Corporate Control, Mergers and Acquisitions

PART A: QUAKER OATS’ ACQUISITION OF SNAPPLE BACKGROUND OF THE COMPANIES ACQUISITION OF SNAPPLE BY QUAKER OATS VALUATION OF SNAPPLE BY QUAKER OATS ANALYSIS OF THE ACQUISITION PART B: TRIARC’S ACQUISITION OF SNAPPLE BACKGROUND OF THE COMPANIES ACQUISITION OF SNAPPLE BY TRIARC VALUATION OF SNAPPLE BY TRIARC ANALYSIS OF THE ACQUISITION PART C: CONCLUSION CONTRASTING THE DEALS KEY LEARNINGS ANNEXURES
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PART A QUAKER OATS’ ACQUISITION OF SNAPPLE  BACKGROUND OF THE COMPANIES
THE

QUAKER OATS COMPANY: Quaker Oats is an American food conglomerate. The story of

Quaker Oats’ success is one of a company led by a strong management effectively growing in the face of increasing competition and economic cycles through internal and inorganic growth. See Annexure A1 for details about Quaker Oats. SNAPPLE BEVERAGE CORPORATION: Snapple is an American beverage company, known for its natural juices and fruit drinks. From a business run part-time by its founding members, Snapple grew to become one of the leading producers of non-alcoholic drinks in North America within a few decades. Annexure 1 provides the background of the company.  ACQUISITION OF SNAPPLE BY QUAKER OATS A. REASONS FOR THE ACQUISITION With an increase in competition, the Snapple stock price had halved, from $60 in 1993 to $30 in 1994. This fall in the share price of Snapple was seen by Quaker Oats as an opportunity to increase its market share in the non-alcoholic beverage market. The acquisition would cement its position as a prominent player in the North American non-alcoholic beverage market. The market was growing at a rapid rate. The acquisition of Snapple was considered necessary by Quaker Oats to remain a competitive player in the market. Yet another reason in favor of an acquisition was that Quaker Oats expected to gain operating synergies from buying Snapple. B. EXPECTED SYNERGIES FROM THE ACQUISITION
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Distribution synergy: Gatorade, positioned as a mass product, and was sold through

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supermarkets and convenience stores. Snapple products were sold largely through independent retailers, vending locations, and restaurants. Quaker Oats expected to utilize each of these distribution channels to bolster the sale of the other product.
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Learning curve effects: With the sales of Gatorade rising from $122 million in 1984 to

about $1.20 billion in 1994 (22% compound annual growth rate), Quaker Oats felt that it could use economies of scope from its Gatorade experience to boost sales for Snapple.
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Common activities: The Quaker Oat management believed that there were significant

synergies to be achieved in common areas such as R&D, manufacturing and marketing.

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Geographic expansion: Snapple generated only 1% of its sales outside North America,

while over 31% of Quaker Oats’ sales revenue came from its foreign operations. This provided a strong platform for Quaker Oats to offer Snapple products to a wider customer base. SOURCE OF SYNERGY Revenue improvement EXPECTED SYNERGY DESCRIPTION International launch of Snapple would generate significant revenues (0% for Snapple currently vs 31% for Quaker). As manufacturing facilities and distribution networks are merged, costs would reduce and profit margins would increase

18% sales growth

Operating margin improvement

Higher EBITDA Margin

 DEAL VALUATION Quaker paid $1.7 billion to acquire Snapple in December 2004. Snapple, at that point was trading at $14 per share. Its market capitalization was $1.7024 billion. For a 96.50% shareholding, the Quaker Oats paid $1.642 billion. The effective premium to market valuation was 3.00%. However, on calculation of intrinsic value, we find that the market had overvalued the stock. Further, the market was in a correction phase. The price of Snapple stock oscillated from $9.38 in June 1993 to $32.25 in March 1994 to $13 in Sept 1994.This volatility reflected the inherent changes in the industry and consequently the market reaction to these fundamental changes; namely increased competition and potential slowdown in the revenue growth rate and margins and therefore the outlook on Snapple. Our basic assumption for valuation is that since the industry is in a highly competitive phase, the Free Cash Flow for the next year would decrease and then get into a stable growth rate of 15% for the next five years. The terminal value is calculated at 5.00% growth rate. A sensitivity analysis on the growth rate predicts a valuation in the range of $1.186 billion $1,418 billion. Clearly, the future decline in growth of the company was not yet completely factored in the market value
Source: www.optimumcapital.com

