Finc 667 - Redhook Loan Proposal Negotiation

Redhook loan proposal negotiation

FINC 667

Professor Len Rushfield

Team member:

Siyun Huang

Bingxin Shi

Chuxuan Tang

Yao Li

Part I Redhook business and financial conditions

The company’s status at the time of the loan proposal

According to historical data, after eight years’ operation, Redhook's ales and porters occupied half of the competitive microbrewery market in the Pacific Northwest.

Because of the re-emergence of Microbreweries, high quality of beer products with freshness and its full-bodied flavor, promising growth of national import beer, company’s top-quality service of retail, and the expected continuing trends of consumption, demand of Redhook’s brewery was projected to exceed, in two years, the 40,000-barrel annual production capacity of the company's single brewery.

In a conclusion, the Redhook had an increasingly competitive growth in the market at the time of the loan proposal.

Projected growth strategy

Firstly, the company pointed out that “current plans called for the construction of a similar-sized brewery in the Bay Area of northern California.” The premium lager market in California is estimated to be over $1 billion so it is profitable to take in place in California. Otherwise, due to Red Hook's outstanding reputation for premium beer, a distribution network, heavy advertising and no domestic competition in their target markets, Redhook is thought that will soon infiltrate market in California.

In addition, they also plan to introduce a lager brand which “would complement Redhook's existing product line of ales and porters and provide significant growth opportunities for the brewery.” Also, this would require Redhook to establish the third largest brewery in the Puget Sound region of western Washington.

Financial expectations

        The growth plan needs $5 million equity infusion from a well-established European brewery which is interested in entering the North American market.

        Also, a new bank financing of $6.5 million is required for Redhook company.

Strengths and weaknesses based on past and recent financial performance

1989

Asset Turnover = Net revenue / Average Total Asset = 2676109 / 2964558 = 0.9027

Current Ratio = Current Asset / Current Liability = 482296 / 408185 = 1.182

Debt-to-Asset Ratio = Total Liability / Total Asset = 1330970 / 2964558 = 0.449

Operating Profit Margin = Operating Income / Net Revenue = 261443 / 2676109= 0.0977

Nine months of 1990

Asset Turnover = Net revenue / Average Total Asset = 2867442 / 3238576 = 0.8854

Current Ratio = Current Asset / Current Liability = 782396 / 490141 = 1.596

Debt-to-Asset Ratio = Total Liability / Total Asset = 1340752 / 3238756 = 0.414

Debt-to-Equity Ratio = Total Debt / Total Stockholder’s Equity = 781566 / 1897824 = 0.412

Operating Profit Margin = Operating Income / Net Revenue = 520970 / 2867442 = 0.1817

Strength

        Using four financial ratios, it is reasonable to display the strength of Redhook.

        If a company has a higher fixed asset turnover ratio than its competitors, it shows the company uses its fixed assets effectively to generate sales better than its competitors. According to data above, comparing 1989 and 1990, the asset turnover indicates an increasing trend. This evidence provides that Redhook uses its fixed assets efficiently.

        If a company has a current ratio above 1 then they are capable of paying their short-term obligations. The higher the ratio, the more capable the company. The company has an increasing current ratio, which is above 1, shows good liquidity.

        If the Debt-to-Asset ratio is less than 0.5, most of the company's assets are financed through equity. 0.414 indicates that Redhook’ assets are more financed through equity, which shows that they do not have much debt pressure.

        Operating margin is a measure of profitability. It indicates how much of each dollar of revenues is left over after both costs of goods sold and operating expenses are considered. Similarly, the profit is increasing year by year.

Weakness

        If a company has a current ratio above 1 then they are capable of paying their short-term obligations. However, the company will be health if the current ratio is above 2. The higher the ratio, the more capable the company. The company has an increasing current ratio, which is above 1, but even in 1990, the current ratio is below 2. This shows a little bad liquidity.

        The weakness is that there might be a shortfall in cash flow. investments in real estate, factories, and equipment, the large increase in output will increase the pressure on cash flow. However, taking a look at the increasing trend of sales of Redhook and the introduction of a new lager product in the future, the shortfall in cash flow will not be a problem anymore. After construction of new factory in 1993, Redhook will provide a good liquidity and much higher cash flow to cover the debt.

Part Ⅱ U.S. Bank/ Redhook business relationship          

Consider the existing and potential relationship between the bank and the company. What should be the bank’s principal motivations in responding to Redhook’s proposal?  What should be the company’s interests in sustaining its long relationship with the bank or, alternatively, considering other proposals for the expansion from competitive banks?

Increasing profitability and projected growth made the Redhook Ale Brewery plan to expand the capacity and product line. The expansion plan has two steps, the first is construct a new brewery in Northern California, the second is introduce a larger brand, which requires the construction of a third, larger brewery. The manager believed the new brand will have huge market and would be estimated to bring $25 million projected sales. The launch of lager product would complement Redhook's existing product and would create more opportunities for the brewery. This expansion plan would require $6.5 million of new bank financing.