m&a pepsico final report sample assignment

8/10/2019 M&a Pepsico Final Report Sample Assignment

1/23

Merger & Acquisition

Final Report

M&A Target for

Submitted to:

Prof. Utkarsh Majmudar

by

Timo Bluemer 11E5110

Julien Bourhis 11E5018

Benjamin Heymans 11E5206

Ralf Meinhardt 11E5103

Alfons Priessner 11E5202

November 18th, 2012


2/23

PepsiCo: Final Report M&A Advisory

2 | P a g e

Table of ContentIntroduction .................................................................................................................................................. 3

PepsiCo Strategy ....................................................................................................................................... 3

PepsiCo Excess-Cash Flow ......................................................................................................................... 4

Selection Approach ....................................................................................................................................... 4

1. Create a Long List of comparable companies ................................................................................... 5

2. Create a Shortlist of 10 companies: .................................................................................................. 5

3. Final Evaluation ................................................................................................................................. 6

Detail Analysis: NIPPON INDOSARI CORPINDO ............................................................................................. 7

Strategic Fit ............................................................................................................................................... 7

Operational Synergies ............................................................................................................................... 9

Financial synergies .................................................................................................................................... 9Ownership structure ................................................................................................................................. 9

Financial Analysis ...................................................................................................................................... 9

Market price ............................................................................................................................................ 11

Key Value Drivers .................................................................................................................................... 11

Value growth duration ........................................................................................................................ 11

Sales Growth ....................................................................................................................................... 12

Operating Profit Margin ...................................................................................................................... 12

Capital Expenditures ........................................................................................................................... 12

Debt Structure & Interest Rates.......................................................................................................... 12

Additional consideration: Exchange rate ............................................................................................ 12

Valuation of NIC .......................................................................................................................................... 12

Standalone valuation: Three-Stage DCF ................................................................................................. 12

Valuation of synergies ............................................................................................................................. 13

Sensitivity analysis .................................................................................................................................. 15

Deal structure ............................................................................................................................................. 16

Negotiation strategy ................................................................................................................................... 16

Appendix ..................................................................................................................................................... 19

References .................................................................................................................................................. 23


3/23


3 | P a g e

Introduction

PepsiCo, Inc. (headquarters located in Purchase, New York, United States) is a multinational corporation

and operates in beverage and snack businesses all over the world. The American company was formed

in 1965 with the merger of Pepsi-Cola and Frito-Lay, Inc. The company uses contract manufacturers or

manufactures their products by their own and sells a variety of grain-based snacks, carbonated and non-

carbonated beverages and foods, distributed in across more than 200 countries.

The product portfolio includes 22 major brands, each generating more than a billion USD revenues. The

largest brands are Pepsi, Lays, Mountain Dew, Gatorade and Tropicana Beverages. With a net revenue

of USD 66,5bn (2011) and a market capitalization of USD 109bn (September 2012) PepsiCo is the biggest

company in their market behind its main competitor The Coca-Cola Company.

Snapshot of PepsiCo Major Brands

PepsiCo Strategy

PepsiCo elaborated a framework for growth that focuses on extending its macro-snacks portfolio and

expanding its nutrition business (dairy, good-for-you products), while increasing profitability of the

beverage business. PepsiCo forecasts an increasing share of the snacks category in its net revenue (table

1) and perspectives for future growth might be outside of the beverage category.

Emerging markets have also represented an increasing share of PepsiCos net revenue from 21% in 2005

to 34% in 2011. In 2021, PepsiCo forecasts that developing and emerging countries would stand for half

of the groups net revenue.


4/23


4 | P a g e

Table 1: PepsiCo Portfolio Evolution

Source: Cons umer Analyst Grou p o f New York Conference Presentat ion, 02/23/2012

Therein, the acquisition of Wimm Bill Dann Foods, Russias leading branded food and beverage

company, in 2011 illustrates this strategy on two fields: one geographic and the second one in nutrition

and snack. Indeed, this acquisition increased PepsiCos revenues in nutrition and functional foods from

USD 10Bn to USD 13Bn, particularly in Dairy products and significantly advanced PepsiCos global

nutrition strategy. (Source: Press Release PepsiCo September/2011)

PepsiCo Excess-Cash Flow

In the Q3 2012 PepsiCo Earnings Conference Call held on October 17th, 2012 PepsiCo announces atarget of approximately $8 billion in cash flow from operating activities but anticipates more than $3

billion in share repurchases for 2012, and expects to pay $3.3 billion in dividends, reflecting its

commitment to return capital to shareholders. The company also made a pre-tax discretionary pension

and retiree medical contribution of $1 billion in the first quarter of 2012, which leaves $700 million as

cash flow that can immediately be used for acquisitions.

TASK: PepsiCos internal corporate development department is required to prepare a deal

concept proposal for a Target Company for which some strong strategic rationale exists

Selection ApproachOur approach of creating a short list of potential acquisition targets can be divided in 3 steps:

1.Long List 2. Short List3. Final

Evaluation


5/23


5 | P a g e

1.

Create a Long List of comparable companies

Our main source for the Long List of potential acquisition targets was Bloomberg.

The result of this step was a Long List of 350 companies operating in food and beverage industry.

We used the following criteria to create our Long List:

Industry Definition: Food and Beverages

Reason: Since the late 90 PepsiCo exclusively focuses on its core business: snack food and beverages.

Hence we did not go beyond their industry definition and just chose F&B companies in order to be in

line with PepsiCos strategy. We also followed PepsiCos approach and did not look for vertical

integration along the value chain.

Geographical Definition: Emerging Markets

Reason:According to PepsiCo Emerging Markets have great growth potential and therefore it is one of

the companys goals to increase their presence in these markets. We only selected companies which

make at least 25% of their revenues in emerging markets.

Corporation Size:> USD 100mn Revenue 2011 & max. market capitalization of USD 5bn

Reason Revenue:

The PepsiCo M&A department has an internal policy that they only target companies which have a

revenue larger than 100mn (Source Interview Melissa Bailey, Director M&A Department PepsiCo in

Oct.2011).