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since the market was in the correction phase. As per our valuation, Quaker Oats expected operational synergy of greater than $600 million in the optimistic scenario and greater than $300 million in the alternative scenario from the acquisition of Snapple. See Annexure A2 for the valuation model.  ANALYSIS OF THE ACQUISITION A. OUTCOME OF THE DEAL The acquisition was a failure right from the start. To finance the purchase, Quaker Oats sold two of its profitable divisions. The company had to pay a huge capital gains tax on the consideration. To make things worse, Quaker Oats could not realize the anticipated synergies with Snapple due to many factors (detailed below). Due to the acquisition, the revenues of Snapple plummeted by $35 million, from $657 million in 1994 to $640 million in 1995. B. REASONS FOR THE FAILURE 1. Inappropriate assessment of product complementarities Quaker Oats failed in their assessment of the similarities between Gatorade and Snapple. In particular, the following were the key differences between the products:
¾ ¾

Nature of the product: Gatorade was a sports drink, while Snapple was fruit-based Production: Quaker produced Gatorade at company owned bottling facility. Snapple Distribution and Marketing: Gatorade was a warm drink sold through mass retail

outsourced the production to co-packers.
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distribution channel such as hypermarkets. It provided comparatively lower margins at of USD 2 per case. Snapple was a cool drink sold through cold chain at Mom and Pop stores and supermarkets. It provided very high margins to the distributors at USD 4 per case. Distributors had a license for specific regions. 1. Conflict with the distribution channels and bottling vendors A major reason of Quaker Oats’ failure to realize operational synergies was its conflict with the existing distribution network. Immediately after the acquisition, Quaker Oats implemented changes in Snapple’s distribution channels by asking the existing dealers to stock Gatorade in equal proportion to Snapple. The distributors were not receptive to these changes, since the margins were higher for Snapple than for Gatorade. This resulted in a strained relationship between Quaker Oats and the distributors of Snapple, with the latter beginning to distrust Quaker
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Oats. Similarly, Snapple’s contractual arrangements with its co-packers prevented Quakers from using its own bottling plant to achieve the anticipated cost synergies in the bottling operations. 2. Overpayment of purchase consideration During the period 1993-1994, Snapple was in a very volatile phase. While it grew at a tremendous rate from 1990 to 1994, it faced an increase in competition from established players such as Pepsi, Coke and Lipton. Snapple’s profitability was expected to reduce and the stock price volatility of Snapple reflected this sentiment. The price of the stock moved from $60 to $14 in a short period of a few months. Quaker Oats looked at this as an opportunity to buy Snapple at a lower valuation. However, as per our calculations the stock should have been in the price range of $8 to $11 a share, as against $13 a share that Quaker Oats paid for Snapple. Annexure A2 shows the valuation calculations. 3. Management hubris As per a study conducted by Mathew Hayward and Don Hambrick of Columbia University, managerial hubris was a major cause of the high premiums that was paid for the acquisition. Under the leadership of CEO William Smithburg, Quaker Oats made a successful buyout and integration of Gatorade in 1983. Smithburg was convinced that he could recreate the magic with Snapple as well. Due to this confidence, he disregarded many of the above-mentioned dissimilarities between the products and acquired Snapple at a price which, as per Wall Street, was at least $1 billion above the intrinsic value.

