Beer

Case: Boston Beer Company

Address the following questions in a 4-5 page write-up of the Boston Beer Company Case to explore the issue of Initial Public Offerings.

1) What do you think of Boston Beer's business model relative to the traditional beer companies' business model? Relative to Redhook and Pete's? (Hint: consider their brewing, production, distribution, marketing strategies. How is each firm attempting to achieve its own sustainable comparative advantage in the market place?)

2) Evaluate Boston Beer's performance relative to its peers (Compare BBC's ratios to the ratios of its peers in exhibit 4). (Hint: how do differences in operating strategies translate into differences in financial ratios? Are there any downside risks to BBC's contract brewing strategy?)

3) What is your assessment of the intrinsic value of Boston Beer's stock at the time of the case? What should be its IPO price?

(Some hints below:

First, you should look at the P/E multiples for Pete's and Redhook around the IPO time for BBC. You should also look at the average amount the price seems to jump on the day of the IPO, and the EPS of BBC for 1994 and 1995. From this, you should figure out what the implied price per share for BBC should be in this market environment.

Second, you should try to justify this price per share by doing FCF analysis. Create a ten year pro-forma spreadsheet, projecting out barrels of beer each year, revenue per barrel, revenue, costs, taxes, etc. Calculate net income, then subtract out net investments and add back depreciation to obtain FCF each year. Don't forget to calculate terminal value at the end of 10 years. Use a 4% growth rate after year 10. Calculate the cost of equity and then discount the free cash flows by this discount rate. Calculate the Present Value of these FCFs plus the present value of the terminal value. To find the implied price, divide this present value by the new # shares outstanding, 19.182mm. To determine the new market value of the firm, multiply the implied price by total number of shares outstanding. Are your assumptions about growth in unit sales realistic or over-optimistic? Using REALISTIC growth assumptions, what price per share do you get?)

4) Do you