Reason Market Capitalization:

PepsiCo's USD 5.4bnacquisition of Russian-based dairy products company Wimm-Bill-Dann Foods OJSC

in 2010 was used as a benchmark for the max. price (excl. premium) which should be paid for a potential

acquisition target. Therefore we were looking for companies with a market cap below USD 5bn.

2. Create a Shortlist of 10 companies:

The following criteria were selected to reduce the Long List to a Short List of only ten companies:

Tighter Industry Definition:Snacks, dairy products and non-alcoholic beverages

Reason: PepsiCo is experienced with these products and identified these as crucial for future growth.

Diversification into other food products and alcoholic beverages was therefore excluded.

Profitability:Operation Margin >6%
http://www.pepsico.com/PressRelease/PepsiCo-Announces-Completion-of-Wimm-Bill-Dann-Acquisition09092011.htmlhttp://www.pepsico.com/PressRelease/PepsiCo-Announces-Completion-of-Wimm-Bill-Dann-Acquisition09092011.html


6/23


6 | P a g e

Reason: PepsiCo is only investing in a profitable business and therefore a 6% operating margin (37.5% of

PepsiCo OM: 16% (2011)) was fixed as an initial benchmark.

3. Final Evaluation

As a final step the short list companies were filtered a second time by key financial indicators, their

availability of sale, their strategic fit and potential other issues. This was done by looking at the

ownership structure, their strategic goals and country risk ratings. Moreover the availability of data was

done as a last check, because it is crucial for further valuation steps. For each criterion, the companies

were sorted in two groups relatively to their peers using the following table:

It turned out, that ownership structure was the most important knockout-criteria. In five cases, thefounder or the founding family holds a majority stake in the company which they are probably not

willing to sell. In one more case, the Vietnamese government holds almost 50% of the shares which

makes the possibility of a takeover by a foreign company very unlikely. Another potential target is

located in Egypt where the political risk for PepsiCo is still prohibitively high.

Company Country Segment

Market

Cap

(MUSD)

Revenue

(T12M)

(MUSD)

Operatin

g Margin

Rev.

Growth

(1Y)

LT Debt/

Equity

Owner-

ship

Other

issues

Target

company

Alaska Milk CorpPhilip-

pinesDairy 498 321 11,9% 29,8% 0,2%

68% held

by MNCNo

Kinh Do Corp Vietnam

Baked

goods

and

Candy

213 205 9,9% -4,4% 1,9%35% held

by 4 inv.Yes

Zydus Wellness India Dairy 307 69 22,3% -0,9% 0,0%

70% held

by Cadia

Health-

care

Yes

Juhayna Food

IndustriesEgypt

Dairy,

Juices 666 418 14,1% 23,3% 14,8% N.A.

Political

risksNo

Kwality Dairy India Dairy 94 451 6,6% 48,6% 94,6%

75%

owned by

family

No

ATLANTIC GRUPA CroatiaFood &

Bev 282 878 8,6% 5,6% 166,3%

Founder

holds

50,20%

No

Nippon Indosari

CorpindoIndo-nesia

Baked

goods578.41 113 16,9% 52,9% 20,9%

76% held

by 3 IBsYes

M Dias Branco Brazil

Cracker,

cookies,

pasta

3.690 1.810 16,4% 21,5% 20,5%

63.1%

held by

founder

No

Vinamilk VietnamDairy

prod-ucts 3.110 1.180 23,7% 29,3% 0,0%

47% held

by

govnmt.

No

Strauss-Group IsraelFood &

Bev 1.140 2.180 6,9% 5,2% 107,9%

Founder

holds

+50%

No


7/23


7 | P a g e

As a result, three potential acquisition targets remain. Based on the financial criteria, Nippon Indosari

Corpindo looks most promising, followed by Zydus Wellness and Ninh Do Corp. However, further

strategic and financial analysis is required to decide upon the final target. Therefore we briefly introduce

each of the three remaining companies:

Nippon Indosari Corpindo Limited

Nippon Indosari Corpindo is an Indonesia-based company engaged in the production of breads and

cakes. The Company markets its products under the brand names Sari Roti, Boti and Sari Cake. Its

products are categorized into three types: white bread, cake and sweat bread.

Zydus Wellness Limited

Zydus Wellness Limited is an India-based company that operates in the Consumer Products segments.

Its business consists of manufacturing and marketing of consumer wellness products in India. During the

fiscal 2012, the Companys EverYuth entered into the male skincare market with the launch of EverYuth

Menz. The SugarFree product includes two product types in its portfolio: Sugar Free Gold and Sugar Free

Natura. Nutralite offered by the Company is an alternative to butter.

Kinh Do Corporation

Kinh Do Corporation is a business group of Vietnam with an emphasis on food production, including

baked goods, confections, snacks and soft drinks. The corporate group also includes companies in the

fields of financial services, real estate and a retail bakery chain. Kinh Do Corporation manages a wide

variety of brand names, distributes imported brand name snack and candy goods, and manufactures

food for export from Vietnam.

Detail Analysis: NIPPON INDOSARI CORPINDO

After further strategic and financial analysis we prioritized NIPPON INDOSARI CORPINDO as mainacquisition target.

Strategic Fit

PepsiCo increases focus on Snacking Business Segment till 2020

PepsiCo current product portfolio mix split between beverages and snacks lies at 52% to 48%. PepsiCo

sees big potential in the snacking business (high growth rate and margins) and hence wants to increase

its focus on snacking products. PepsiCo forecasts an increasing share of the snacks category in its net

revenue so that the portfolio split based on net revenue in 2020 shifts to 45% Beverages and 55%

snacks. This goal is hard to achieve by organic growth of the existing snacking products. Therefore

Nippon Indosari Corpindo, which offers Snacks like Cakes and Sweet/Non Sweet Bread, has a highstrategic fit on a corporate level. (Source: Consumer Analyst Group of New York Conference

Presentation, 02/23/2012)

PepsiCo increases focus on Emerging Markets

Emerging markets have represented an increasing share of PepsiCos net revenue from 21% in 2005 to

34% in 2011. In 2021, PepsiCo forecasts that developing and emerging countries would stand for half of


8/23


8 | P a g e

the groups net revenue. Since Nippon IndosariCorpindo is operating in Indonesia, one of the growing

emerging markets, and has the potential of entering further growing countries in the AsianPacific

Region, the acquisition target has a high strategic fit for PepsiCo. This acquisition will increase PepsiCos

revenue share in Emerging Markets.