PART B TRIARC’S ACQUISITION OF SNAPPLE  ABOUT TRIARC COMPANIES INC Triarc was a consumer products company with operations in beverage and restaurant businesses. Triarc was formed when the New York-based investment partnership led by Nelson Peltz and Peter May acquired DWG Corp which comprised a jumbled mass of unrelated businesses. Triarc’s new management brought in strategic focus and created a much narrower operating scope. By 1997, Triarc operated well known beverage brands such as Mistic and Royal Crown Cola, and the fast food restaurant chain, Arby's. The company was acclaimed for its relations
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with distributors, its flair for marketing, and its shrewdness in developing new products for an established brand.  ACQUISITION OF SNAPPLE BY TRIARC A. REASONS FOR THE ACQUISITION By 1997, Triarc Companies Inc had further refined its core businesses and focused on two business segments: beverages and restaurants. It had a strong resolve to turn Triarc into a branded consumer products company. The acquisition of Snapple Beverage Corporation was expected to contribute substantially to the branded beverage side of its business. Along with its Mistic brand of beverages, Triarc could become the market leader in the premium beverage category. Quaker Oats' mismanagement of the Snapple brand had lowered its bargaining power, enabling Triarc to purchase Snapple at an acutely reduced price of $300 million for a brand with over $500 Million in sales. Further, Triarc’s divestiture of its inherited businesses from DWG Corp. provided it sufficient financial leeway to capitalize its acquisition of the popular brand. B. EXPECTED SYNERGIES FROM THE ACQUISITION Operating Synergies Triarc’s success with the Mistic brand of beverages, which it restored to profitability from a relatively impaired stage, had helped it to develop key capabilities. It had demonstrated its talent for improving relations with distributors. In an extremely marketing intensive business, it had developed a flair for marketing; from packaging innovations to consumer targeting. It had also stepped up the pace of innovation by regularly introducing new product lines. Snapple, on the other hand had great brand equity; everybody knew the Snapple brand. An analysis of the sources of value that are key to achieving the acquisition objectives is given in Annexure B1.
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Source of Synergy

Expected synergy

Description Mistic sales had seen improvement of 12% in past 2 years. Also, beverage industry was expected to grow at an average of 15%. Triarc expected to extend its improved margins to the entire beverage line

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Revenue improvement

12% sales growth

Operating margin improvement 10% EBITDA margin

 DEAL VALUATION By 1997, Quaker had racked up roughly another estimated $90 million in Snapple losses, further cutting the unit's value. Snapple sold out to Triarc for a stunningly low price of $300 million. The deal value was just over half of Quaker’s Snapple unit's $550 million in sales. Most industry experts considered the final deal value a fire-sale price and not to be based on actual valuation. Triarc's offer represented not only the highest bid to buy Snapple outright but one that brought with it substantial cash and no antitrust problems. Facing stiff shareholder pressure to put the debacle behind them, Quaker went with the sure thing. Triarc had plans to issue an IPO for its beverages division before the acquisition of Snapple. Hence it would be reasonable to assume that the investment partnership that owned Triarc was interested in the exit value of the business at the end of 3-4 years, rather than in its value as a going concern. Thus the expected returns from the deal to Triarc is done using EV/EBITDA multiples. See ANNEXTURE B2, B3 Value of control: To determine the terminal value of Snapple business at the end of 2000, revenue and cost synergies are
Cost of equity IRR 22.13% 37.08%

assumed to be as given in the section- operational synergies. EV/EBITDA multiple of comparable firms are used to arrive at terminal enterprise value for Snapple beverage unit. The IRR for the investment is computed and is compared with the cost of equity, which is used as the hurdle rate. Cost of equity is computed per CAPM using beta of the beverage industry in 2000. Thus we can see that Triarc could expect to get significantly high returns from its investment in Snapple. Sensitivity analysis around expected revenue and cost synergies is performed in later section to analyze deal risk. See ANNEXTURE B4 Deal structure: On May 22, 1997 the Company acquired Snapple, from Quaker for $311.9 million consisting of cash of $300.1 million, $9.3 million of fees and expenses and $2.5 million of deferred purchase price. The purchase price for the Snapple acquisition was funded from (i) $75.0 million of cash and cash equivalents on hand and contributed by Triarc to Triarc Beverage Holdings Corp. ("TBHC"), a wholly-owned subsidiary of the Company and the parent of Snapple and Mistic, and (ii) $250.0 million of borrowings by Snapple on May 22, 1997 under a $380.0 million credit agreement, as amended (the "Credit Agreement"), entered into by Snapple, Mistic and TBHC (collectively, the "Borrowers"). Triarc’s decision to make an all-cash purchase offer for full equity holding of Snapple gave it a favorable position since Quaker was looking for a quick exit. The all-cash offer also enabled Quaker to register benefits from capital losses.
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¾ DEAL RISKS Financial risks: The financial valuation assumes YoY revenue growth of 12% and EBITDA margin of 10%. Due to market uncertainties or other unexpected events, actual values may be different. Sensitivity analysis is performed on these assumptions to assess their robustness. Sensitivity is assessed for revenue growth projections and EBITDA margins to see its impact on the expected IRR. See ANNEXTURE B5
Hurdle rate=22% EBITDA margin 5% 7% 9% 10% 12% Revenue growth 0% 2% -2.86% -0.92% 8.67% 10.84% 18.17% 20.53% 22.39% 24.84% 30.06% 32.66%

