Case Study on Mergers and Acquisitions by Welingkar Students : Ashutosh Dubey, Nilesh Rander and Himanshu Rawat.

1. Submitted by : WeHedgers
Team Members
Campus
Maverick 2015
Ashutosh Dubey PGDM Ebiz adashutosh@gmail.com 7709345679
Nilesh Rander PGDM Ebiz nileshrander@gmail.com 9773471248
Himanshu Rawat PGDM Ebiz himanshu_rawat2005@yahoo.com 7666626232

2. Executive
summary
Market Analysis
and attractiveness
Opportunity
assessment
Value Proposition
Operational
Considerations
Recommendation
Strategic
objectives
To explore Beer market attractiveness To perform the target analysis.
Analysis
1.Estimated growth rate of US beer market
and specifically Craft beer segment
2.Compared the attractiveness of Craft
beer market.
3.Perform the Cost benefit analysis to
purchase BeerCo.
1.Cost and revenue synergies of BeerCo
2.Operating margins of potential target
BeerCo and its comparison with other
players.
3.Identify the opportunities for profitability
improvement for product line of BeerCo.
Key findings
1. Average Growth rate of revenue of US
beer market is 0.71% and but for Craft beer
segment, it is 8.89%.
2.Wine and Spirit are capturing the Beer
Market share.
3.Demand of Craft Beer is estimated at
6.67% highest in the beer market segment.
4.Craft beer has low competiton ,medium
investment and high profit margin.
1. BeerCo produces 6 out of top 20 craft
beers.
2.Operating margins of BeerCo (21.62%)
outshines the industry average(20%).
3.Ale product line represents the
opportunities for profitability improvement.
4. BevCo should open a new production
facility of cans which will be feasible from
2016.
Conclusion
BevCo should acquire BeerCo to enter the beer market to diversify revenue streams and
broaden its portfolio of brands.

3. • Industry average growth of revenues for US
beverage market is 3.28%.
• Wine has revenue growth of 4.66% while
Spirit has 7.24%.
• Average growth of Beer Market is 0.71%
portraying this segment as not very attractive
in term of revenues.
-4.00%
-2.00%
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
0
2000
4000
6000
8000
10000
12000
14000
Super premium Craft Import Premium Sub Premium
Revenue of Beer by Segment
2014 2019(E) Average YOY growth Rate
•Demand of craft beer increased by 6.67% as compared to next best segment Super premium
which is 1.25% from 2014 to 2019.
•Revenue of Craft beer is expected to grow by 8.89 % between 2014-19 as compare to
Imported beer which grow by 2.6 %
•Even though inelastic relationship , price of craft beer is increased by 1.67% as compared to next best segment Imported beer as 1.38%
.Hence higher profitability.
•From data given, Craft beer has very low competition, requires medium investment and from calculations also we found that profit margin
is also high as compare to other segments.Revenue growth is also high as compare to competitor segments .
•Craft beer is one of the most profitable as well as demanding segment of beer industry , which will be a good add to portfolio.
Executive
summary
Market Analysis
and attractiveness
Opportunity
assessment
Value Proposition
Operational
Considerations
Recommendation

4. Factors that BevCo should consider when evaluating the opportunity to purchase BeerCo and enter the craft beer market
Wide portfolio of Beverages
which need addition of beer.
BeerCo ,a coveted player in
US craft beer market.
Craft beer is one of the most
profitable and demanding
segment of beer, BeerCo
produces 6 out of 20 top
Craft beers
BeerCo is a US-based
brewer with sales and
distribution solely in the
United States therefore US
beer market & craft beer
market growth.
Competition, Investment
required and profit margins.
Consumers are now shifting
towards Craft beer from
other segments, so the
market of Craft beer is
attractive and emerging
• Considering the cost &
revenue synergies, for
BevCo a new operating
margin of 29% could be
achieved by acquisition.
Executive
summary
Market Analysis
and attractiveness
Opportunity
assessment
Value Proposition
Operational
Considerations
Recommendation