PepsiCo enters new Snacking Segment: Cakes and BreadThis acquisition will give PepsiCo access to a totally new product line: Cakes and Bread, which has two

main advantages. First, PepsiCo can build some new capabilities needed for this specific market and

might leverage these learnings in their core markets. Second, the cake and bread market has been

growing for years. In Asia-Pacific cakes and pastries market grew from $24.4bn in 2008 to forecasted

$35.2bn in 2013 which means a CAGR of 7.6% according to Datamonitor. The bread market is growing as

well at a CAGR of 4.9% between 2008 and 2013, and will reach an expected value of $9.53bn. Growth in

these markets is also expected to come from consumers who are moving away from their well known

local breakfast foods as a result of increasing western influence. With this merger PepsiCo can anticipate

the huge growth potential in the next years.

Promising Outlook for Baked Goods Industry in Indonesia

Baked goods continue to benefit from the increasingly busy lifestyle of Indonesian consumers, which is

leading to higher demand for more practical and convenient food. Pastries Category is expected to have

a 5.9% CAGR until 2016 against 5.7% for the Bread Category and 2% for the Cakes Category. Globally,

Baked Goods are expected to grow by 5.5% a year by 2016 (Source Euromonitor).1.

More particularly for Nippon Indosari Corpindo, the Indonesian middle class expanding rapidly in

more ways than one could contribute to demand that will drive net income up 13% in 2012 (Source:

Jakarta Globe)2, according to Yusuf Hardy, the operational director of Nippon Indosari Corpindo.

The Sweet Bread Line is the largest contribution to the companys sales with 56% in 2011, whichrepresents $49.6 million. Moreover, consumption of breads in Indonesia is still low and a revenue

growth of 30% per year is achievable2. Indeed, according to data from Euromonitor, a market research

provider, Indonesians consume 1.7 kilograms of bread per year in 2010, far lower than neighboring

Malaysia at 5.9 kilograms.

Pastries are by far the biggest contributor to sales of baked goods in Indonesia, both in terms of volume

and value. In general, the popularity of pastries in Indonesia remains unmatched by any other types of

baked goods thanks to the more versatile image of pastries, which are popular not only as breakfast

items but also as snacks. The most popular types of pastries in Indonesia are mostly filled pastries,

especially chocolate filled buns and cheese filled buns. During the first half of 2010, Nippon Indosariexpanded its range of pastries by launching various products including chocolate and pineapple filled

buns, chocolate and blueberry filled buns and blueberry cream filled buns.

1Euromonitor, October 2011 Baked Goods in Indonesia

2The Jakarta Globe, Company Behind Sari Roti Keen to Grow Iconic Brand April 15, 2012


9/23


9 | P a g e

Operational Synergies

PepsiCo already has a Joint Venture with the leading Indonesian Food Company, Indofood, for Snacking

Products. But this Joint Venture only sells PepsiCosand Indofoodssalty snacks. A potential acquisition

of NCI would enrich PepsiCosproduct portfolio by sweet snacks. PepsiCos experience in the Indonesian

market increases NIC attractiveness as potential acquisition target. But more importantly, there is some

space for operational synergies through conjoint purchasing or centralizing administrations or

production.

Financial synergies

In this area, mainly cash synergies are important. NIC currently has large cash outflows as they require

high capital expenditures in order to sustain their enormous growth of 33% (CAGR last 5 years). Their

current cash position is low which is why they are in need for external funds to finance especially

expenditures in fixed assets. PepsiCo on the other hand has large net inflows of cash due to the maturity

and stability of their business. Therefore, cash can easily be transferred to NIC to maintain or even

increase future growth.

Ownership structure

The current ownership structure seems favorable for PepsiCo. The two major shareholders, which are

both investment funds from the British Virgin Islands, Bonlight Investments Limited and Treasure East

Investments Limited, just released 25.21 million shares. Thus, their ownership declined to 31.5% from

previously 34%. Their investment seems to be only profit oriented and not driven by strategic interests.

Therefore, buying the shares from these firms should be feasible if the price is attractive for them.

Financial Analysis

We analyzed key ratios and compared NIC, its industry, and put them in perspective with regard to

PepsiCo. The study covers the main aspects of the financial situation of the respective companies:growth, liquidity, profitability, efficiency and management effectiveness.

Area KPI NIC Industry PepsiCo

Growth rate Sales growth 1 y 47,12 9,12 6,72

Financial StrengthCurrent Ratio 1,19 1,37 0,99

LT Debt to Equity 20,93 29 104,09

Profitability

Gross Margin 46,45 38,54 51,99

Operating Margin 16,71 8,5 13,89

Net profit margin 13,42 5,92 9,08

Effective tax rate25,4 31,85 28,11

Efficiency

Receivable turnover 9,46 16,83 8,33

Inventory turnover 30,16 5,79 7,26

Asset turnover 1,35 1,09 0,9

Management

effectiveness

ROA 18,15 8,03 8,17

ROI 21,73 11,24 10,88

ROE 25,48 18,86 26,98


10/23


10 | P a g e

Growth rate

The year to year sales growth of Nippon Indosari Corpindo is very impressive. Far above the industry and

PepsiCo figures, this trend is positive for the acquirer to continue to boost sales.

Financial Strength

Nippon Indosari Corpindo has a strong financial position and a low leverage ratio compared to theindustry. Needless to compare the debt position with PepsiCo as the size and track record of the

companies are not comparable. The company's ability to pay short-term obligations proves to be a bit

lower than the industry, but still good, with a current ratio higher than 1.

