HONY, CIFA, AND ZOOMLION : Creating Value and

Strategic Choices in a Dynamic Market

Group No. 10
Alok Raj M139-18 (7908096646;
alok.raj18@iimranchi.ac.in)
Devabrata Das M151-18 (8700412369;
devabrata.das18@iimranchi.ac.in)
Shikshit Kumar Gope M179-18 (7042473866;
shikshit.kumargope18@iimranchi.ac.in)

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 Question 1: What are the risks of pursuing the CIFA acquisition?

What are the potential benefits?

The first risk associated with the acquisition would be with respect to the

incorporation of the difference in the product lines and value propositions of

both the organizations. The non-existence of synergy between the two

companies which are both culturally as well as geographically different,

would also be a cause of concern with the acquisition and finally, the sales

target of CIFA had a probability of being negatively impacted because of the

poor market sentiment and demand for construction related products in the

European Market.

On the contrary, there are various benefits associated with the acquisition of

CIFA, first one being the ability to compete with Sany in term of global

presence and capacity. Other benefits associated with the acquisition would

be expansion of market leadership in emerging markets such as Russia,

China and India, the ability to capitalization of CIFA’s advanced technology

and distribution networks in complementary markets for an increased global

presence.

Question 2: How is investing in Zoomlion’s acquisition of CIFA

different from investing in Zoomlion itself? Does this pose fewer or

more risks for Hony?

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 Regulatory complexities exist in the investment in Zoomlion, since more

holding shares of Hony would lead to the dilution of the state’s stake and

that would catch the eye of regulatory agencies since they are against such

transactions. Investing in Zoomlion’s acquisition of CIFA, on the other hand,

would not be faced with such regulatory complexities. Having said that, Hony

would have to face a greater risk in the second case due to the possession of

extra risk of success of the Zoomlion CIFA merger and the realization of

benefits that would follow.

Question 3: What is the valuation of CIFA? Please use cash flows and

cost of capital data from the case. You may wish to assume that

CIFA will grow at 5% per year through 2012 and 2% per year

thereafter.

Assignment
6_Hony, CIFA and Zoomlion- Creating Value and Strategic Choices in a Dynamic Market_ Group 10.xlsx

Enterprise Value is approximately 998 million Euros.

Question 4: Another source of profits for Zoomlion is sales of its own

products through CIFA’s distribution network. This might be

assumed to begin in 2010 and to grow at the same rate as CIFA’s

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 sales. How significant will the after-tax profits from such sales need

to be (if any) to justify a valuation of 500 million Euros?

Please refer to the Zoomlion tab in the Excel Sheet attached above. Here, the

assumption made is that 15% of total sales come from the new channel. The

valuation from additional sales comes to be 3051.775 million RMB. The after

tax profits enhance the returns for Zoomlion by directly impacting the topline

and are therefore essential.

Question 5: How much do you believe should Zoomlion bid for CIFA,

based on the answers above?

Zoomlion’s bid should be anywhere below the balance amount, that is, below

645.9 million Euros.

Question 6: What is the estimated return of CIFA deal for Hony?

Assume that-

Hony will exit in 5 years

Hony will exercise the option at the time

CIFA’s entry trailing EV/EBITDA multiple was 10, and Zoomlion would

be trading at an average EV/EBITDA multiple of 20 at the time of

exit.

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 Hony’s current investment- 18.04%, i.e., 90.2 million Euros.

Projected EBITDA of CIFA after 5 years = 71.6 million Euros.

Conversion Multiple = 15

Conversion Price = 71.6*15 = 1074 million Euros.

Amount Hony will get =. 18.04% of 1074 = 193.75 million Euros.

Total annual return for Hony over 5 years = 16.52%

Question 7: Should Hony participate in Zoomlion acquisition?

Due to high returns and a good business relationship with Zoomlion, and the

additional advantage to Hony in terms of greater future global scalability as a

result of conversion of CIFA shares into Zoomlion, Hony should participate in

the acquisition. The offer brings in an additional advantage to Hony in terms

of the experience of working with Zoomlion and the ability to improve the

managerial and operational efficiencies of the new entity.

However, since Hony is taking an added risk for this project, the decision to

participate or not, should depend upon the offers in terms of returns.

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