1. What situation was Khemka family involved in during the case?

What other
options could they choose originally?

(1) What situation was Khemka family involved in during the case?

In August 1998, the Russian economy collapsed. With default on public and private
debts and a massive devaluation of the rouble, the drop in traded equities in the
Russian market was precipitous. SUN Brewing’s stock price, which had reached an
all-time high of $19.5 in March, slumped to $1.75 (about 90%) on September 22, and
the stock price still remained under $3.00 by March 1999.

In that tense and chaotic time, SUN Brewing had no choice but to cancel the IPO at
NYSE that was planned for $200 - $400 million in equity. Meanwhile, there was a $40
million bridge loan that needed to be repaid. Also, Sun Brewing was facing intense
competition from its longtime rival, Baltika, which had replaced SUN’s as the leading
Russian brewer.

(2) What other options could they choose originally?

Bring another strategic partner (and idea originally dismissed because the family
didn’t want their power over the company threatened)

Reinvest from the family pool (that option was highly overlooked because the family
already budgeted the project and they prefer to ensure a backstop reserve of capital for
preservation and discipline, also for the family reputation)

Quit the business (seriously consider if the best option for them is to move on to new
opportunities in other industries.)
2. Why are there different financing ways in each period?

There are many different stages of financing and operating methods , we need to
consider the different situations of the environment of the company such as economic
factors, political factors, technology factors ,social factors and also the information of
competitors.

(A) 1992 During opening of SUN(From family business)

At first, 100% financing came from SUN Trade International Ltd (STI), its own group
company.

(B) 1993 (private placement)

Starting from 1993, SUN made private placement to three investors and got
15,000,000 US dollars, in return for a combined 30% stake in the company. The
placement left the Khemka family with ownership of 70% of SUN Brewing’s equity.

(C) 1994(Global Depository Receipts)

SUN issued GDR (Global Depository Receipts) to private investors, getting

42,000,000 US dollars ,which resulted in Khemka family ownership going down to
60%.

(D) 1995 (IPO in Luxembourg)

SUN filed for IPO in Luxembourg Stock Exchange, listed its 12,650,000 issued
shares, along with all of the 6,309,500 issued GDRS.

(E) 1998 (IPO in New York Stock Exchange)

SUN would like to do an IPO on the New York Stock Exchange, but not succeed
because of the financial crisis in Russia.

At the beginning stage (A) and (B) the finance come from their group and private

Placement with three institutional inventors. At the growing stage(C)(D) they do

the(Global Depository Receipts) and (IPO in Luxembourg) to gain more money. At
the third stage(D), they have profits and become mature, they decide to go IPO in
New York Stock Exchange, but not succeed.
 3. How many funds did SUN Brewing need in March, 1999? What is the value of
the company at this time?

(1) How many funds did SUN Brewing need in March, 1999?

Obligation to buy back 1,322,083 shares from STI at $11.25 per share $14.9 million

Operating liabilities $17 million

$25 million - $6 million =

Bridge loan $19 million

Estimation of required capital expenditures $100 million

Total funds needed $150.9 million

Cash and cash equivalents ($5 million)

Additional capital needed $145.9 million

Thus, SUN Brewing needed $145.9 million additional capital in March, 1999.

(2) What is the value of the company at this time?

Method 1: Market value of equity

Enterprise value = market value of equity + debt - cash = $120,388,000

It will undervalue the market value of equity because of the depreciation of the ruble
just a few months ago, making SUN Brewing’s stock price drop over 90%. Therefore,
we tried another method.

Method 2: Discounted cash flow

According to the NYU Stern study, beverage(Alcoholic) beta is 0.78.

(Sources: NYU Stern Betas by Sector (US))

According to the tables above, the weighted average cost of capital is 9.29%, and the
sustainable growth rate is 6.17%.

The enterprise value is $407.8 million.

4. What kind of risks investing in the Russian beer industry in 1999?

Market risk:

In 1998, the Russian economy collapsed. With the country defaulting on public and
private debt, and massive devaluation of the ruble, the drop in traded equity in Russian
companies was precipitous. Because of the bad economic environment, SUN
Brewing’s stock price Sharply declined. SUN Brewing’s stock price, which had
reached an all-time high of $19.5 in March, plummeted to $1.75 in September.

System risk:

In 1999, SUN Brewing was facing intense competition from its longtime rival,
Baltika, which had overtaken SUN as the leading Russian brewer. Analysts expected
Baltika to become an even tougher rival following the merger between Carlsberg and
Swedish-based Pripps, which was a co-owner in Baltika’s holding company. So it
caused a lot of pressure to the SUN Brewing. For the Khemka family, concerns
included not only the debt but also financing for future growth and required capital
expenditures, which were estimated to be well over $100 million.

Credit risk:

In 1998, Russia had a complex political situation; the financial crisis and political
crisis were intertwined. The year from March to August has two changes of the
government.

5. Analyze the pros and cons of the Khemka family facing in 1999.

In 1999 Russia was in a deep financial crisis which led to the devaluation of the Ruble
(national currency), so Khemka, starting to losing competition and losing its stock
value, was facing a difficult situation and they had to make a decision fast from the
two options: wait it out or bring in a major global beer company as a strategic
partner.
Pros of waiting it out:
1. Family will sustain the controlling stake in the company and remain being the
major decision maker
2. SUN will remain being an independent company

Cons of waiting it out:

1. The already severely plumed stock price will likely stay lower than $3.00
2. Taking a risk of running the business on sparse amount of cash
3. Require the family to inject additional funds
4. Having its competitor, Baltika already overtaking SUN in sales, SUN might have
further difficulties competing with other companies in the same industry

Pros of bringing in a major global beer company as a partner:

1. Potential of debt coverage with help from the partner
2. Help SUN to improve and maintain its position as the number two in Russia
3. Additional financial and human resources, more talent

Cons of bringing in a major global beer company as a partner:

1. The family is losing the controlling power and flexibility in decisions
2. Conflicts between the partners might occur
3. Uncertainty whether the partner will be willing to buy at sufficient premium to
the depressed stock

Because waiting it out in a collapsed economy puts the company under the risk of
bankruptcy, the option of bringing a partner places less financial risk, hence I view it
as a better decision.