Profitability

The gross margin is an important indicator for profitability as it shows the capability of a company to

demand a premium over its direct costs. The gross margin for NIC is 46% is about 8% higher than the

industry average. It is however slightly lower than PepsiCo's, but probably due to the fact that PepsiCo s

brand image is very strong.

The operating margin is very useful to compare the profitability of the operating activities of a company.

It is not influenced by different financing decisions or tax regimes. NIC has an excellent operating margin

of more than 16%, almost double of the industry average and almost 3% higher than PepsiCo's.

The net profit margin shows how the company is performing after tax and interest. Nippon's net profit

margin of more than 13% is also excellent, clearly beating the industry and PepsiCo.

With about 25%, NIC enjoys lower effective tax rates than an average competitor with 31% and PepsiCo

with 28%. This number also helps to explain the high net profit margin NIC. All in all the figures indicate

very high profitability.

Efficiency

Nippon Indosari Corpindo collects receivables and extends its suppliers' credit in an efficient way to

provide better liquidity. Similar to PepsiCo's level, NIC is still far below the industry, which leaves room

for further improvements in cash collection effectiveness.

The asset turnover of 1.35 indicates high efficiency in the use of fixed assets. The industry average is

slightly above 1 while PepsiCo's is slightly below.

Management effectiveness

ROI measures profitability in terms of investment. With more than 21% Nippon outperforms the

industry and PepsiCo by nearly 10% indicating that they have great investment opportunities.

Nippon Indosari Corpindo yields an interesting Return on Equity, higher than industry average, and in

similar range of current PepsiCo figures. The target looks then attractive from a potential shareholder's

perspective.

Cash Flow Analysis

Cash flows from operating activities have been positive (at least since 2007) and growing at a steady

pace since 2009. The company is following a positive trend in operation performances.

Investing activities have been highly cash consuming in the last 2 years, mainly due to heavy

investments in capital expenditures.


11/23


11 | P a g e

As a result, free cash flows have been slightly negative in 2010 and 2011, reaching equilibrium in 2008

and 2009. No cash flows are then available to shareholders or debtholders. However, the situation

should change in the coming years as the investment in capital expenditures will bring some returns and

additional cash flows in the operations.

Regarding the financing side, a $ 10 million long term reimbursement combined with an increase of $ 20

million in equity in 2010 resulted in a positive financing cash flow of roughly $ 10 million during that

year. Except from that, financing cash flows remain stable and close to a $ 0 level for the whole period

between 2007 and 2011. In conclusion, net change in cash has been positive in 2010 thanks to the

financing share. In 2011, NIC suffered an $ 8 million outflow of cash.

Market price

As concluded above, the financials of NIC in comparison to the industry in which they operate as well as

to PepsiCo look very promising. However, their good performance and their growth opportunities seem

to be valued by the market already. An indicator for this is the price-to-sales multiple of more than 6 (for

comparison, PepsiCo has a multiple of only 1.64).

Key Value Drivers

Our team will use the DCF model for the company valuation, which requires some assumptions.

Multiples are less reliable as we could see that NIC performs stronger and has higher growth than the

typical company in their industry. The Shareholder Value-Driver Tree helps to identify value drivers,

which will be discussed in more detail below.

Value growth duration

Value growth duration is a key value driver for the company value and a key input in our DCF. Currently,

the NIC is growing in a very profitable way and much faster than the industry and the overall market. It

will be important to determine for how long the company can outperform the competition in its market.


12/23


12 | P a g e

As the bakery market is very fragmented is it possible that NIC can maintain strong growth for a

relatively long period.

Sales Growth

The sales growth will be driven by the Indonesian GDP, consumer expenditure and growth of middle-

class households. With a expected GDP of 6,1% in 2012 and a constant forecast, Indonesias economy isone of the most growing in Asia and above some other emerging market economies such as Vietnam

(5.6%), Russia (2.8%) and Brazil (2.7%). This is also reflected in the consumer expenditure per household

which will increase by 39.2% from 2012 to 2020 and a growing number of middle-class households from

13.7 million in 2011 to 31.1 million in 2020.

Operating Profit Margin

NCI operating Margin is 16.72% (2012). A merger with PepsiCo would have positive effects on the

drivers of the operation margin. Potential centralization of administration, purchasing, marketing, etc.

saves expenditures, which has a positive effect on the operating margin. A further driver on the

operating margin is the inflation (8.3% in 2012), because raw materials, salaries, etc. become more

expensive, but this cost increase cannot always be transferred to the customer via a price increase. Thus

the high inflation is another driver on NCIs operating margin.

Capital Expenditures

Capital expenditures may be influenced by the age of their equipment since they would have to reinvest

to keep supplying the demand. Also, recently opened factories might increase the depreciation: 3 out of

the 6 current factories of the company opened in 2011 and should be emphasized by the construction of

new plantstwo new ones are expected for 2012 for about $21 million.

Debt Structure & Interest Rates

The interest rate for debt could be improved by quantitative and qualitative factors. Due to the strongcash figures by PEPSICO, Nippons liquidity could be improved and debt could be paid back to improve

the equity/debt ratio. Moreover innovation can be boosted, technologies transferred and management

know how shared. The interest rate for debt could be improved by quantitative and qualitative factors.

Due to the strong cash figures by PEPSICO, NICs liquidity could be improved and debt could be taken on

to gain additional tax shields.

Additional consideration: Exchange rate

For PepsiCo as a US-based company, the development of the exchange rate is a major value driver. The

acquisition price will be paid in dollars while the cash flows PepsiCo will receive in the future will be in

local currency. Fluctuations in the exchange rate can therefore have a large impact on the profitability of

the acquisition.

Valuation of NIC

Standalone valuation: Three-Stage DCF

Possible valuation techniques are the dividend discount model, comparables (transaction or trading

multiples), DCF with exit multiple and DCF with terminal growth rate. Dividend discount model is not


13/23


13 | P a g e

applicable because no clear dividend pay-out policy is available. Transaction comparables are not

applicable either as no transactions of comparable companies (industry, size and South-East Asia) are

available. Trading multiples are also not very helpful as most of the companies in this industry are not

listed and none has similar growth rates compared to NIC. This fact also rules out the use of exit

multiples in a DCF analysis. Therefore, by far the best method seems to be the DCF with a terminal

growth rate.