5% 2.00% 14.10% 24.07% 28.51% 36.56%

10% 6.86% 19.54% 29.98% 34.63% 43.07%

12% 8.80% 21.71% 32.35% 37.08% 45.67%

Beverage industry overall growth rate for the period 1997-2005 was expected to be 18%. Also Triarc had EBITDA margin of 40% for its Mistic line of beverages. From the analysis, it is clear that even with very conservative assumptions, the deal for Snapple at $300 million is highly attractive for Triarc. Integration risks: Operational synergies originate by integrating sources of value of the acquirer and the target. The success of an acquisition would ultimately depend upon the degree of integration achieved between key sources of value. The complexity involved in integrating these sources of value is analyzed in ANNEXTURE B6 Market risks: The competition in the non carbonated segment was consolidating with the
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leading players focusing on groundbreaking innovation to meet consumer demands for hydration and variation in taste. Snapple had a competitive edge due to its substantial market share.

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 ANALYSIS OF THE ACQUISITION A. Outcome of the deal
¾

Snapple’s Distributor Relationships –Triarc realized the importance of the distribution

network and the Snapple brand's remarkable success in smaller retail formats, such as

delicatessens and convenience stores and promised a renewed commitment to this network. And this was all the more easier for Triarc since it had a good rapport and reputation of its own, thanks to its own drink Mistic.
¾

Renewed Focus on Promotion –The focus was on bringing back the quirky image of

Snapple and for that they brought back Snapple’s spokeswoman Wendy “Snapple Lady”. Use of innovative advertising and promotions helped increase sales drastically and this was a strategy Triarc used to continue to enhance their brand equity;
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Product Innovation – Triarc had to understand the consumers well enough and expand

their product line systematically and which they did. Two weeks after their acquisition they introduced three exotic tea flavors, a line of Snapple Farms 100% juice products and a smoothie like beverage in six flavors called White Snapple. All these innovative product line extensions had a significant impact on sales. Due to the in-house product development and packaging capabilities, Triarc could bring these products to market quickly and with minimal investment A. A Successful Merger Financial and Operating results (See ANNEXTURE B6)

In June 2000, Triarc Management announced an initial public offering (“IPO”) of the beverage group. When they were contemplating this decision Cadbury Schweppes plc offered to buy the Snapple Beverage Group. As Cadbury’s purchase price included a significant premium over the value that they had expected to achieve through the IPO, they accepted Cadbury’s offer and completed the sale of the Snapple Beverage Group in October 2000. The deal was successfully completed at a price of 1,725,779.58 Euros. This definitely is a very successful deal as the turnaround was executed out in less than 3 years time and especially of a company which was in distress and bought at $300 million. Minus all the debt a pre-tax gain in excess of $ 700 million was recorded.

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PART C
¾ CONTRASTING THE DEALS

QUAKER-SNAPPLE TRIARC-SNAPPLE

 KEY LEARNINGS The deals studied in this report provide an excellent contrast to understanding the strategic and financial aspects of implementing M&As. The best practices to be followed in various stages of the deal can be summarized as follows: Pre-merger Strategic due diligence: This involves clear understanding of the sources of value that contribute to operating synergies of the combined firm. The complexity involved in integrating the sources of value should be carefully analyzed and market uncertainties that may hamper key synergy expectations should be factored in. Financial due diligence: This involves clear understanding of the sources of financial synergies like debt capacity, tax benefits etc. The intrinsic value of the firm and the value from synergies should be carefully modeled and the premium offered should not exceed the synergy value. Post-merger
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Integration Strategy: The integration strategy should determine the level of integration for assets, processes and human resources of the acquirer and target firms. The strategy should be designed to extract synergies while preserving the key sources of values of the combining firms.

