Module Code and Title: FIN 4052
MAPE: Mergers & Acquisitions and Private
Equity
Qualification: MA Finance/MBA
GLOBAL-UNINUTTUNO
Assignment
Brief
Final submission date: 14 July 2015
Date issued: Week commencing: 23 March 15
Lecturer/Module Leader:
Jonathan Price FCSI
Plagiarism is presenting somebody else’s work as your own. It includes: copying information directly
from the Web or books without referencing the material; submitting joint coursework as an
individual effort; copying another student’s coursework; stealing coursework from another student
and submitting it as your own work. Suspected plagiarism will be investigated and if found to have
occurred will be dealt with according to the procedures set down by the College. Please see your
student handbook for further details of what is / isn’t plagiarism.
Important Information:
Submission of coursework must be undertaken according to the relevant procedure. Lecturers will
give information as to which procedure must be followed, and details of submission procedures
and penalty fees can be obtained from Academic Administration or the general student handbook.
Assignment Type & Weighting:
-This is an individual assignment.
-It will constitute 100% of your overall mark for the module.
Word limit:
-3500 words (+/- 10%)
Grading Criteria:
Postgraduate Marking Criteria for this assignment is available at the end of this document.
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Guidelines
Submissions will be expected to demonstrate the following qualities:
1. Answering the central focus of the assignment topics.
2. A critical appreciation and application of relevant literature and theories to
support argument and substantiate model(s) and other aspects of the assignment.
3. Taking ownership of the content, being prepared to debate and argue a personal
position, evidences evaluative skills. A submission made up of extracts from
published sources which is descriptive and just theoretical, is not acceptable. Your
submission must have interpretation and consideration of the challenges and issues
of taking theory into practice (using cases and/or personal experience).
4. Ability to analyse relevant theoretical concepts in a critical manner, evaluation of
material.
5. Logical flow of ideas and treatment; imaginative approaches; appropriate
selection of real world factors related to the model(s) or specific assignment topic.
6. Evidence of additional personal research, and the ability to analyse material from
a variety of appropriate relevant perspectives. A clear and listing of references
using the Harvard referencing method.
7. Presentation, structure, appropriateness of methodology, breaking into section
headings/subheadings, tidiness.
8. A strong, robust and supportable conclusion.
Learning Outcome
On successful completion of this assignment you will be able to:
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2
3
4
5
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Identify and critically analyse the relative importance of different types of drivers of M&A
and Private Equity.
Identify value creation and critically assess the success or otherwise of an M&A
transaction
Analyse the current M&A and Private Equity strategies of a selected organisation and
critically appraise suggestions for improvement of current practices
Critically evaluate the relative importance of the key elements in a successful M&A and
Private Equity transaction
Understand how to value a target company for an acquisition transaction
Perform critical analysis of comparative issues in M&A and Private Equity
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Write an acquisition report
Assignment title
Purpose of this assignment
You work an M&A advisory firm. One of your clients is the Japanese beverages firm Suntory.
Your supervising partner has asked you to write a report analysing the valuation of a small traded wines and spirits
company, Distil plc (formerly known as Blavod Wines and Spirits plc) as a potential acquisition for Suntory.
You can access Distill’s annual reports by clicking on the following link: http://distil.uk.com/investors/accounts An
extract from some recent broker’s reports on the company are attached as further background.
It is important that you refer to the issues mentioned in the learning outcomes of the modules when
answering the following tasks;
TASK 1 - Strategy
Marks Allocated: 50%
Put together an analysis as to whether Suntory should be interested in acquiring Distil. Consider the pros and cons
and possible reasons for such an investment and come to a recommendation.
TASK 2 - Corporate Valuation
Marks Allocated: 50%
Calculate the maximum price that Suntory should be prepared to pay, justifying your recommendation with
appropriate valuation techniques and quoting appropriate financial ratios.
Suggested Reading: Brokers’ Reports
1) “Blavod Wines & Spirits* (BES) has released an upbeat trading statement – with “trading in line with market
expectations” and a “focus on key brands producing increased sales”, whilst a recently implemented new sales
order transaction and reporting system “has greatly improved efficiencies in processing orders”.
The company emphasised it “has continued to expand its market coverage with four new export markets for
owned brands in North America, Europe and Asia and an additional three markets in mainland Europe becoming
active”. Looking forward, it expects to see sales increased in new and existing European markets as a result of a
recent distribution agreement with Waldemar Behn GmbH & Co for the production of Blavod Black Vodka in
Germany (noted to be “progressing well”) and it has also trademark registered a new premium spiced rum,
RedLeg, “in all key markets around the world”. The initial production run of this has been successfully completed
and first orders are now being dispatched to customers.
It looks clear that (new Executive Chairman) Don Goulding & co. have already achieved much in strengthening
the company’s operations and expanding sales and distribution channels, though additional working capital
remains “required to meet the ongoing cash requirements of the business and ultimately to allow the
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development of the company over the medium term”. On this, the company is again positive –
noting “discussions with a number of parties”, that “a further announcement on this matter is expected to be
made shortly” and that “once adequately funded, will be in a position to accelerate this growth”.