The company is currently growing rapidly (at more than 30% annually) and it has the potential to grow

strongly and constantly increase its market share over a longer period. In a two-stage DCF, we would

have the problem of either using a very high long-term growth rate or modeling an abrupt and very

sharp drop in the companys sales growth. Both assumptions seem to be very unrealistic. Therefore, a

three-stage DCF, using detailed forecasts till 2016, followed by a slow-down in market share growth

from 2016-2021 and a terminal value afterwards, is most appropriate to value the company.

We use a constant WACC to value the company using an Indonesian market risk premium of 7.3%3and a

risk free rate of 5.75%4. NIC operates in the food industry which is not very sensitive to overall market

developments as the consumption of bread and cakes does not heavily depend on market

developments. A beta for NIC is not directly available, so we used the sector beta of 0.5 5and relevered

it. Using these numbers as well as the current capital structure of 99.53% equity, we arrive at a WACC of

9.39%.

In order to forecast the free cash flows to the firm, a set of assumptions are used (Exhibit 2).

Furthermore, we assume that PepsiCo will acquire NIC at the end of 2012. Therefore, the free cash flows

from 2012 do not need to be discounted.

Calculating the free cash flows and discounting them at the WACC, we arrive at a standalone equity

value of Rupiah 7.3 trillion or $ 753mn (Exhibit 3).

Valuation of synergies

Synergies can only be implemented after the acquisition of NIC. Consequently, PepsiCo cannot make use

of any synergies in 2012.

Market share

We believe that PepsiCo, due to its expertise in marketing and distribution can increase NICs market

share. We plan to increase the marketing budget and run additional advertising campaigns for Rupiah

10bn (roughly $ 1mn) each year from 2013-2016 to strengthen the brand and increase revenues.

Furthermore, NICs bargaining power towards customers (especially retailers) is increased by the

acquisition, so that better shelf-positioning and slightly higher prices seem achievable.

3Source:http://www.iese.edu/research/pdfs/di-0920-e.pdf

4Source: http://www.tradingeconomics.com/indonesia/government-bond-yield

5Source:http://www.reuters.com/finance/stocks/financialHighlights?symbol=ROTI.JK
http://www.iese.edu/research/pdfs/di-0920-e.pdfhttp://www.iese.edu/research/pdfs/di-0920-e.pdfhttp://www.iese.edu/research/pdfs/di-0920-e.pdfhttp://www.reuters.com/finance/stocks/financialHighlights?symbol=ROTI.JKhttp://www.reuters.com/finance/stocks/financialHighlights?symbol=ROTI.JKhttp://www.reuters.com/finance/stocks/financialHighlights?symbol=ROTI.JKhttp://www.iese.edu/research/pdfs/di-0920-e.pdf


14/23


14 | P a g e

Additionally, financial synergies come into play. NIC currently has large cash outflows and requires high

amounts of external funds to invest in fixed assets in order to maintain strong growth. If there are

limitations in procuring these funds, NIC cannot exploit all profitable growth opportunities. When

PepsiCo with its strong cash flows acquires NIC, these limitations will disappear and NIC can grow faster.

We assume that, with the help of PepsiCo, NIC can capture an additional 0.4% of market share each yearfrom 2013-2016 and that this increase will be permanent as NIC can maintain its strong position against

competitors. As the implementation of these synergies is risky, we increase the discount rate to value

this type of synergies by 1.6%. The expected higher market share will increase NICs value by Rupiah

500bn (Exhibit 4).

Margin improvements

Due to the increased bargaining power towards suppliers we expect slightly lower costs for inputs.

PepsiCo as a very experienced producer has high competencies in optimizing production processes such

as packaging. We expect higher production efficiency due to waste reduction, productivity increases of

the workforce etc. These levers translate into gradual improvements in the COGS (lowering the COGS as

% of sales-ratio till 2016 by 0.3% each year). After 2016 the ratio will be lowered permanently by 1.2%

compared to the base case.

A similar impact can be assumed for SG&A as % of sales-ratio. PepsiCo has excellent skills in logistics and

distribution and there are potential synergies for the sales force as both PepsiCo s as well as NICs

products are mostly sold in the same outlets. Furthermore, there is some potential to reduce

administrative costs by transferring best practices in controlling, HR and other support functions from

PepsiCo. Improvements of 0.25% each year till 2016 are feasible, lowering the ratio permanently by 1%

in the years afterwards.

Using the WACC seems adequate to measure these synergies because cost reductions are more easilyimplemented than revenue increases. Margin improvements combined will account for the majority of

synergies to PepsiCo and are valued at Rupiah 729bn (Exhibit 4).

Additional tax shield

Currently, NIC has practically no long-term debt which also has to do with the limited access to debt

financing in the Indonesian financial system. After an acquisition by PepsiCo, NIC will have significantly

better access to capital markets. Taking on additional debt worth Rupiah 3 trillion at the beginning of

2014 is feasible leading to high tax shields in the future. The year 2014 is chosen because at that point in

time, the expected cash flows are high enough to support the interest payments. We consider the tax-

savings to be very certain. However, the amount and conditions for taking on debt in 2014 are notperfectly predictable. Therefore, we use the risk-free rate adding 2% to it as the discount rate.

Consequently, the present value of the tax shield is Rupiah 461bn.

All in all potential synergies are valued at Rupiah 1.7 trillion or 23% of the standalone equity value of NIC

(Exhibit 4).


15/23


15 | P a g e

Sensitivity analysis

To have a more precise idea of a valid range of the valuation, we conducted several sensitivity checks. As

sales growth is the most important driver of our valuation, we developed three scenarios with different

sales growth. In the base case, the sales grow as expected. In the low case, they grow 10% less and in

the high case 10% more than expected.

Furthermore, we decided to do a sensitivity analysis in each case with the two following variables: the

WACC and the Growth rate for the Terminal Value. Both variables have a strong impact on the valuation

and are difficult to forecast precisely.

