/craft-beers-say-hello-cans-goodbye-bottles-an-aluminum-revolution/

http://www.bizfilings.com/Libraries/pdfs/starting-manufacturing-business-guide.sflb.ashx

Operational Integration in M&A : http://www.tompkinsinc.com/podcast-42-global-ma-challenges-of-operations-integration/

http://www.pwc.com/us/en/transaction-services/publications/operations-integration.jhtml

https://www.brewersassociation.org/press-releases/year-beer-2014-craft-beer-review-brewers-association/

Assumptions
NPV method of discounting total costs using CAGR of 2014 ( assuming if facility is to be built in 2014 next least cost to
build a facility is now i.e. 2015

Working Notes
Data Analysis and working notes attached as excel :

Skunkworks_Case
1