NiseFoodCorporation is analyzing the possibility to acquire... NiseFoodCorporation is analyzing the possibility to acquire KradFood Corp. Kradfood
Question:
NiseFoodCorporation is analyzing the possibility to acquire...
NiseFoodCorporation is analyzing the possibility to acquire KradFood Corp.
Kradfood earnings have been under pressure in recent years, thanks to the change in consumer preferences. Consumers are now more willing to pay an extra price for healthier food, and are reducing the consumption of fast food.
Nisefood Corp is exposed to the growing segment of the food industry, while Kradfood is focused on un-healthy food.
Nisefood expects to improve Kradfood distribution channel, using its existing distribution network, restructuring production facilities from un-healthy food to healthy food and to reduce operating costs in the process.
There is enough room to grow the acquired company (Kradfoods) sales by 12% per year during the next 4 years, and then reduce the growth rate to 6% per year until year 10. Growth at perpetuity is estimated to be 5%.
The EBITDA Margin will also improve by 2.75% of sales thanks to the synergies in the distribution channel and the manufacturing operating efficiencies.
The acquirer expects the NWK to be reduced by 0.1% of sales (per year) from 2017 level in years 2108 to 2020 and then to grow at 0.05% (per year) as percentage of sales from 2021 onwards (20121 included).
The depreciation expense will be stable as percentage of sales during the forecast period.
Capital Expenditure will increase by 0.30% per year as a percentage of sales during the first three years (2018 to 2020), but will come back to the 2017 level as a percentage of sales from 2021 onwards.
The tax rate is expected to be 30%
Please find the P&L and Balance Sheet of Kradfoods Corp in the Excel attached, save time and use that information for your calculations.
Nisefoods Corp will change the leverage of the acquired company.
The new capital structure will be 58% debt to total debt plus equity (D/V)
Please find the relevant information to calculate the discount rate (WACC):
The risk free rate is 2.25%
The corporate Spread is 1.23%
The levered beta of Kradfoods Corp is not known but we have data from a universe of "comparable companies " shown in the Excel.
The Equity Risk Premium is 5.75%
Nisefoods Dividend Payout ratio is 35%. Management expects to increase the payout ratio to 45% after the acquisition. Nisefoods Inc business size (sales) are similar to Kradfoods Corp, but more profitable. It has grown in the past through debt issuance and retained earnings. Nisefoods Balance Sheet is more geared than Kradfoods Corp BS.
Nicefoods management owns 20% of the company, and has an incentive program linked to economic value creation during long term periods (6 years). The stock options, if granted, would increase their stake to 25% of the company in 5 years.
Using the information given above please:
- Calculate the projected FCF
- Value KradFoods Corp using a DCF analysis. What is its' EV? What is the Value of its' Equity?
- Value KradFoods Corp using Market Multiples. The multiples to be used must be derived from the information given for comparable companies table above.
- Value the company using the fundamental P/E ratio and EV/EBITDA ratio.
- Please describe the impact of the change in the dividend policy from the point of view of signaling and agency problem. Make any assumptions you need to make to support your comment.
Please work all your calculations in the Excel given, and answer the questions above both quantitatively and qualitatively (if you think there is room to make comments).
Fundamentals of corporate finance
ISBN: 978-0078034633
10th edition
Authors: Stephen Ross, Randolph Westerfield, Bradford Jordan