If we call WACC0 the estimation of the WACC calculated for our assumptions, the sensitivity varies from

WACC00.5% to WACC0 + 1%. The expected Growth rate for the Terminal Value (g = 4%) is the basis of

the sales growth for the last year. The sensitivity varies from g 0.5% to g + 1%. The results of our

sensitivity analysis are shown in the table below.

We consider Rupiah 8.9 trillion ($ 925mn, highlighted in green in the base case) to be the most likelyvalue, however there is some downside potential even in the base case. If the terminal growth rate is

lower and the WACC slightly higher (WACC + 0.5% and g 0.5%), the company is only worth Rupiah 7.7

trillion ($ 796mn) or 14.5% less than in the most likely case. However even in this scenario, paying a

premium on top of the current market price of NIC is justified.

Even in the low case (low sales growth), a premium of approx. Rupiah 1 trillion ($100 mn) on top of the

market price is a reasonable price for PepsiCo, however PepsiCo could face losses if the WACC and/or

the growth rate turn out to be worse than expected.

In the high case (stronger sales growth), there is significant upside potential: the company could well be

worth more than Rupiah 10 trillion (or $ 1,000mn).

All in all, the sensitivity analysis shows that there is significant uncertainty in the valuation of NIC.

However, there is a slight asymmetry between potential losses and gains that is in PepsiCo s favor. In the

high case, the valuation increase is more significant than the valuation decrease in the low case which

makes the deal attractive for PepsiCo.

WACC \ g 3% 3.5% 4.0% 4.5% 3% 3.5% 4.0% 4.5% 3% 3.5% 4.0% 4.5%

8.89% 7,698 8,194 8,791 9,526 8,643 9,209 9,890 10,728 9,706 10,351 11,127 12,081

9.39% 7,058 7,462 7,940 8,516 7,915 8,375 8,920 9,578 8,879 9,403 10,024 10,772

9.89% 6,514 6,846 7,235 7,696 7,296 7,674 8,118 8,643 8,175 8,606 9,111 9,709

10.39% 6,044 6,321 6,642 7,016 6,762 7,077 7,443 7,870 7,568 7,927 8,343 8,830

WACC \ g 3% 3.5% 4.0% 4.5% 3% 3.5% 4.0% 4.5% 3% 3.5% 4.0% 4.5%

8.89% 798 850 912 988 896 955 1,026 1,112 1,007 1,073 1,154 1,253

9.39% 732 774 823 883 821 868 925 993 921 975 1,039 1,117

9.89% 675 710 750 798 757 796 842 896 848 892 945 1,007

10.39% 627 656 689 728 701 734 772 816 785 822 865 916

Total Value (incl. synergies; Rupiah billion)

Total Value ($ million) Total Value ($ million) Total Value ($ million)

BASE CASE HIGH CASE


LOW CASE



16/23


16 | P a g e

Deal structurePayment by cash deal or stock deal

There are two kinds of paying the acquisition price: cash deal or stock deal. The purchase price will be

paid in cash at a cash deal. On the other hand a portion or the entire amount of the acquisition price is

paid in shares of the acquiring company during a stock deal. During the M&A wave from 2003 till 2005

around 50% of deals were paid in cash.

At stock transactions, buyers share the value as well as the risk of the transaction with the shareholders

of the company they acquire. In cash deals, acquiring shareholders take on the entire risk that the

expected synergy value embedded in the acquisition premium will not materialize.

PepsiCo has a lot of cash to finance a cash deal in that case. With net cash provided by operating

activities of US$ 8.9bn and cash/cash equivalents of US$ 4.1bn referring to the balance sheet in 2011,

PepsiCo is well prepared. Moreover PepsiCo would have a certain purchase price and no dilution of

ownership. The certain purchase price guarantees a less risky transaction for both companies because

cash does not fluctuate like stocks. A stock deal could increase the stock price significantly, so theacquirer would pay much more. Furthermore cash deals prevent the dilution of ownership of your

company. It allows maintaining the current ownership status of your company. Otherwise the target

entitled to a percentage of the acquirer future profits and would have a vote in shareholder decisions.

The disadvantage of spending down the cash reserves could be compensated quite easily by PepsiCo

due to their high liquidity as already mentioned.

Another argument for a cash deal is the sellers preference. PepsiCo has to convince the major investors

of Nippon. These two major investors are Investment funds. They would prefer cash instead of stocks, to

invest in new projects.

Negotiation strategyAnalysis of possible defense tactics by the target company

An analysis of the possible defense tactics is essential to figure out the right negotiation strategy as

defense tactics could delay the outcome or/and increase the uncertainty of the deal taking place.

Several defense tactics by Nippon could confront PepsiCo. But in case of Nippon, the major shareholders

are two investment funds with 63% of the shares, whose behavior is important for PepsiCo:

- Bonlight Investments Limited (31.5%)

- Treasure East Investments Limited (31.5%)

As an investment fund, the main objective could be to buy shares of a company, increase the value andsell it. It is less probable that proactive or pre-deal preparations like special charter amendments exist.

The same applies for a possible golden parachute. If these existed the actual major shareholders would

decrease the value for an acquiring company with negative impact on a potential purchase price.

Employee stock ownership plans, other labor agreements and poison puts would be against the

investment strategy of investment funds as well.


17/23


17 | P a g e

A usual reactive tactic is litigation. Nippons shareholder could try to increase the uncertainty and

improve their psychological position between buyer and seller. But in the end it should be no problem

for PepsiCo if the shareholders are willing to sell. Since Nippon is an Indonesian company, different

regulations could make the transaction harder. Bapepan-LKthe Indonesian capital market regulator

has introduced new takeover rules in June 2008. PepsiCo has to make sure, that minimum 20% of the

shares are free float.

