Analysis Of Bega Cheese Ltd’s Acquisition Plan For Mondelez Grocery Business

Purpose of the Acquisition

The main purpose of this assignment is to analyse the business of Bega Cheese ltd and the acquisition plan which the business intends to follow. The plan of the management if Bega Cheese ltd is to acquire the business of Mondelez Grocery business which is a part of the ANZ grocery business. The management of Bega Cheese ltd wants to further diversify the business and penetrate into new businesses.

Bega Cheese ltd is an Australian company which is engaged in dairy business and manufacture of dairy based products of the business. As per the current estimates of the business, the company is regarded as one of the leading dairy companies in Australia and it is also estimated that the market valuation of Bega Cheese ltd is around $ 775 million. The company has its origins as early as 1850 when the farmers of Bega valley started selling milk products. It was in 1899 when the actual company was established and the company started manufacturing other dairy products which are quite successful in the market.

Discussion

As per the case study which is provided in the assessment, the management of Bega Cheese ltd is planning to acquire the property of Mondelez Grocery. The reason for the diversification which can be identified from the case study is the continuous turmoil and intense competition which was there in the dairy industry. The business of Bega Cheese ltd was affected due to such excessive and intense competition. Therefore, the management wanted to diversify the business and enter a similar but new market. Mondelez Grocery Store provided the company with the option of diversifying and the management had already engaged in dairy production and baby formula and therefore was confident that if the acquisition was completed they will be able to handle the business perfectly and the business of Bega Cheese ltd would greatly benefit from such an acquisition. The acquisition will be allowed the business to gain synergy which will help Bega Cheese ltd to face the competition and develop the business further from the point of view of the management. As per the estimates of 2016, Bega Cheese ltd at current had three major product lines which were dairy products manufacture, Fast Moving Consumer Goods (FMCG) which were basically dairy products such as cheese, butter and Baby formula and other nutritional product. Due to the intense competition in market, the acquisition of a new product will allow the business to have better performance in the market and moreover increase the sales of the company.

Background of Bega Cheese Ltd

As per the case study Mondelez is a part of ANZ grocery shops which the business has decided to sell off. The business of Mondelez is basically known for its three most successful brand products which are vegemite, ZoOSh and Bonox. Out of the three which is mentioned above Vegemite is dates back a long time and has a rich history in Australia and is regarded as a most reputed brand. As per the acquisition requirements, Bega Cheese ltd would receive license for the three products and the management of Bega Cheese ltd is of the view that such will be benefiting the business and revenue generation capacity of the company.

Relative valuation may be defined as the process by which management of the business can make comparison as to the prices of the assets of the company with the market value of the similar assets. The method is very useful in valuation of the assets of the business and more over it is used for the purpose of comparison of different projects which are available. Relative Valuation is used by businesses to analyse whether the projects which the business wants to invest in has worth and viability. The management of the Bega cheese ltd needs to analysis the acquisition plan of the business based on residual valuation of the proposal. The business of Mondelez grocery shops is to be analysed on the basis of the performance of the competitors of the business. The business of Mondelez has competitors such as Nestle company, Hershey Company, Kelloggs Company, Cott Beverage Company. The business valuation of each of these competitors is similar or very close to the market valuation of the business. The relative valuation of the competitors are shown below:

Figure 1: (Table showing Relative Valuation)

Source: (Created by the Author)

As per the above table, Nestle Company has the highest enterprise valuation as compared to the other enterprises which are included in the table which is shown above. Mondelez Company has an enterprise value of $ 81.75 million. The lowest valuation for enterprise which is shown in the above table is Cott Beverage Company. The above table makes it clear that the market value and Enterprise Value/ EBITDA shows that Mondelez grocery company. The business of Mondelez company looks quite promising as the market valuation of the company is shown to be favourable. The business of Mondelez as shown among the group of competitors are shown to be similar with the competitors. The maximum amount of sales which is achieved by Nestle company due to size and the wide range of operations of the business.

Discussion

Intrinsic Valuation

The intrinsic valuation is conducted by the business to ascertain the intrinsic value of the shares of the business. This sort of valuation is also known as fundamental analysis which is used to determine the market value of the shares or stocks of the business. The purpose of intrinsic valuation is to ascertain the true value of the shares of the business. In the case study which is provided in the question, the management of Bega Cheese ltd will be conducting intrinsic valuation so that the valuation of the acquisition of the business can be justified to the shareholders of the company. The valuation of the intrinsic value for the acquisition project of Mondelez Project is shown with respective calculations below:

Figure 2: (Table showing Free Cash flows growth of the business)

Source: (Created by the Author)

Computation of Weighted Average Cost of Capital

The weighted average cost of the capital of the business reflects the level of returns which are expected by the business and the same is important in the computation of Discounted Cash flow of the business. On the basis of the discounted cash flow of the business, the viability of the decision regarding the acquisition of Mondelez Grocery shop is to be taken by the business. The computation of the WACC of the business is shown below:

Figure 3: (Table showing Dividend Growth Rate)

Source: (Created by the Author)

Figure 4: (Table showing Cost of Equity)

Source: (Created by the Author)

Figure 5: (Table showing Cost of Debt Computation)

Source: (Created by the Author)

Figure 6: (Table showing Weighted Average Cost of Capital Computation)

Source: (Created by the Author)

The weighted average cost of capital which is computed for the business is shown to be 5.94% and 1.92% for the year 2016 and 2015 respectively. The cost of equity of the business is computed to be 6.77% and 9.47% The cost of debt of the business is shown to be 5.58% for the year 2016 and 4.49% for the year 2015. The weighted average cost of capital of the business represents the level of risks which the business might be facing in the current circumstances and the level of risks which the business is likely to face if the project is undertaken by the management of Bega Cheese ltd.

Discounted Cash Flow Analysis and Equity Share Price

The calculations which are shown above show that the fair value of the share price per shares of the company as shown in the table above. The above projects show that if the business acquire the shares of the Mondelez Grocery shop than Bega Cheese ltd will be benefiting from the acquisition.

Conclusion

The above analysis and computation shows that Bega Cheese ltd should acquire the shares of the business of Mondelez grocery shops. The fair value of the shares are favourable and the acquisition transaction of the business will add synergy to the business of Bega Cheese ltd. The business will be acquiring synergy effect and thereby allow the business to compete in the market and effectively generate the revenue.

Reference

Bennett, Daniel, Stefan Bode, Maja Brydevall, Hayley Warren, and Carsten Murawski. “Intrinsic valuation of information in decision making under uncertainty.” PLoS computational biology 12, no. 7 (2016): e1005020.

Davidson, Marc D. “On the relation between ecosystem services, intrinsic value, existence value and economic valuation.” Ecological Economics 95 (2013): 171-177.

Frank, Murray Z., and Tao Shen. “Investment and the weighted average cost of capital.” Journal of Financial Economics 119, no. 2 (2016): 300-315.

Inger, Kerry K. “Relative valuation of alternative methods of tax avoidance.” The Journal of the American Taxation Association 36, no. 1 (2013): 27-55.

Liebreich, Michael. “Bloomberg new energy finance summit.” London: Bloomberg New Energy Finance (2013).

Sharma, Manu, and Esha Prashar. “A conceptual framework for relative valuation.” The Journal of Private Equity (2013): 29-32.

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