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ANNEXURE A1: ABOUT THE COMPANIES THE QUAKER OATS COMPANY1 The Quaker Oats Company was founded in 1901 as a result of merger of four oat mills in North America. In within a period of eighty years, the sales of the company grew over a hundred-fold, from $16 million in 1901 to $2 billion in 1979. Over this period, Quaker Oats further diversified its product line and geographic spread. The company invested in foreign markets by establishing self-supporting overseas subsidiaries in Europe, South America and Asia. In 1942, Quaker Oats’ sales reached $90 million. In the later part of the century, Quaker Oats expanded in the industry's fastest-growing areas: pet foods, convenience foods, and ready-to-eat cereals. The slow growth of the food industry in the 1960s caused the company to make acquisitions outside the food industry. One such was the Fisher-Price Toy Company, purchased in 1969. By 1979, Quaker Oats had a return on capital of 12.30%, higher than the industry, but below Kellogg's 19.40%. Quaker Oats actively managed its acquisitions: it sold its stake in its subsidiaries involved in businesses such as cookies, restaurants, toys, chemicals and the specialty retailing space. The company exited its investments at high valuations. By 1987, Quaker Oats’ return on shareholder equity matched Kellogg's. In 1983, Quaker Oats acquired Stokely-Van Camp, the maker of Gatorade sports drink. The company concentrated on three major divisions: American and Canadian grocery products; international grocery products; and Fisher-Price toys. The company hived off Fisher-Price Toys in 1991. Sales that year reached a record $5.50 billion. The company’s international sales continued to be a significant percentage of the company's total. In 1994, Quaker Oats was a strong player in the global food industry. Gatorade had been a star performer for the company. The company saw a unique opportunity to expand its presence into the non-alcoholic beverages by acquiring the Snapple Beverage Corporation. The acquisition would launch the company in the league of the largest manufacturers of non-alcoholic beverages in North America.

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1 All data in this section is sourced/verbatim from http://en.wikipedia.org/wiki/Quaker_Oats_Company and from http://www.fundinguniverse.com/company-histories/The-Quaker-Oats-Company-CompanyHistory.html

SNAPPLE BEVERAGE CORPORATION2 In 1972, childhood friends Hyman Golden, Arnold Greenberg and Leonard Marsh founded the Unadulterated Food Products Inc. in New York. Subsequently, the name of the company was changed to Snapple Beverage Corporation. Due to marketing budget constraints, the company adopted an unconventional 'anti-establishment' approach to market its products. This approach set the Snapple brand apart from traditional beverage brands, and won it loyal customers. In 1982, the company forayed into selling natural sodas. By 1986, the company had started distributing juices and health drinks through health stores. In 1987, the company introduced Snapple iced tea, manufactured using a unique process, which became an instant success. In 1991, Snapple's revenues more than doubled to $95 million, with 55 percent of its sales coming from the iced tea segment. The company had attained a solid second place in this market with 19.30% of sales, closing behind long-time market leader Lipton, with 37.20% of the market. In January 1992, the investment banking firm, the Thomas H. Lee Company invested in Snapple. With this deal, Snapple gained the resources to pay for nationwide distribution of its products. Snapple expanded its distribution to every major city in North America. It also launched an initiative to sell its products in foreign markets. By the fall of 1992, Snapple pulled ahead of Nestea to become the leader in the ready-to-drink iced tea market. Snapple announced its IPO in December 1992. On December 15, the stock was offered at $20 a share. The four million shares were quickly bid for, and the stock price quickly rose to $33. In 1993, sales were up 119% from the previous year - the third year in a row in which sales of Snapple drinks had more than doubled. By 1994, sales had begun in Canada, Mexico, the United Kingdom, Greece, Norway and Hong Kong. Snapple was considering investing in Australia, Singapore and the Philippines for expansion. At this point in time, the stock of the company was trading at around $30 per share, nearly half of its price of about a year ago, and was considered an attractive takeover target by the industry.
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2 All data in this section is sourced / reproduced ad-verbatim from http://en.wikipedia.org/wiki/Snapple, from http://www.fundinguniverse.com/companyhistories/Snapple-Beverage-Corporation-Company-History.html and from http://www.icmrindia.org/casestudies/catalogue/Marketing/MKTG148.htm

