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AIG/IBA M&A Case Competition Finalist Presentation

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A 72-hour M&A case competition on whether Whole Foods Market should be taken private by The Blackstone Group, or seek out strategic partners in order to alleviate sliding margins and increased competition in the US organic and natural foods market.

Our solution, a strategic merger with Publix Super Markets and a public health-focused growth strategy was well-received by the judges from Guggenheim Partners.

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AIG/IBA M&A Case Competition Finalist Presentation

  1. 1. 11/21/2015 KICC Application 1 Goizueta Finance Group 2015 M&A Competition Benjamin Detemmerman, Benjamin Poon, Jia Tang, Kasper Stockel, Michael Bolliger Synergy is Still King NAVIS Global
  2. 2. Company & Industry Problem Analysis Whole Foods should merge with Publix Merging with Publix allows shareholders’ gain to be maximized Overview Problems & Solution Financials Whole Foods should not go private with Blackstone Executive Summary 11/21/2015 2GFG M&A Competition 2015
  3. 3. Company and industry overview 11/21/2015 3 Mission To promote the vitality and well- being of people by supplying the highest quality, most wholesome foods available. Locations 412 9 10 Growth rate • Grocery market 3% • Natural retail market 9% Company IndustryCompany Industry Core competence • Premium quality brand • Superior customer shopping experience GFG M&A Competition 2015
  4. 4. Increasing costs & competitions hamper Whole Foods’s growth 11/21/2015 4 Missing Targets by Sales Growth -0.6% Sales/Square Foot -5% ROIC -0.6% Gross Margin is narrowingCOGS is growing Same store sales growth decelerated The only driver of growth is expansion CostsCompetition 20% COGS 2013-15 0% 2% 4% 6% 8% 10% 2011 2012 2013 2014 2015 Same Store Sales Growth 34.8% 35.0% 35.2% 35.4% 35.6% 35.8% 36.0% 2013 2014 2015 Gross Margin 290 315 340 365 390 415 440 2011 2012 2013 2014 2015 Number of Stores Results: Falling short of expectations GFG M&A Competition 2015 Key Question: How to maximize shareholder value in the long run?
  5. 5. Whole Foods’s possible alternatives 11/21/2015 5 Go private and get acquired by Blackstone Merge with Publix Others? GFG M&A Competition 2015
  6. 6. Whole Foods should not be acquired by The Blackstone Group 11/21/2015 6 ….while Whole Foods is not the caseCompanies that go private with PE are usually Whole Foods currently has If Whole Foods goes private with PE • Mature firms with no growth prospect • Struggling with a FCF problem • In need of capital restructuring • Suffering from agency problem • The industry is growing, and Whole Foods ranks first • FCF/OCF = 25.94% • High debt capacity • Committed executives • Sound long-term plans • Low market price • Restructure of management level • Short-sighted, strategies made to ensure a profitable exit strategy in 3-5 years • Disadvantageous to shareholders’ gains GFG M&A Competition 2015
  7. 7. Whole Foods’s possible alternatives 11/21/2015 7 Go private and get acquired by Blackstone Merge with Publix Others? GFG M&A Competition 2015
  8. 8. Whole Foods should merge with Publix 11/21/2015 8 Whole Foods Market • The largest natural and organic foods supermarket in the U.S. • 433 stores worldwide, including UK, Canada and across 42 U.S. states Publix • One of the 10 largest-volume supermarket chains in the U.S., rank 1st in Florida • 1,109 store locations in 6 Southern states 取長補短,相得益彰 (Compensate our weaknesses while gain through combined strengths) GFG M&A Competition 2015
  9. 9. How are the synergies going to benefit Whole Foods 11/21/2015 9 Cost Synergies Growth Synergies • Significant reduction of COGS • Reduction of overhead costs • Having access to pharmacy industry and boost product sales • Increase in online sales • Cross-selling opportunities 0% 2% 4% 6% 8% 10% 2011 2012 2013 2014 2015 Same Store Sales Growth 34.8% 35.0% 35.2% 35.4% 35.6% 35.8% 36.0% 2013 2014 2015 Gross Margin GFG M&A Competition 2015 Narrowing Gross Margin Decelerated Sales Growth Benefits from SynergiesExisting Problems