Another defense tactic is the counter-tender, which seems not realistic due to the different sizes of both

companies. Asset restructuring would decrease the attractiveness for PepsiCo, but would not be a

reasonable strategy for an investment fund as major shareholder. Moreover it is less probable that a

white knight or greenmail would save the target companythis is not needed for an investment fund. It

is more likely, that another potential buyer could compete against PepsiCo. Due to the low quota of

public shares a leveraged recapitalization makes also no sense. The last defense tactic to be mentioned

is a management buy-out, by the current management of Nippon. In this case a significant use of debt

financing is needed as well as a financial partner. Such a financial partner could be one of the current

investment funds. However, Nippon has currently negative cash inflow. There is a lack of cash thatmakes it harder to finance such a management buy-out. Anyway PepsiCo has to make sure, to negotiate

with the two major shareholders in the same way under the same circumstances.

In conclusion, PepsiCo does not have to expect major defense tactics by Nippon. In the end it will be a

negotiation with the major shareholders.

Approach for negotiation

Our approach consists in a first negotiation with the board of directors of NIC to convince them on the

positive aspects of PepsiCos takeover. Due to their important equity stake in the company, we can

assume that representatives of the investments funds will sit on the board, which will be favorable for

the later discussion with the funds themselves.

The purpose is to propose a friendly takeover, in the form of the acquisition of a majority of the shares

of NIC. One of the key elements we will emphasize during the discussions is that we want to keep the

current management in place, as we consider they are doing a great job in managing the company.

If the discussion with the board gives positive results, we will contact the two investment funds. As a

certain part of the equity need to be free floated, according to Indonesian regulation, PepsiCo is only

interested in buying a majority stake of the equity, but not 100%. We want to make a direct cash offer to

the investment funds.

The investment funds are exclusively interested in a financial return on their shares, not in a strategic fit.

As a result, the cash offer with a decent premium should be the perfect solution to convince them to sell

their shares to PepsiCo. Moreover, those funds recently sold 2.5% of their respective stake in NIC. This

indicates that they are satisfied with the current share price and do not consider the stock to be

undervalued. In addition, they are also probably looking for a potential exit strategy and the PepsiCo

offer is the perfect solution to answer that need of the current main shareholders.


18/23


18 | P a g e

Our reserve price of Rupiah 5.6 trillion ($ 585mn) or Rupiah 8,848 per share for the 63% of the equity

from the investment funds is based on our valuations and on the value of the potential synergies,

valuing the total company at 9.0 trillion ($ 926mn). Our negotiation strategy recommends starting the

offering at a lower price of Rupiah 7,150 per share, but giving the current shareholders a decent

premium of 10% compared to the current price6 of Rupiah 6,500 per share. If they refuse, we will

progressively increase our offer. We are optimistic to settle the deal below Rupiah 8,000 per share, well

below our reserve price of Rupiah 8,848 per share.

6Share price on Oct. 29, 2012


19/23


19 | P a g e

AppendixExhibit 1: Bloomberg output


20/23


20 | P a g e

Exhibit 2: DCF assumptions

Sales growth: Overall market grows at the same rate as the Indonesian GDP. NICs market share

increases by 1.7% each year till 2015 and afterwards market share growth linearly decreases.

SG&A: Due to economies of scale, SG&A as a percentage of sales linearly decrease from 24% to 22.5% in

2015 and remain constant afterwards.

PP&E: Due to economies of scale, the fixed capital requirements (PP&E as % of next years sales)

decrease from 48.9% in 2012 to 42.9% in 2016.

Depreciation: Depreciation as % of last years PP&E remain constant at 6.9%.

Capital expenditures: Capital expenditures are calculated as sum of the increase between this years and

last years PP&E andthe incurred depreciation for this year.

Change in net working capital: Historical averages of several ratios (inventory turnover ratio, accounts

payable turnover ratio etc.) are used to forecast this item.

Stand-alone equity value: This number is calculated by reducing the firm value from the DCF by the

market value of debt. We hereby assume that market value of debt is equal to book value of debt.


21/23


21 | P a g e

Exhibit 3: DCF-valuation

(000Rupiah)

YEAR

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

TV

EBIT

264,051,719

335,374,142

420,506,204

516,954,723

599,749,130

677,756,818

745

,796,013

804,485,060

851,890,397

886,136,391

EBIT*(1-t)

198,038,789

251,530,606

315,379,653

387,716,042

449,811,848

508,317,613

559

,347,010

603,363,795

638,917,798

664,602,293

Depreciationandamortisation

38,452,921

49,885,611

58,806,463

67,962,436

75,942,263

82,565,115

90

,853,728

98,003,295

103,778,268

107,950,155

ChangeinNetWorkingCapital

2,007,068

-642,472

-566,733

-462,898

-937,444

-873,997

-788,253

-679,929

-549,204

-396,749

Capitalexpenditure(Capex)

203,869,180

178,958,825

191,281,570

183,420,219

171,766,387

202,490,641

194

,298,732

181,559,693

164,140,076

170,738,507

FCFF

30,615,461

123,099,864

183,471,279

272,721,157

354,925,168

389,266,084

456

,690,259

520,487,326

579,105,194

602,210,690

626,419,560

PresentvalueofFCFF

30,615,461

112,534,201

153,328,189

208,352,976

247,881,796

248,531,455

266,552,956

277,714,703

282,470,523

268,528,937

5,202,678,567

Firmv

alue

7,299,189,764

-Marketvalueofdebt

-33,071,521

StandaloneEquityValue

7,266,118,243

Forecast


22/23


22 | P a g e

Exhibit 4: Valuation of synergies & total value

HigherMarketshare

2013

201

4

2015

2016

2017

2018

2019

2020

20

21

TV

Additionalmarketsharetobasecase

0.40%

0.80%

1.20%

1.60%

1.60%

1.60%

1.60%

1.60%

1.60%

1.60%

Costofadditionaladvertising

-

10,000,000

-

9,643,20

0

-

9,643,200

-

9,643,200

-

-

-

-

-

-

EffectonEBIT

1,369,405

15,277,20

0

31,171,217

48,108,814

61,096,395

64,157,324

67,159,887

70,081,342

72,898,6

12

1,412,391,712

EffectonFCFF

502,643

6,665,60

3

16,444,477

28,470,285

35,090,395

39,286,916

43,451,236

47,640,482

49,541,2

71

959,849,292

PVofadditionalmarketshare(atWACC+2%)