2) Drinks brand owner Blavod Wines & Spirits (BES) has announced the acquisition of the Blackwood's, Jago's
and Diva brands today, upgrading its position from a distributor of the brands to the outright owner. Blavod paid
just £1 each for the Diva and Jago's brands while it parted with £50,000 to acquire the Blackwood's Brand.
Blackwood's is a Gin and Vodka specialist and its vintage dry gin is sold in a number of UK stores including
Sainsbury's and Tesco. Last year Blackwood's generated £358k of sales net of duty and £102k of contribution.
Diva and Jago are smaller brands which focus on Vodka and Vodka cream liqueur respectively. Furthermore,
Blavod revealed that it has signed a three year agreement with Hi-Spirits Ltd for the distribution of its portfolio
of owned brands. As a result Blavod will now stop operating its own sales and distribution network, instead
focusing on developing its portfolio in a shift which will result in one-off costs being occurred.
Assessment...
The acquisitions are encouraging moves but not, we believe, particularly game-changing ones. Blackwood's is
Blavod's top profit contributor at present and this acquisition will further help the company to capitalise on the
apparent popularity of the Vodka and Gin brand. With the shares flat at 0.9p on the back of the announcement,
investors look to be wary of the change of focus and the associated costs. Nevertheless, we view the transition
from brand distributor to brand owner as an interesting move, albeit one which could require time to yield
benefits. On this basis we retain our "hold" recommendation on the group as it remains to be seen how the
company will cope during this period of flux.
3) Drinks brand owner Blavod Wines & Spirits (BES) has announced interims to September, uncharacteristically
soon after the period end.
Numbers...
Revenues for the six month period were down by 35% at £1.29 million as the company made the decision to
concentrate on its own higher margin owned brands. In this respect gross margins improved from 20.7% to
21.5%. Margins on owned brands rose from 42% to 47% and we expect to see margins rise further as the
contribution from wholly owned brands increases in the second half and beyond. Combined with lower
advertising and admin costs, operating losses for the period were cut from £479,000 to £212,000.
Encouragingly, there was a net cash inflow from operations for the period of £154,000, mainly due to a decrease
in inventories and a fall in trade receivables. Blavod ended the period with cash of £53,000 and had a £162,000
finance facility liability. As we recently commented on, the company has raised £571,300 (£552,000 net) since
the period end for use in marketing and to promote the re-launch of certain brands.
Operations...
Highlights of the period include the company's self developed RedLeg Spiced Rum being distributed in 450 beer,
wine & spirit stores and 175 Dan Murphy liquor stores in Australia. Encouragingly, RegLeg is now being
promoted to distributors in twelve major US cities after winning a double gold medal in its category at the San
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Francisco World Spirits Competition. Elsewhere, Blackwoods Gin 40% was re-launched in August, Blackwoods
60% in October, and November will see the re-launch of Blackwoods Botanicals Vodka. In September
supermarket giant Tesco increased distribution of Blackwoods Gin from 192 stores to 566 nationwide.
Blavod maintained that it is on target to achieve monthly break-even in the early part of the next financial year.
Assessment...
A good set of results from Blavod, with the positive operational cashflow achieved in the first half being a
pleasant surprise. However, with this being achieved by reducing stock levels and debtors we do not expect it to
be repeated to the same extent in the second half. Also a pleasant surprise is how soon after the period end the
results have been released, which suggests that Blavod is now a much better run operation. Blavod had
previously announced its results up to 5 months after the period end - which was not very impressive for a
company of its size.
What Blavod needs to do now is show that it can be cashflow positive on a consistent basis. Given the firm's
recent comments it now looks as if that is not too far away, with the new financial year being just 5 months
away.
Valuation...
Blavod shares currently trade at 1.2p to capitalise the firm at £4.36 million. We continue to believe that the
valuation looks fair given the firm's disappointing past and current lack of profitability. However, things seem to
be moving in the right direction under the leadership of former Managing Director of Diageo, Don Goulding.
We see two potential share price drivers in the coming months. 1) The company confirming that it has moved
into a monthly break-even position and 2) further distribution deals being signed for its portfolio of brands. As
previously commented, RedLeg rum is now showing itself to be a major asset for Blavod. With the potential to
distribute the brand into international markets and get into a major UK pub chain there could be considerable
upside here.
As ever, we believe the best outcome for long suffering investors would be for a big name drinks company to
take over Blavod. And with deals in the drinks industry often taking place on the basis of sales multiples there
could be significant upside. But we believe that further work is needed to be done before the company is
considered to be worthy of a purchase by a larger industry player.
4) Drinks brand owner Distil (previously known as Blavod Wines & Spirits) has announced maiden annual results
under its new name.
Numbers...