  10. 10. Synergy benefits under different scenarios 11/21/2015 10 • Overhead savings 4% • COGS savings of 3.5% • EBITDA margin on Pharmacy products 8.5% • Overhead savings 2% • COGS savings of 2% • EBITDA margin on Pharmacy products 7.1% but sales 20% below expectations • Ready to eat products 22% below expectation 18.63% 39.45% 11.86% 30.05% 0.00% 10.00% 20.00% 30.00% 40.00% 50.00% 60.00% 70.00% 80.00% 90.00% 100.00% Worst Case: $4.69bn Cost Synergies and Merger Gains Overhead Costs COGS Pharma Extension Ready to eat extension 20.50% 39.24% 10.89% 29.37% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Best Case: $7.73bn Cost Synergies and Merger Gains Overhead Costs Cogs Pharma Extension Ready to Eat Extension • Overhead savings 2.5% • COGS savings of 2.5% • EBITDA margin on Pharmacy products 7.9% 15.74% 37.23% 13.07% 33.96% 0.00% 10.00% 20.00% 30.00% 40.00% 50.00% 60.00% 70.00% 80.00% 90.00% 100.00% Base Case: $5.81bn Cost Synergies and Merger Gains Overhead Costs Cogs Pharma Extension Ready to Eat Extension Best Case Base Case Worst Case GFG M&A Competition 2015 Growth Synergies Cost Synergies Growth Synergies Cost Synergies Growth Synergies Cost Synergies
  11. 11. Whole Foods shareholder gains 11/21/2015 11 • Publix pays a 20% premium to acquire all of Whole Foods Shares • 1 WFM to 1.8 Publix share exchange rate • WFM Shareholders own 45% of the total shares of the post-merger firm • Why Shares? So WFM Shareholders maintain an ownership stake Merger Approach: Exchange of Shares BEST CASE BASE CASE WORST CASE Post-merger firm now worth $34.06bn $32.02bn $30.95bn Total gain to Whole Foods shareholders $16.10bn $14.84bn $14.23bn
  12. 12. Buyout may be unfavorable – Whole Foods is currently underpriced • Growth uncertainty and increasing competition drives down current price • Whole Foods share is underpriced: • Current share price: $29.93 • Intrinsic value: $34.45 11/21/2015 12GFG M&A Competition 2015
  13. 13. Comparison of Alternatives • Blackstone pays a premium to take Whole Foods private. • The worst case merger scenario would generate higher returns than a 30% premium. • The best case merger scenario would generate higher returns than a 50% premium. 11/21/2015 13GFG M&A Competition 2015
  14. 14. Merging with Publix is always the best option 11/21/2015 14 • Highly unlikely – LBO Industry Premium Avg. of 24.3% • Best alternative for Whole Foods shareholders is to merge GFG M&A Competition 2015 10.00 11.00 12.00 13.00 14.00 15.00 16.00 17.00 WFM Current Value Historic Avg. Premium 30% PE Case Worst Case 50% PE Case Best Case Comparison of Alternatives
  15. 15. Whole Foods’s possible alternatives 11/21/2015 15 Go private and get acquired by Blackstone Merge with Publix Others? GFG M&A Competition 2015
  16. 16. Why Whole Foods is the best fit for Publix? 16 Financial • Increasing sales in natural and organic food industry • Unleveraged • Solid cash positions (FCF/OCF=25.94%) • The largest natural and organic foods supermarket in the U.S. • Strong brand image • National presence, covering 42 states • Global presence Geographical Brand Cultural • Great cultural fit Strategy Compatibility GFG M&A Competition 2015
  17. 17. 11/21/2015 KICC 2014 17 Don’t sell the chicken that lays golden eggs. 別殺生金蛋的雞
  18. 18. Index Page 11/21/2015 AIG M&A Case 2015 18 • Cover Page • Executive Summary • Company Overview • Problem Analysis • Alternatives Tree • M&A with Blackstone • Bad Timing - Underpriced • M&A with Publix • Synergies • Scenario Analysis • Shareholder Gains • Financial Comparison • Whole Foods is the best fit for Publix • Appendix: • Risk & Mitigation • Implementation Timeline • Historical LBO Premiums • Distribution of Merger Gains • Alternatives Evaluation • Position Map • Synergies with Publix Pharmacy • Key Assumptions of Synergy Calculation • Calculation of Total Shareholder Value
  19. 19. Appendix: Risks & Mitigation 11/21/2015 AIG M&A Case 2015 19 Risks 1. Risk of adverse selection 2. Cultural risks: both companies have distinct cultures with could result in incompatibilities, lower productivity, turnover of key talents 3. Strategic risk leading to costly diversion: Mitigation 1. Risk of adverse selection: Incentivize actions by performance- contingent payout structures and other incentive structures 2. Cultural risks: walk the talk and articulate the mission and vision of the new company on a steady basis. 3. Strategic risk leading to costly diversion: Clear process planning and scenario technique to address unexpected outcomes Index Page