5. •Operating margin for BeerCo is 21.62 which is above craft beer industry standard 20%.
•This indicates the operational efficiency is high and a good indicator for the BevCo to acquire it.
Cost Break-up of Craft beer
Source: http://www.huffingtonpost.com/2014/09/12/craft-beer-expensive-
cost_n_5670015.html?ir=India&adsSiteOverride=in
Executive
summary
Market Analysis
and attractiveness
Opportunity
assessment
Value Proposition
Operational
Considerations
Recommendation
BeerCo has three primary product lines (Lager,Ale, and Stout). Of the three product
lines, ALE represents opportunities for profitability improvement.
Since
1. ALE is high price point craft beer with high revenue as compared to STOUT.
2. Small change in SG&A expenses will improve the profit margin(Operating
margin).
3. The sensitivity to SG&A expenses in ALE is more as compared to other high
priced point product lines.
4. ALE has only 3 varieties so expenses can be easily controlled.
5. Sales are the most important factor for Profitability improvement
Lager Ale Stout
Financials 2013 2014 2015 2013 2014 2015 2013 2014 2015
Revenue 625 719 863 208 228 262.2 150 158 173
COGS 400 460 552 113 124 141.588 81 85 94
COGS as % Revenue 64.00% 63.98% 63.96% 54.33% 54.39% 54.00% 54.00% 53.80% 54.34%
SG&A 125 150 195 30 30 33 23 21 23
SG &A as % Revenue 20% 20.86% 22.60% 14.42% 13.16% 12.59% 15.33% 13.29% 13.29%
Operating Income 100 109 116 65 75 87.612 46 51 57
Operating Income as % of
Revenue 16.00% 15.16% 13.44% 31.25% 32.89% 33.41% 30.67% 32.28% 32.95%
Operating margin 16% 15% 13% 31% 33% 33% 31% 32% 33%
Levers for improving profitability: (Top line and Bottom line levers)
1. Improvement in Sales by maintaining the potential growth of 10.4%(Avg
growth of ALE for next 5 years) by capitalizing the synergies .
2. Reduction in SG&A expenses(Packaging, Labour,Distributor margin, Retailer
margin) by a little margin.
2. Increase the life of product .
3. Searching for Tax saving options.
4. Saving Inventory losses .
5. Decrease the overheads by using seasonality demand methodology.

6. Different Valuation Methodologies
For BeerCo:
Economic Income model (Market comparison) is most effective valuation method to assess
BeerCo’s value as the competitors /industry valuation parameters are known.
Between Revenue and EBITDA multiple ,we choose Revenue Multiple because
1.Craft beer is still an emerging sector.
2.It is expected to commit significant A&P(advertising and promotion) to drive future growth(which
will depress EBITDA).
We arrived at the purchase price of $2.4Bn using the above method of evaluations(Transaction
Revenue Multiple).
BeerCo
Transaction
Revenue Multiple
1.84x(Industry
average)
Transaction
EBITDA Multiple
11.4x(Industry
average)
Pros . Highly effective when capital structure of
a target is expected to remain stable over time
Cons . Assumptions for future are made on
present situation.
It underestimates the valuation.
Pros: . Highly effective when ratios of the
competitors is known
Cons . Sometimes a delusional picture is shown
of the whole sector, for example if sector is
gloomy then Multiples of the whole industry is
overvalued.
Pros: Data of the company is analyzed properly.
Cons: Valuation is considering only quantitative
parts not qualitative, so valuation done is under
valued/overvalued
Executive
summary
Market Analysis
and attractiveness
Opportunity
assessment
Value Proposition
Operational
Considerations
Recommendation