500,1

42,3

71

Marginimprovements

2013

201

4

2015

2016

2017

2018

2019

2020

20

21

TV

LowerCOGSas%o

fsales

-0.30%

-0.60%

-0.90%

-1.20%

-1.20%

-1.20%

-1.20%

-1.20%

-1.20%

-1.20%

EffectonFCFF

3,323,139

8,082,90

3

14,470,291

22,287,945

25,079,517

27,597,220

29,768,932

31,523,106

32,790,3

34

635,304,230

LowerSG&Aas%o

fsales

-0.25%

-0.50%

-0.75%

-1.00%

-1.00%

-1.00%

-1.00%

-1.00%

-1.00%

-1.00%

EffectonFCFF

2,769,283

6,735,75

3

12,058,576

18,573,288

20,899,597

22,997,683

24,807,443

26,269,255

27,325,2

79

529,420,192

TotaleffectonFCFF

6,092,422

14,818,65

6

26,528,867

40,861,233

45,979,114

50,594,903

54,576,376

57,792,360

60,115,6

13

1,164,724,421

PVofmarginimprovements(atWACC)

729,1

17,2

15

Additionaltaxshield

2013

201

4

2015

2016

2017

2018

2019

2020

20

21

TV

Newt

otallong-termd

ebt

33,071,521

3,000,000,00

0

3,000,000,000

3,000,000,000

3,000,000,000

3,000,000,000

3,000,000,000

3,000,000,000

3,000,000,0

00

3,000,000,000

Oldtotallong-termd

ebt

33,071,521

33,071,52

1

33,071,521

33,071,521

33,071,521

33,071,521

33,071,521

33,071,521

33,071,5

21

33,071,521

Difference

-

2,966,928,47

9

2,966,928,479

2,966,928,479

2,966,928,479

2,966,928,479

2,966,928,479

2,966,928,479

2,966,928,4

79

2,966,928,479

Additionaltaxshield

-

42,6

49,59

7

42,6

49,5

97

42,6

49,5

97

42,6

49,5

97

42,6

49,5

97

42,6

49,5

97

42,6

49,5

97

42,6

49,5

97

454,2

58,1

36

PVofadditionaltaxshield(atriskfreerate+2%)

461,6

69,0

48

Standaloneequityvalue

7,266,118,243

Totalvalueofsynergies

1,690,928,634

TotalvalueforPepsico

8,9

57,0

46,8

78


23/23


23 | P a g e

ReferencesPepsiCo Homepage:

www.PepsiCo.com

PepsiCo Annual Report:

http://www.PepsiCo.com/annual11/downloads/pep_ar11_2011_annual_report.pd

Interview with Mrs Belissa October 26th, 2011

http://www.thedeal.com/content/consumer-retail/unilever-pepsi-scour-globe-for-deals.php

Consumer Analyst Group of New York Conference Presentation, 02/23/2012

http://www.PepsiCo.com/Investors.html

Bloomberg:

http://www.bloomberg.com/quote/PEP:US

Reuters:

www.reuters.com

NIPPON INDOSARI CORPINDO:

http://sariroti.com/

NIC Annual Report:

http://www.sariroti.com/0_repository/Annual-Report%20Sari-Roti%202010-Final.pdf

Euromonitor:http://www.euromonitor.com/

Datamonitor:

http://www.datamonitor.com/

WACC Sources:

http://www.iese.edu/research/pdfs/di-0920-e.pdf

http://www.tradingeconomics.com/indonesia/government-bond-yield

http://www.reuters.com/finance/stocks/financialHighlights?symbol=ROTI.JK

http://www.pwc.com/id/en/indonesian-pocket-tax-book/assets/Indonesian-pocket-tax-book_2012-update.pdf

Takeover Defenses:

Mergers, Acquisitions and Corporate Restructuring, by Patrick Gaughan, Wiley International,

2003 (Third Edition)
http://www.pepsico.com/http://www.pepsico.com/http://www.pepsico.com/annual11/downloads/pep_ar11_2011_annual_report.pdhttp://www.pepsico.com/annual11/downloads/pep_ar11_2011_annual_report.pdhttp://www.thedeal.com/content/consumer-retail/unilever-pepsi-scour-globe-for-deals.phphttp://www.thedeal.com/content/consumer-retail/unilever-pepsi-scour-globe-for-deals.phphttp://www.pepsico.com/Investors.htmlhttp://www.pepsico.com/Investors.htmlhttp://www.bloomberg.com/quote/PEP:UShttp://www.reuters.com/http://sariroti.com/http://www.sariroti.com/0_repository/Annual-Report%20Sari-Roti%202010-Final.pdfhttp://www.sariroti.com/0_repository/Annual-Report%20Sari-Roti%202010-Final.pdfhttp://www.euromonitor.com/http://www.datamonitor.com/http://www.iese.edu/research/pdfs/di-0920-e.pdfhttp://www.iese.edu/research/pdfs/di-0920-e.pdfhttp://www.tradingeconomics.com/indonesia/government-bond-yieldhttp://www.reuters.com/finance/stocks/financialHighlights?symbol=ROTI.JKhttp://www.reuters.com/finance/stocks/financialHighlights?symbol=ROTI.JKhttp://www.reuters.com/finance/stocks/financialHighlights?symbol=ROTI.JKhttp://www.tradingeconomics.com/indonesia/government-bond-yieldhttp://www.iese.edu/research/pdfs/di-0920-e.pdfhttp://www.datamonitor.com/http://www.euromonitor.com/http://www.sariroti.com/0_repository/Annual-Report%20Sari-Roti%202010-Final.pdfhttp://sariroti.com/http://www.reuters.com/http://www.bloomberg.com/quote/PEP:UShttp://www.pepsico.com/Investors.htmlhttp://www.thedeal.com/content/consumer-retail/unilever-pepsi-scour-globe-for-deals.phphttp://www.pepsico.com/annual11/downloads/pep_ar11_2011_annual_report.pdhttp://www.pepsico.com/

m&a pepsico final report sample assignment

Documents