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SynergyValue
Evaluation
Proudly presented by Group 4
BackgroundEquity Value
Agenda
Wang Qian
Angela Han
Xie Muyi
Yang Yiwen
Sheng Wandi
VS
Coca-Cola re-entered the Chinese market in 1979. Established 23 bottling plants and 27 production locations. Total investment adds up to more than 1.1 billion U.S. dollars Local employment reached 15,000.
SynergyValue
Evaluation
— Proudly presented by Group 4
BackgroundEquity Value
HUIYUAN VS COCA-COLA
2008 Total Market Size:
Chinese Fruit, Vegetable, and
Soft Drink Market
SynergyValue
Evaluation
— Proudly presented by Group 4
BackgroundEquity Value
HUIYUAN VS COCA-COLA
Coca-Cola, 11.8%
Huiyuan, 8.5%Master Kong,
7%
Tongyi, 6%
Daneng; 5.70%
Others, 60.4%
Following Google and Microsoft, Coca-Cola, with $67.6 billion
Brand Name
Market Share
Rank
Coca-Cola 52.8% 1
Pepsi 32.8% 2
Daneng 1.7% 3
China Softdrink Market Share (2008)
Brand Name Value (2008)
Cash Reserve (Sep 26, 2008)cash and cash equivalents: USD 7.8 billion
2004 2005 2006 2007 20080
5000
10000
15000
20000
25000
30000
35000
Net IncomeNet Operating Revenues
Built in 1992 and benefited from China’s growing soft drink market NO. 2 in China’s broad beverage market NO. 1 in leading China’ s vegetable and fruit juice market China’s most famous brand name of juice production
SynergyValue
Evaluation
— Proudly presented by Group 4
BackgroundEquity Value
HUIYUAN VS COCA-COLA
HUIYUAN
1) Unsophisticated
marketing campaign
2) Limited cost saving by scales
3) High barrier to enter
international market
4) Insufficient financial
resource for expansion
1) Market leader position
2) Good quality supply
3) Welcomed flavor
4) Government benefit
5) Developed sales network
and distribution channel
Competitive Strengths
Bottle-neck of long-term development
SynergyValue
Evaluation
— Proudly presented by Group 4
BackgroundEquity Value
HUIYUAN VS COCA-COLA
HUIYUAN
Coca-Cola’s Intention to Acquire HUIYUAN
• Coke-Cola: Enter Chinese Original Juice and premium market Dominate the entire beverage and juice market Enrich its brand image and achieve greater economic
scale
• HUIYUAN To save both COGS and Operating Expense Stronger marketing promotion Strengthen its brand value by aligning with Coca-
Cola
SynergyValue
Evaluation
— Proudly presented by Group 4
BackgroundEquity Value
HUIYUAN VS COCA-COLA
Synergy Value
USD 2.5 Billion by CashHKD 12.2 per share
SynergyValue
Evaluation
— Proudly presented by Group 4
BackgroundEquity Value
HUIYUAN VS COCA-COLA
Multiples Approach
Evaluation of HUIYUAN
DCF Approach
Synergy Value
Divided by total NO. of shares
WACC?
— Proudly presented by Group 4
Background SynergyValue
EvaluationEquity Value
• Cost of Capital Calculation– WACC components
• Cost of equity• Cost of debt• D/E ratio• Tax rate
HUIYUAN VS COCA-COLA
— Proudly presented by Group 4
Background SynergyValue
EvaluationEquity Value
• Cost of Capital Calculation– Cost of Equity
• Cost of equity components– Beta: 2.60 (From Quamnet.com)– Risk-free rate: 2.96%– Market return: 15.19%
• Cost of equity calculation– CAPM = Risk free rate + Beta × (Market return – Risk-free rate)
– 34.75%
HUIYUAN VS COCA-COLA
— Proudly presented by Group 4
Background SynergyValue
EvaluationEquity Value
• Cost of Capital Calculation– Cost of Equity
• Risk-free rate: Exchange Fund Notes during 15 years on September, 2008
HUIYUAN VS COCA-COLA
— Proudly presented by Group 4
Background SynergyValue
EvaluationEquity Value
• Cost of Capital Calculation– Cost of Equity
• Market return: Daily geometric average growth rate of Hang Seng Index of the last 30 years, then obtain effective annual growth rate