7. Purchase
Price of
BeerCo
Post
acquisition
market
share
Negotiatio
n skills
Financials
of target
company
Market
Condition
Industry
popularity
Acquisition
Structure
and tax
attributes
Location of
operation
Eagerness/
Objective
of both
parties
• The range of wine, beer, and distilled spirits offered by brand
and by type is wide. Demand is relatively
inelastic during both good and bad economic times.
• There is an overall long-term trend of rising affluence around
the globe. Thus, more and more consumers are
becoming increasingly discerning about what they purchase.
• Premium alcoholic beverages are growing in popularity,
particularly flavored ones
• As is the case with premium wine and spirits, craft beers are
very popular with consumers. These beers are
priced higher and are quite profitable, as long as the cost of
their rich ingredients is covered.
Executive
summary
Market Analysis
and attractiveness
Opportunity
assessment
Value Proposition
Operational
Considerations
Recommendation

8. Facilities like Raw
material availability
Capacity of Brewery
container
Labor Supply
Production techniques
and capacity
Supply chain
Finishing and
Packaging.
Operational Considerations while setting up new business unit
Case
Total cumulative cost for 5
years(Million USD)
Continue to Buy from Supplier 900
Build Own Facility 575
Continue to Buy
from Supplier
Build Own
Facility
So, BevCo should go for “Build Own Facility”
Case 1 Cost $0.15
Continue to Buy from Supplier
Year 2014 2015 2016 2017 2018 2019
No of Cans (millions) 500 700 900 1100 1300 1500
Cost to BeerCo 75 105 135 165 195 225
Cumulative Cost 75 180 315 480 675 900
Case2
Build Own Facillity
Year 2014 2015 2016 2017 2018 2019
No of Cans (millions) 500 700 900 1100 1300 1500
Variable cost (0.05) 25 35 45 55 65 75
Fixed Cost 100 25 50 25 50 25
Total Cost 125 60 95 80 115 100
Cumulative 125 185 280 360 475 575
Thus,
In Year 2016, building a new facility become more
economical for BeerCo.
Executive
summary
Market Analysis
and attractiveness
Opportunity
assessment
Value Proposition
Operational
Considerations
Recommendation

9. Executive
summary
Market Analysis
and attractiveness
Opportunity
assessment
Value Proposition
Operational
Considerations
Recommendation
Strategic
•Affordability : Potential acquisition target BeerCo should cost around $2.4 billion, which is derived in terms of Industry Valuation
parameters, Revenues and Growth Rate.
• BeerCo should be acquired to diversify revenue streams and broaden its portfolio of brands.
•BeerCo is a good add to BevCo to increase market share and tap uncovered geographies.
Financial
•Profitability: Craft Beer has highest operating margin and growth(revenue) among other beer segments. So to invest in BeerCo will
increase profitability in future.
•Acquisition of BeerCo will lead to 5% growth in revenues as well as 10% reduction in costs.
•Cost and Revenue synergies will further enhance the growth of BevCo.
Operational
•Product lines ,Customer base, Brand reputation, Distribution channels will increase.
•Production : Facilities ,Labor supply, Capacity and Production techniques will increase.
•R&D: Licenses, Patents ,R&D centers and expertise will be added.
Reduction in Cost
of procurement
Prevention of
Inventory Losses,
Cutting overheads,
Use of modern
technology
Reduction if
margins, Efficient
supply chain,
Prediction of
Demand
Profitability improvement
We recommend BevCo to acquire BeerCo for its strategic, financial and operational advantage.

10. Appendix
• 2014 US Alcoholic Beverage Market ($B)
Sno. Year Market YOY growth %
1 2014 59.2
2 2015 60.2 1.69%
3 2016 63.2 4.98%
4 2017 65 2.85%
5 2018 66.5 2.31%
6 2019 68.9 2.89% Using trend methodology
CAGR 3.08% Five years
2014 2019 CAGR Average annual growth
Segment Revenue % Revenue %
Wine 9.5 0.1605 11.713 0.17 4.28% 4.66%
Spirit 17.2 0.2905 23.426 0.34 6.37% 7.24%
Beer 32.6 0.5507 33.761 0.49 0.70% 0.71%
Total 59.2 1 68.9 1 3.08% 3.28%
Sales volume (Million barrel) Average price per bottle($) Sales volume (Million bottles) Revenue in Million ($) Average
Segment 2014 2019-E 2014 2019-E 2014 2019-E 2014 2019-E Growth YOY revenue growth
Super premium 10 10 0.64 0.68 3180 3180 2035.2 2162.4 1.25%
Craft 9 12 1.2 1.3 2862 3816 3434.4 4960.8 8.89%
Import 29 31 0.7 0.74 9222 9858 6455.4 7294.92 2.60%
Premium 58 53 0.44 0.45 18444 16854 8115.36 7584.3 -1.31%
Sub Premium 107 95 0.37 0.38 34026 30210 12589.62 11479.8 -1.76%