ANNEXURE A2: VALUATION MODEL

Valuation of Snapple and Synergy calculation Pre Acquisition 1991 1992 1993 $95.0 $231.9 $516.0 Net Sales 0 0 0 244. 222. % Increase 11 51 Cost of Goods Sold 58.9 143.2 298.7 % of Sales Sell, Gen & Admin SGA % Of Sales Operating Income % of Sales % Increase EBIT(1-Tax Rate) Add Depreciation Change in WC Capex FCF
1

1994 $697. 60 135. 19 402.9 57.76 168.5 24.15 126.2 18.09 123.6 04 $126. 20

1995 $837. 12 $502. 27 $334. 85 $292. 99 $41.8 6

Post Acquisition Analysis 1996 1997 1998 1999 $1,004. $1,205. $1,446. $1,735. 54 45 54 85 $1,041. 51 $694.34 $607.55 $86.79

2000 $2,083. 02 $1,249. 81 $833.21 $729.06 $104.15

2001 TV

$602.73 $401.82 $351.59 $50.23

$723.27 $482.18 $421.91 $60.27

$867.93 $578.62 $506.29 $72.33

62.00 20.4 21.47 15.8 16.63

61.75 66.3 28.59 22.4 9.66 141.77 2 6.9 0

57.89 115.2 22.33 102.1 19.79 455.80 4 61.26 0.5 -32.2 10 83.96

0.2

100.7 52

1819. PV of FCF 2 52 Value Per 14.96 Share 32 1 Growth rate of 20% from 1995 based on Gatorade growth rate 2 Discount Rate of 13.50% based on WACC calculation

115.8 65 102.0 84

133.24 452 103.43 265

153.23 12 104.79 96

176.21 588 106.18 461

202.64 826 107.58 793

233.04 55 109.00 98

2878. 8 1186. 42

Analysis of Premium Paid Stake Acquired Number of Shares acquired (in Millions) Value of 96.5% stake based on DCF Amount Paid (in Millions) Premium Paid % 96.50% 117.34 4 1368.8 0 1700 24.20

Calculation of WACC Value per share based on DCF Projection Cost of Debt After Tax cost of Debt Cost of Equity CAPM Rf Market Premium Be Value of Debt on the books Market Value Equity @ USD 14 per share Enterprise Value

14.96 0.05 0.0325 0.1389 0.05 0.07 1.27 69.5 1702.4 1771.9

WACC 0.135 Beta Equity taken at 1.27 as the stock was very volatile compared to the market

Valuation of Snapple in December 2004 Growth Phase for 05 years at 20% Pre Acquisition 1991 1992 1993 1994 $95.0 $231.9 $516. $697. 0 0 00 60 244. 222 135. 11 .51 19 58.9 62.00 20.4 21.47 15.8 16.63 143.2 61.75 66.3 28.59 22.4 9.66 141.77 2 298.7 57.89 115.2 22.33 102.1 19.79 455.8 04 61.26 0.5 -32.2 10 83.96 402.9 57.76 168.5 24.15 126.2 18.09 123.6 04 $126. 20 1995 $837. 12 $502. 27 $334. 85 $292. 99 $41.8 6 Post Acquisition Analysis 1996 1997 1998 1999 $1,004. $1,205. $1,446. $1,735. 54 45 54 85 $1,041. 51 $694.34 $607.55 2000 $2,083. 02 $1,249. 81 $833.21 $729.06 2001 TV

Net Sales % Increase Cost of Goods Sold % of Sales Sell, Gen & Admin SGA % Of Sales Operating Income % of Sales % Increase EBIT(1-Tax Rate)
1

$602.73 $401.82 $351.59

$723.27 $482.18 $421.91

$867.93 $578.62 $506.29

$50.23

$60.27

$72.33

$86.79

$104.15

$41.8 6

$50.23

$60.27

$72.33

$86.79

$104.15

Add Depreciation Change in WC Capex FCF PV of FCF
2

0.2

6.9 0

Value Per Share

1418. 45 11.66 49

100.7 52

75.56 4 66.57 62

90.6768 70.388 946

108.812 16 74.420 031

130.574 59 78.681 971

156.689 51 83.187 987

188.027 41 87.952 057

2322. 69 957.2 39

Valuation of Snapple in December 2004 Sensitivity Analysis Growth Phase for 05 years at 15% Pre Acquisition 1991 $95.0 0 1992 $231.9 0 244. 11 143.2 61.75 66.3 28.59 22.4 9.66 141.77 2 1993 $516. 00 222 .51 298.7 57.89 115.2 22.33 102.1 19.79 455.8 04 61.26 0.5 -32.2 10 83.96
2