HUIYUAN VS COCA-COLA
Date Adjusted Close Growth Rate
9/3/2008 20585.1 97.83% Geometric Growth rate (daily) 0.03874%
9/2/2008 21042.5 100.65% Geometric Growth rate (annual) 15.1872%
9/1/2008 20906.3 98.33%
8/29/2008 21261.9 101.38%
8/28/2008 20972.3 97.71%
— Proudly presented by Group 4
Background SynergyValue
EvaluationEquity Value
• Cost of Capital Calculation– Cost of Debt
• Retrieved directly from Huiyuan’s 2007 annual report• 6.49%
HUIYUAN VS COCA-COLA
— Proudly presented by Group 4
Background SynergyValue
EvaluationEquity Value
• Cost of Capital Calculation– Cost of equity = 34.75%– Cost of debt = 6.49%– D/E ratio = 0.33– Tax rate = 33% (from Huiyuan’s 2007 annual
report)
HUIYUAN VS COCA-COLA
— Proudly presented by Group 4
Background SynergyValue
EvaluationEquity Value
• Cost of Capital Calculation– D/E ratio calculation
• Book value of debt = HKD 2,225,987,000– Total liabilities from Huiyuan's 2007 consolidated balance
sheet
• Market value of equity = HKD 6,741,866,376– Share price = HKD 4.59
» Average closing price as quoted on the Stock Exchange for the 60 trading days prior to and including the last trading date
– Number of shares = 1,468,816,204» Stated in Huiyuan’s 2007 annual report
HUIYUAN VS COCA-COLA
— Proudly presented by Group 4
Background SynergyValue
EvaluationEquity Value
• Cost of Capital Calculation– WACC Formula
– Cost of Capital = 27.20%
HUIYUAN VS COCA-COLA
) 1( /1
/
/11
RateTaxDebtofCostEDED
EquityofCostED
DCF Approach
Terminal Value
PV of In-
horizon
cash flows
Total
value of HuiYuan
DCF Approach• Assumption
– 2008 growth rate: 26%, decreases at rate of 1% each year until 2019
2005 2006 2007
RMB 000 RMB 000 RMB 000
Sales 1392100 2066275 2656337
DCF Approach
• Short-term period: 10 years• Long-term growth rate: 15% (According to a report)
DCF Approach
• Other assumptions– Current Liabilities, current assets and variable
costs grow in the same rate with sales– Long term assets and non- current liabilities are
constant during in-horizon period
Year Sales Net Income OCF2008 3346985 347662.4318 207551.4
2009 4183731 455563.2214 280424.5
2010 5187826 585044.1689 367872.1
2011 6381026 738910.6949 471789.1
2012 7784852 919938.0077 594049.6
2013 9419671 1130752.542 736427.6
2014 11303605 1373691.196 900501.3
2015 13451290 1650641.261 1087545
2016 15872522 1962866.019 1298413
2017 18570851 2310823.165 1533413
2018 21542187 2693985.388 1792189
2019 24773515 3110674.305 2073609
DCF Approach
• Future cash flow by pro Forma analysis• CFFA=OCF - Change in Capital Spending - Change in NWC
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 20190
500000
1000000
1500000
2000000
2500000
10-year Cash Flow (RMB 000)
10-year Cash Flow
DCF Approach
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 20190
1000000
2000000
3000000
4000000
5000000
600000010-year Cash Flow (RMB 000)
NormalHighUgly
Scenario analysis– High: 23%– Normal :26%– Low :35%
DCF Approach
• Terminal Value of Hui Yuan Juice:1.53 billion RMB
• PV of cash flow from 2009-2019: 1.79 billion RMB
• NPV of Hui Yuan Juice: 3.32 billion RMB Deduct book value of debt
Value of Equity of Hui Yuan Juice: 1.21 billion RMB
— Proudly presented by Group 4
Background SynergyValue
EvaluationEquity Value
HUIYUAN VS COKE-COLA
Multiple approach
• P/E ratio multiple approach
Formula:
— Proudly presented by Group 4
Background SynergyValue
EvaluationEquity Value
HUIYUAN VS COKE-COLA
Multiple approach
• Comparable firms Tianyi Fruit Holdings Limited SDIC Zhonglu Fruit China Haisheng Juice Holdings Co Ltd. Uni-President China Holdings Ltd. Yantai North Andre Juice Co., Ltd.