  20. 20. Appendix: Implementation Process 11/21/2015 AIG M&A Case 2015 20 2016 2017 2018 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q Overhead Costs Gradual Implementation COGS Cost Savings Pharmacy Pre-launch marketing Post-launch marketing Ready-to-Eat WFM Ready-to-Eat in Publix Evaluation and improvements 1 Year Pilot covering 10% of Publix Stores Planning Phase of 2 Years Index Page
  21. 21. Appendix: Historical LBO Premiums 11/21/2015 AIG M&A Case 2015 21 Index Page
  22. 22. Appendix: Distribution of Merger Gains 11/21/2015 AIG M&A Case 2015 22 Index Page • Merged Company Value: $34.06bn • WFM Shareholders Value $16.1bn • Merged Company Value: $32.07bn • WFM Shareholders Value $14,84bn • Merged Company Value: $30.95bn • WFM Shareholders Value $14.23bn Best Case Base Case Worst Case 68.95% 31.05% Best Case Distribution of Merger Gains Whole Foods Shareholders Publix Shareholders 71.00% 29.00% Base Case Distribution of Merger Gains Whole Foods Shareholders Publix Shareholders 76.90% 23.10% Worst Case Distribution of Merger Gains Whole Foods Shareholders Publix Shareholders
  23. 23. Appendix: Alternatives Evaluation 11/21/2015 KICC 2014 23 Customer Base Expansion 4 0 0 5 Cost of Implementation 4 3 4 2 Time Needed 3 3 3 1 Ease of Implementation 3 4 3 1 More DesirableLess Desirable Merging with Publix Acquired by Blackstone International M&A Integrate with suppliers 0 1 2 3 4 5 Index Page
  24. 24. Appendix: Position Map 11/21/2015 AIG M&A Case 24 FreshFoodNon-perishable Premium Value Index Page
  25. 25. Appendix: Synergy potential of Pharmacies in Whole Food Stores 11/21/2015 KICC 2014 25 • Publix Pharmacies open new growth driver for the merged company • In-store pharmacies to provide health consulting to advice customers on diets, nutrition, and weight loss by eating more organic and natural foods in order to prevent diabetes and high cholesterol. • Future Vision: expand health services to Whole Foods Markets Index Page
  26. 26. Appendix: Key Assumptions of Synergy calculation 11/21/2015 KICC 2014 26 • Three Cases considered • Best Case: 4.4Bn • Base Case: 3.1Bn • Low Case: 2.7Bn • 38.5% Tax Rate • WACC 9.2% • EBITDA margins of 8.5% • Ramp up of synergies of 5 years Key Assumptions of Synergy calculation Index Page
  27. 27. 11/21/2015 KICC 2014 27 Index Page Appendix: Calculating the Total Shareholder Value Publix P $20,00 WFM P $29,93 Publix # 777090000 WFM # 357860000 Publix V $15.541.800.000 WFM V $10.710.749.800 Premium 20% Price Paid $12.852.899.760 Shares Issued by Publix to pay for WFM 642644988 Total Shares post-merger 1419734988 Share Exchange Rate 1,80 Publix Shares for each WFM share Apparent Cost $2.142.149.960 PVCS $5.818.000.000 Apparent NPV Publix $3.675.850.040 Value of New Company $32.070.549.800 New Stock Price $22,59 True Cost $3.806.028.518 True NPV Publix $2.011.971.482 WFM Shareholders get 3806028518 65,42% of the merger gains Publix Shareholders get 2011971482 34,58% of the merger gains WFM Shareholders now have 45,27% of the total shares in the new company Publix Shareholders now have 54,73% of the total shares in the new company WFM total shareholder value $14.841.722.170 Publix total shareholder value $17.228.827.630 $32.070.549.800 71.00% 29.00% Base Case Distribution of Merger Gains Whole Foods Shareholders Publix Shareholders
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    Jul. 31, 2016
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    Feb. 26, 2016

A 72-hour M&A case competition on whether Whole Foods Market should be taken private by The Blackstone Group, or seek out strategic partners in order to alleviate sliding margins and increased competition in the US organic and natural foods market. Our solution, a strategic merger with Publix Super Markets and a public health-focused growth strategy was well-received by the judges from Guggenheim Partners.

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