Winery Industry

In order to check the synergy occurred by the acquisition of Bel Vino, International Beverage analyzed its financial statements and drew the outcomes from various areas. Throughout the consolidated income statement, the company calculated the net sales growth and broke down the sales growth into International and US. As mentioned earlier about IB’s the flat growth rate of sales, it remained at 0.66% in net sales growth, 0.5% domestically and 1.00% internationally until the end of the fiscal year 2012. However, all three rates went up by 11% in net sales growth and 14% in US since the acquisition of Bel Vino in 2013. Even though the International sales growth did not increased significantly, it jumped up to 5.71%, which shows the improvement on every sales growth rate. Unfortunately, the graph after 2013 indicated the fall of net sales growth down to 0.82%, US sales growth to 0.49%, and International sales growth to 1.53%. As shown in the graph, every sales growth stayed at the slightly upward changing or the same rate. Moreover, the company computed EBIT margin for the sake of evaluating its growth, and understanding costs of the business in winery industry, which began with 9.07% in 2010 and decreased by 3.69% until 2012. It meant that the company was getting lower profitability, but went back up to 7.56% once IB acquired Bel Vino and EBIT margin in 2017 exceeded even 9.07%, the initial rate of the year 2010, and reached to 10.81%.

As far as the cost improvement was concerned, IB came up with 62.08% in 2010 by dividing the cost of goods sold by sales and it went up to 65.37% before the acquisition. However, this number started to drop down from 2013 and kept falling down to 62.02% in 2017, lower than the initial rate in 2010. According to background knowledge about Bel Vino, the company could presume that it kept dropping, in spite of a slow pace, after 2013 because of the excellent cost control of Bel Vino, which even Wall Street analysts acknowledged.

Regarding with the net working capital, the company added the accounts receivable and the total inventory, subtracted the accounts payable, and had $930 in 2010. Growing at the increasing pace, net working capital in 2017 was bumped up to $1372.8, which was clearly improved. Additionally, IB calculated the working capital turnover, 2.73 in 2011 and 2.18 eventually in 2017, to see the speed with which funds were provided by current assets to satisfy current liabilities. Also, it was necessary to check the company’s ability to pay off its short-term obligations with the current assets by calculating the current ratio. As one of the large companies in the winery industry, IB had an enough liquidity of 5.39 in 2012 to cover its current liabilities, and retained at slightly above 5.00 although dropped a bit after the acquisition.

IB computed 13.92% of ROE in 2010 with the Du Pont analysis consisted of net income margin, asset turnover, and book leverage, 5.44%, 1.005, and 2.545, respectively. Because NI margin decreased to 3.23% during pre-acquisition year, while the asset turnover and book leverage relatively remained in constant, ROE undoubtedly dropped down to 7.77% in 2012. However, starting to rise up to 15.52% after 2012 due to the uptrend of ROE breakdown, ROE from 2013 through 2017, as shown in the exhibit, increased significantly to 27.74%. In other words, although the net income went up while shareholders’ equity kept falling down, this upward rate indicated how efficiently the shareholders’ equity had been used after the year 2013.

The debt-to-equity ratio calculated by IB rose up to 2.43 until 2017 at a constant growing pace, beginning from 1.55 in 2010 shown in the graph. It implied that it became higher in returns to equity holders, but the risk did not seem to be worse since the shareholders’ equity fell down more hugely than the total leverage the company had after the acquisition of Bel Vino.

To determine the reservation price of Bel Vino, IB computed WACC based DCF and APV with perpetuity assumption, and WACC based DCF and APV with earnings multiple under the base, worst, and best case scenarios. Under the base case assumption the value per share based on WACC was $51.9, and the price per share from APV was $47.94. In addition to these values, IB estimated $52.53 and $57.28 for the DCF and APV with earnings multiple, respectively. Under the worst case assumption representing the valuation with no improvements, $48.36 and $44.95 were the DCF and APV with perpetuity assumption, whereas $49.14 and $54.02 were the DCF and APV with earnings multiple, respectively. Under the best case assumption made of the operational improvements, the estimates were $55.48 for the DCF; $50.96 for the APV with perpetuity assumption, and $55.94 for the DCF; $60.57 for the APV with earnings multiple. Averaging out these 12 values, IB estimated $52.42 for the reservation price of Bel Vino.