Net Sales % Increase Cost of Goods Sold % of Sales Sell, Gen & Admin SGA % Of Sales Operating Income % of Sales % Increase EBIT(1-Tax Rate)
1

1994 $697. 60 135. 19 402.9 57.76 168.5 24.15 126.2 18.09 123.6 04 $126. 20

1 1995 $837. 12 $502. 27 $334. 85 $292. 99 $41.8 6

Post Acquisition Analysis 2 3 4 5 1996 1997 1998 1999 $1,004. $1,205. $1,446. $1,735. 54 45 54 85 $602.7 3 $401.8 2 $351.5 9 $723.2 7 $482.1 8 $421.9 1 $867.9 3 $578.6 2 $506.2 9 $1,041. 51 $694.34 $607.55

6 2000 $2,083. 02 $1,249. 81 $833.21 $729.06

7 2001 TV

58.9 62.00 20.4 21.47 15.8 16.63

$50.23

$60.27

$72.33

$86.79

$104.15

$41.8 6

$50.23

$60.27

$72.33

$86.79

$104.15

Add Depreciation Change in WC Capex FCF PV of FCF

0.2

6.9 0

100.7 52

75.56 4 66.58

86.898 6 67.46

99.933 39 68.35

114.92 34 69.25

132.161 91 70.17

151.986 19 71.09

1186. 65

1877. 48 773.7 6

Value Per Share

9.758 59

ANNEXURE B1: OPERATING SYNERGIES FROM TRIARC – SNAPPLE MERGER

ANNEXURE B2: IRR CALCULATION FOR SNAPPLE INVESTMENT
$ millions Revenues Operating margin EBITDA EV/EBITDA Enterprise value (2000) Purchase price (1997) IRR
1 1

1997 550

1998 616

1999 689.92

2000 772.71 10% 77.27104 10 772.7104

300 37.08%

Assume revenue growth of 12%

ANNEXURE B3: COMPUTING COST OF EQUITY FOR TRIARC
Computing cost of equity rf (30 yr Treasury rate) rm (5 yr S&P 500 returns) β unlevered (beverage industry ) D/E for Triarc after acquisition Tax rate β levered for Triarc Cost of equity
1 2 3 3 2 1

6.35% 18.00% 0.85 0.99 40.00% 1.35 22%

Source: www.damodaran.com D=Long term debt for Triarc, E=Triarc share price after announcement*No.of shares outstanding Assume βd=0 for Triarc, since its debt was not traded and it had identifiable assets more than its outstanding debt

ANNEXURE B4: SENSITIVITY ANALYSIS ON REVENUE GROWTH ASSUMPTIONS AND EBITDA MARGINS

ANNEXURE B5: INTEGRATION COMPLEXITIES OF TRIARC – SNAPPLE MERGER
Complexity of integration MEDIUM MEDIUM LOW HIGH HIGH HIGH

Synergy

Description Increased sales volumes due to an extended product portfolio Improve operating cost drivers through product synergies

Sources of synergy Integrated product portfolio Cultural integration of brands Targeted promotion campaigns Regular product line extensions Rationalized manufacturing costs by leveraging complementary product synergies Scaled national distribution network by leveraging relations with small retail channels

Increased revenues

Optimize Snapple’s operating margin

ANNEXURE B6: FINANCIAL AND OPERATING RESULTS OF TRIARC-SNAPPLE MERGER

References:
1. http://www.brandchannel.com/features_profile.asp?pr_id=107

2. Paper no. 1-0041 – Tuck School of Business

3. http://www.mindfully.org/Plastic/Recycling/Noncarbonated-Beverage-Containers1feb07.htm

4. damodaran.com 5. Triarc Annual Reports 97, 98, 99, 00
6. "How Snapple Got its Juice Back," Harvard Business Review, January 2002, Vol. 80, No. 1

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