For the year to March 2014 revenues were £2.4 million, down from £3.79 million due to the company's strategic
decision to focus on its own brands and not on third party distribution deals. The operating loss was cut from
£619,000 to £367,000, with a 29% cut in administrative expenses being seen.
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The balance sheet had £344,000 of net cash at the period end after the company raised £552,000 net of costs
during the period and also fully repaid its invoice discounting finance facility. There was also a £67,000 net
inflow from operations, with good working capital management offsetting the operating loss. Crucially, the
company commented that it has sufficient cash reserves to meet its needs to move into a break even position.
Operations...
Operational highlights of the year included sales of Blackwoods Gin up by 36% and RedLeg Spiced Rum up by
37%. The year also saw the launch of Blackwoods Vintage Dry Gin, Blackwoods Limited Edition 60% Gin and
Blackwoods Vodka. All three are said to have been well received and are now stocked in a number of UK bars
and retail outlets. However, there was a fall in sales of Blavod Black Vodka, which the firm blamed on the lack of
a US distributor. The Diva Vodka and Jago brands were re-designed and are nearing re-launch in UK.
In addition, the international network was increased, with Spanish distributor, The Water Company, appointed
for an initial three year term. Elsewhere in Europe, the firm's agreement with Waldemar Behn for production
and distribution of Blavod Black Vodka in Germany is said to be progressing well.
Assessment...
We see these as a slow but steady set of results from Distil, which understandably reflect the changes made to
the business model during the year. Highlights for us include the small positive cashflow from operations, the
firm becoming debt free and it being implied that break-even remains on track for the early part of this financial
year (as previously stated). The firm has also made good progress on cutting operating costs and we note that
this year will not see a number of non-recurring expenses associated with the new strategy implementation.
Valuation...
Distil shares have fallen from recent two year highs of 1.925p to the current 1.1p, which capitalises the company
at £4 million. We continue to believe that the the current valuation looks about right given the firm's
disappointing past, lack of profitability and slow progress.
However, we see the potential for good long-term prospects, especially for the RedLeg rum brand, which has the
potential to be distributed into additional international markets and get into a major UK pub chain. There is also
the potential for a larger drinks company to take over Blavod, and with deals in the drinks industry often taking
place on the basis of sales multiples there could be significant upside. We believe that the firm still has much
work to do however before this could happen.
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Grading Criteria
Criteria
Generic skills:
communication
and
presentation.
Knowledge &
Understanding
Analysis
Synthesis/
Creativity/
Application
Weighting
100%
70%+
60-69%
Well structured
report which
follows
appropriate
Comprehensive and format but some
correctly structured aspects of layout
assessment. Style of and referencing
writing is very fluent could be
and develops a
improved. Style of
coherent and logical writing is fairly
argument. Excellent fluent. Good
referencing.
referencing.
50-59%
Good report in most
aspects but suffers
from variations in
quality and the layout
contains some
inadequacies. Style of
writing is satisfactory.
Referencing needs
improving.
Good range of
Demonstrates
Wide range of
knowledge
excellent knowledge knowledge
demonstrated but
of theory and
demonstrated and weaknesses in key
provides critical
evidence of good areas. Some
theoretical
understanding of understanding
underpinning. Very the topic.
displayed of the topic.
good interpretations
and summarising of Ability to interpret Summary and
main themes.
and summarise
interpretation are
succinctly.
satisfactory.
Excellent use of
Use of theory and
theoretical and
Very good use of concepts limited but
conceptual models to the theoretical and relevant. Application
guide analysis linked conceptual models could be improved and
with a critical
with good critical there is a tendency
discussion of main
discussion and
towards description.
themes.
application.
Deconstructs the
Must provide more
major themes used in Good evidence of evidence of
the argument.
deconstruction.
deconstruction.
Very good account
Logical presentation of main themes
of themes with
with sound
appropriate examples application. Good
being demonstrated. attempt at
Very good
applying models to
demonstration of
the
Good account of main
synthesis. Models
argument. .Fairly themes with some
have been clearly
good attempt at attempt at application.
applied to the
synthesising the Limited
argument.
salient points.
evidence of synthesis.
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Fail
Very poor report
which is incorrectly
structured and
contains major errors
and omissions. Style
of writing lacks
coherence and
fluency. Poor
referencing.
Very poor range of
knowledge
demonstrated and
there are major
weaknesses evident in
interpretation and
understanding.
No clear
interpretation of main
themes.
Very poor use of
theory and very little
application of
concepts.
Very little description
with not much
evidence of analysis.
Very poor account of
main themes with
little or no
application. No links
between models and
argument.
Evaluation
Shows clear evidence
of in-depth critical
reflection and
evaluation of the
argument by
providing a robust
defence of the
opinions presented in
the assessment.
Shows evidence of
critical reflection
and evaluation
and a fairly
cohesive defence
of the argument
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Shows little or no
evidence of critical
reflection and needs
Shows some evidence to be much more
of critical reflection but developed. There is
could have been
no defence of the
developed.
opinions presented.