11. Company Financials in 2014 ($) If Acquired With Synergies If Acquired
In million USD BevCo BeerCo BevCo+Beer Co Growth BevCo BeerCo
BevCo+Beer
Co Growth
Revenue 3350 1110 4460 33.13% 3,517.50 1,165.50 4,683.00 40%
COGS 2180 669 2849 30.69% 1,962.00 602.10 2,564.10 18%
SG&A 652.6 201 853.6 30.80% 587.34 180.90 768.24 18%
Total cost 2832.6 870 3702.6 30.71%
Operating income 517.4 240 757.4 46.39% 968.16 382.50 1,350.66 161%
Operating margin 15.44% 21.62% 16.98% 1.54% 27.52% 32.82% 28.84% 13.40%
EBITDA 530 260 790
EBITDA margin 15.82% 23.42% 17.71% 1.89%
Synergies
Based on our analysis, we can achieve 5% revenue
growth and 10% total cost reduction through this
acquisition
2014 2015
In million
USD BeerCo
Revenue 1105 1298
COGS 669 786
SG&A 201 236
Operating
income 240 276
Operating
margin 21.62% 21.27%
EBITDA 260 305
EBITDA
margin 23.42% 23.53%
Company Beer Type
Acquired
price Revenue - EBITDATransaction Revenue Multiple Transaction EBITDA multiple
Craftbev Co Craft 990 510 15.69% 80 1.94 12.38
Epic MJ Craft 270 156 16.67% 26 1.73 10.38
Park Ave Normal 112 17 23.53% 4 6.59 28.00
Mark North Normal 1380 836 19.02% 159 1.65 8.68
So By Econmic Income Model, We have to take multiples from the same sector, BeerCo belongs to Craft Beer Segment.
Beer Co Revenue EBITDA
Average Industry vis Segment Multiple 1.83597285 11.37981 Year Total Revenue Lange Ale Stotut
Revenue in 2014 1110 2014 1105 719 228 158
Revenue in 2015 1298.2 2015 1298.2 863 262.2 173
EBITDA 260
Estimated Purchase Price 2383.45995 2958.75
So we will give purchase price as 2.38 Billion USD based on Transaction Revenue Multiple of Craft beer Segment Industry in US.
What purchase price would you estimate based on current financial projections? (Use the M&A information provided by the
client’s bankers, and the P&L given. Disregard synergies.)

12. As a part of optimizing operations, BevCo would like to better understand BeerCo’s supply base. In particular, should BevCo
continue to purchase cans from the existing supplier or open
a new production facility?
Case 1.
Continue to Buy
from Supplier
Year 2014 2015 2016 2017 2018 2019
No of Cans (millions) 500 700 900 1100 1300 1500
Total Cans 6000million
BeerCo pays
$0.15 per can
to its existing
supplier.
Total Cost 900million USD
Capex structure
Case 2. CumulativeFunding No of Cans Net Funding
Build Own Facillity 100 500 100
125 625 25
Year 2014 2015 2016 2017 2018 2019 150 750 25
No of Cans (millions) 500 700 900 1100 1300 1500 175 875 25
Total Cans 6000million 200 1000 25
Variable cost 0.05 225 1125 25
Total Variable cost 300 250 1250 25
Fixed Cost 100 25 50 25 50 25 275 1375 25
Total Fixed Cost 275 300 1500 25
Total Cost 575million USD