— Proudly presented by Group 4
Background SynergyValue
EvaluationEquity Value
HUIYUAN VS COKE-COLA
NItarget EPScom pricecom Equity value
Tianyi 640,217,000 0.0280 0.80 18,318,296,854
Zhonglu 640,217,000 0.5030 17.86 22,870,903,057
Haisheng 640,217,000 0.1324 1.33 6,441,218,748
Uni-President 640,217,000 0.1404 5.08 23,144,280,278
Yantai 640,217,000 0.0520 1.05 12,924,782,161
Unit: RMBMultiple approach
— Proudly presented by Group 4
Background SynergyValue
EvaluationEquity Value
HUIYUAN VS COKE-COLA
Share price range: 4.4~15.6Weighted average share price: 11.4 RMB
Equity value range: 6.4B~23.1BWeighted average equity value: 16.7 billion RMB
Multiple approach
Result
— Proudly presented by Group 4
Background SynergyValue
EvaluationEquity Value
HUIYUAN VS COKE-COLA
2005 2006 2007Net income 110192 220983 640217
2005 2006 20070
200000400000600000800000
Multiple approach
Big Concern
Weights on Multiple and DCF
80%
20%
Sales
DCFMultiple Weighted value of equity:
4.22 billion RMB
20%*16.7B + 80%*1.21B =4.22 B
• Equity value • Synergy value• Debt
• Company value 15.23 billion RMB
Scenario Analysis盛要用
Performance Total value
Normal 15.23 billion RMB
High 17.83 billion RMB
Low 14.69 billion RMB
— Proudly presented by Group 4
BackgroundSynergy
ValueEvaluationEquity
Value
HUIYUAN VS COCA-COLA
• “If the Offers are completed, The Coca-Cola Company is expecting to use its expertise as a global beverage company to further develop the “Huiyuan” juice brand to address the evolving needs of the Chinese consumer. There are anticipated synergies that will drive operational and cost efficiencies, particularly in Huiyuan’s production footprint and in The Coca-Cola Company’s distribution and raw material purchasing capabilities.”
----JOINT ANNOUNCEMENT
Synergy Value
— Proudly presented by Group 4
BackgroundSynergy
ValueEvaluationEquity
Value
HUIYUAN VS COCA-COLA
In millions dollars 2007 2006 2005 2004 Average
Net operating revenues 28857 24088 23104 21742
Cost of Goods Sold 10406 8164 8195 7674
Cost % of Revenue 36.06% 33.89% 35.47% 35.30% 35.18%
Coca Cola’s cost
Same Cost % of Revenue after merge
— Proudly presented by Group 4
BackgroundSynergy
ValueEvaluationEquity
Value
HUIYUAN VS COCA-COLA
In millions
RMB2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 on
25% 24% 23% 22% 21% 20% 19% 18% 17% 16% 15%
Sales 3320.42 4117.32 5064.31 6178.45 7475.93 8971.12 10675.63 12597.24 14738.77 17096.97
COGS(65.83%) -2185.81 -2710.41 -3333.80 -4067.24 -4921.36 -5905.63 -7027.70 -8292.69 -9702.45 -11254.84
COGSafter
merge (35.18%)
-1168.11 -1448.46 -1781.61 -2173.56 -2630.01 -3156.01 -3755.65 -4431.67 -5185.05 -6014.66
Cost Saving 1017.70 1261.95 1552.20 1893.68 2291.35 2749.62 3272.05 3861.02 4517.39 5240.18
Synergy 11,006.70
Cost Savings
— Proudly presented by Group 4
BackgroundSynergy
Value EvaluationEquity Value
Value of the deal = Weighted Average Equity Value + Synergy Value
4.22bil. + 11.006bil. RMB
=15.226 billions RMB
=17.42 billion HKD
RMB to HKD exchange rate (09/03/2008) =1.14390
Value per share =17.42 billions HKD /1,468,816,204 shares = 11.86HKD/ share
Cost of the deal = 12.20HKD /share
HUIYUAN VS COCA-COLA
not so good a deal as it seems?
— Proudly presented by Group 4
BackgroundSynergy
Value EvaluationEquity Value
HUIYUAN VS COCA-COLA
ScenarioPerformance
In Horizon Growth Rate
Total value of the deal (HKD) Value per share
Normal 26% 17.42 billion 11.86 HKD
High 36% 20.39 billion 13.89 HKD
Low 23% 16.80 billion 11.44 HKD
— Proudly presented by Group 4
BackgroundSynergy
Value EvaluationEquity Value
• May have under looked other synergy values– Brand effect– Possibility of expanding to international market
• Depends on Coca Cola’s valuation for the Chinese market– Eager to expand Chinese juice market
• Actual value may be larger for Coca Cola
HUIYUAN VS COCA-COLA
USD 2.5 Billion by CashHKD 12.2 per share
SynergyValue
Evaluation
— Proudly presented by Group 4
BackgroundEquity Value
HUIYUAN VS COCA-COLA
Multiples Approach
Evaluation of HUIYUAN
DCF Approach
Synergy Value
Conclusion
Divided by total NO. of shares
WACC?
Not a good deal ?
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