BENZY FOODS BUSINESS EXPANSION

B Food industries (BFI) is a producer and exporter of a diversified line of packaged food
products, sweets and soft drinks, based in Dreamland (D). the company is organized in
three divisions.
1. Packaged Foods Division
2. Sweets and confectionary
3. Soft Drinks Division
Sales in D and exports for 1990-95 were as shown in Table-1

Table - 1 In million of Ry.

Year Sales in D Exports Total Sales % of Exports to Sales
2005 125.4 233.4 358.8 65.00
2006 125.3 256.3 381.6 67.20
2007 121.2 260.7 381.9 68.35
2008 130.3 300.9 431.2 69.80
2009 145.9 350.2 496.1 70.60
2010 142.0 410.0 552.0 74.30

BFI has an arrangement with Bon Swiss, a Swiss confectionary company, to

manufacture and sell a selected line of its products in Western Europe and in the Middle
East under a Licensing agreement. It also has a 49% interest in BFI (Kenya), a Joint
Venture with private local investors to produce and market a limited line of its products in
Kenya and other East African countries. Sales on Bon Swiss and BFI (Kenya) for 2005-
2010, which are not included in BFI exports listed above, are as shown in Table-2.

Table – 2 In million of Ry.

Bon Swiss BFI (Kenya)
Year Sales Royalties paid Sales Dividends trfd
to BFI (D) to BFI (D)
2005 34.2 3.4 20.0 1.7
2006 38.5 3.9 23.9 1.9
2007 29.6 3.0 34.5 2.8
2008 37.2 3.7 36.8 4.2
2009 45.9 4.6 40.2 3.8
2010 50.0 5.0 36.7 4.0
The management has been considering for some time terminating its licensing
agreement with Bon Swiss and the Joint venture in Kenya and setting up a wholly
affiliate in Milan, Italy. A committee headed by Simon Peter is has concluded that the
company’s profits from sales in these markets can be substantially increased within a
few years, given aggressive market and direct control on activities. These have been
lacking under the present arrangements. The committee, which was entrusted with
investigating the project, is impressed by the favorable investment climate in Italy, but is
concerned over the prospects of the exchange rate of Italia Euro against the Ringy (Ry).
In its recommendations on the exchange rate risk, the committee indicated that the Lira-
Ringy exchange rate would remain more or less volatile over the intermediate term.
Along with the exchange rate gyrations, the committee considered Italy in recent years
as a country with high political risk.

A task force was constituted to collect data for the calculations. It complied data on
projected sales exports, profit margins, taxable income, transferable dividends and other
payments to BFI (D), concessionary arrangements made available.

Sales and profit margins covering the period and projected exports by BFI (Italy) to
Europe, Africa and Middle East during the same period are given in Table – 5.

Table - 5

Year Sales (in Operating Exports(in Operating

million Euro) Profit Margin million Euro) Profit Margin
before royalty before royalty
& m fee and mgmt fee

2012 17,800 0.25 294694 0.24

2013 20,200 0.25 337064 0.24

2014 24,700 0.25 391,623 0.24

2015 30,300 0.23 492,757 0.22

2016 35,900 0.23 590,263 0.22

2017 40,000 0.22 722,342 0.20

2018 47,500 0.19 823,175 0.18

Mr. Banerjee, Sr. manager of the core committee division and chairman of the task force
entrusted with evaluating BFI (Italy), is hoping to finalise his report on the project,
supported the calculations and appropriate recommendations.
The operations of BFI (Italy) will be subject to the following provisions:

1. Up to 90% of net profits of BFI (Italy) will be transferable to BFI (D) during the
first five years of operation, falling to 75% of net profits thereafter. There is no
withholding tax on dividends transferred to the parent company. Neither the
parent company will be taxed on the cash flows from the subsidiary because of
special concession agreements between two countries with respect to specific
industry.

2. All royalties and management fees are freely transferable to the parent. It is
planned that the agreement between BFI (D) and BFI (Italy) will stipulate a
royalty of 10% and a management fee of 5% on all combined domestic sales and
exports.

3. Estimates for the initial investment on the project broken down by currency are
as shown in Table – 6. Terminal value is estimated to be 0.59 million.

Table - 6

Year Currency Amount Purpose

2011 Euro 45 billion Construction of plant & W/C

2011 Ringy 24.67 million Equipment shipped from U.S

2012 Euro 18 billion Equipment purchased locally

Sales and exports of by BFI(Italy) will replace exports or sales currently made by the
facilities in Swiss and Kenya and about 10% of the exports made by the parent
company. The replaced sales and exports are projected to increase at the following
average growth rate.

Table - 7

Average growth rate(sales) of the respective Average Loss of Margin for

operation Benzy (respective cash flow in
various forms which would
have otherwise received) as a
% of sales

Bon Swiss 8% 10% of sales

BFI(Kenya) 12.9% 9.6% of sales

 BFI(D) 9.7% 8.4% of sales

Exch Rate: Euro per Ringy:

2011 2012 2013 2014 2015 2016 2017 2018

2250 2272 2295 2218 2341 2364 2388 2412

Cost of capital: 18%

Tax on domestic: 25% for year 1 & 30% thereafter (for the new Italian business)

Tax on exports: 15% for year 1 and 20% thereafter (for the exports from Italy)