BevCoCharting the way forwardThe campus Maverick

Campus Maverick Round 1 1

Our client, BevCo, is a leading international producer and marketer of wine and spirits with operations in the United States, Canada, Mexico, New Zealand, and Italy. Founded in 1960, BevCo has grown to become a significant player in the alcoholic beverage industry with more than 100 brands in its portfolio, sales in approximately 100 countries, about 40 facilities and approximately 6,300 employees. Recently, however, BevCo has been facing declining revenue and profitability due to shifts in consumer tastes to other categories, such as beer.

To bolster growth, the client is exploring several options to enter the beer market to diversify revenue streams and broaden its portfolio of brands. The beer industry is highly consolidated, with a few major players controlling more than 70 percent of total volume and hundreds of smaller players selling to the rest of the market.

Large domestic brands, while still constituting the majority of US beer sales, are declining as consumer tastes shift to craft brews, and imports. BeerCo, a US-based brewer with sales and distribution solely in the United States, has been identified as a potential acquisition target. The BeerCo portfolio includes six of the top 20 craft beer brands in the United States and a coveted portfolio of premium brands in the growing US craft beer category.

BevCo has limited experience in the beer industry and has asked Deloitte to help it determine if it should acquire BeerCo and identify integration considerations that need to be addressed.

You are a member of the Deloitte team engaged to help BevCo understand the market situation and conduct target analysis, including strategic assessment, financial assessment, and operational assessment. Additionally, the client would like assistance in estimating the acquisition price for BeerCo.

Business situation

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Case roles and questions

A1. Estimate the growth rate of the US beer market from 2014-2019. Based on this, how attractive does this market appear?2. Estimate the growth rate of craft beer in the same period. (You can use average annual growth rate instead of CAGR.)3. Using available data, compare the attractiveness of the craft beer segment to other alcoholic beverage segments. What do you conclude from this?B1. What factors should BevCo consider when evaluating the opportunity to purchase BeerCo and enter the craft beer market?2. Describe in a qualitative manner the potential revenue and cost synergies from an acquisition of BeerCo.3. Considering the potential synergies above, estimate the new operating margin for 2014 that could be achieved through the acquisition (using BevCos analysis).C1. Calculate BeerCos operating margin. How does this compare to the industry average?2. BeerCo has three primary product lines (Lager,Ale, and Stout). Of the three product lines, which one represents opportunities for profitability improvement?3. Based on the above profitability analysis, what levers would you consider to improve the profitability of the identified product line?D1. There are several methods to determine valuation. What are the pros and cons for each? What is the most suitable approach for assessing BeerCos value?2. What purchase price would you estimate based on current financial projections? (Use the M&A information provided by the clients bankers, and the P&L given. Disregard synergies.)3. Beyond synergies, what considerations could impact the purchase price?E1. What operational considerations should BevCo keep in mind when setting up this new business unit?2. As a part of optimizing operations, BevCo would like to better understand BeerCos supply base. In particular, should BevCo continue to purchase cans from the existing supplier or opena new production facility?3. At what point, if any, would building a new facility be more economical?

Data sheet 0Key market trends

The range of wine, beer, and distilled spirits offered by brand and by type is wide. Demand is relatively inelastic during both good and bad economic times.

There is an overall long-term trend of rising affluence around the globe. Thus, more and more consumers are becoming increasingly discerning about what they purchase.

Premium alcoholic beverages are growing in popularity, particularly flavored ones.

As is the case with premium wine and spirits, craft beers1 are very popular with consumers. These beers are priced higher and are quite profitable, as long as the cost of their rich ingredients is covered.

Small brewers pay close attention to quality and have expanded slowly, but are capturing market share. Large brewers, mindful not to lose sales, have developed their own premium brands, while some have acquired smaller rivals.

Producers of alcoholic beverages invest large amounts of cash in marketing and advertising to build brand recognition. Debt burdens have been growing in recent years as companies aggressively expand through acquisitions.

A steady wave of consolidation has led to the alcoholic beverage market being much more fragmented than it was in the last decade.

1 What is craft beer? A beer with a distinctive flavor, produced in small quantities and distributed in a particular region

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66.565.063.060.259.2

2014 2015 20182017 2019

+2.9%

2016

?

32.617.2

59.29.5

BeerSpiritsWineTotal

Data sheet 1General market/company information

2014 US Alcoholic Beverage Market ($B)

US Beer Market Segmentation

2014 US Alcoholic Beverage Market Size by Category ($B)

Company Financials in 2014 ($)

Segment

Sales Volume (Barrels in millions)

Average Price Per Bottle ($)

2014 2019(E) 2014 2019 (E)

Super premium

10 10 0.64 0.68

Craft 9 12 1.2 1.3

Import 29 31 0.7 0.74

Premium 58 53 0.44 0.45

Sub Premium

107 95 0.37 0.38

* 1 Barrel = 318 bottles of beer

In Billions of USD BevCo BeerCo

Revenue 3.35B 1.11B

COGS 2.18B 669M

SG&A 652.6M 201M

EBITDA 530M 260M

Operating Income 517.4M ?

Operating Margin % 15.4% ?

Data sheet 2Market analysis

Excerpt from BevCo Market Research Characteristics of Segments

Interview Excerpt from BevCo Executive

Recent M&A Activity

Wine and spirits market continues to gain market share from beer, its share will be 17% and 34% of the US alcoholic beverage market by 2019

Average operating margin is 20% in the craft beersegment

In considering an acquisition, profitability & investment required are the most important factors, followed by the market competition and the growth rate

Based on our analysis, we can achieve 5% revenue growth and 10% total cost reduction through this acquisition (based on 2014 financials)

CompetitionInvestment

Needed MarginMarket Growth

Wine Medium High High Medium

Spirits Medium Medium Medium ?

Beer (Overall)

High Medium Low ?

>>Super Premium

Medium Medium Medium ?

>>Craft Low Medium High ?

>>Import Medium Medium Medium ?

>>Premium High Medium Low ?

>>Sub Premium

High Medium Low ?

Target Acq. PriceTarget's Segment

Target Rev. ($M)

Target EBITDA ($M)

Transac. Rev Multiple

Transac. EBITDA Multiple

On the Rocks 1,000 Margarita 641 103 1.6x 9.8x

Craftbev Co 990 Craft beer 510 80 1.9x 12.3x

Park Ave. 112 Beer 17 4 6.5x 25.9x

Mark North 1,380 Beer 836 159 1.7x 8.7x

Epic MJ 270 Craft beer 156 26 1.7x 10.4x

Won Winery 130 Wine 96 13 1.4x 10.1x

Jane Co. 280 Spirits 175 34 1.6x 8.1x

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Data sheet 3BeerCo company information

Financial Information Breakdown*

Product Line Information YoY Revenue Growth Breakdown

All numbers in millions of dollars (USD)

Revenue COGS SG&A Cost of Capital

2013 2014 2013 2014 2013 2014 2013 2014

Lager Product Line 625 719 400 460 125 150 3.60% 4.50%

Ale Product Line 208 228 113 124 30 30 4.00% 4.80%

Stout Product Line 150 158 81 85 23 21 4.00% 4.90%

Overall 983 1105 594 669 178 201 3.90% 4.70%

Product Line

Packaging Medium

Product Life

Number of Products

Price Point

LagerAluminum Cans

110 days 7 varieties Medium

AleGlass Bottles

90 days 3 varieties High

StoutGlass Bottles

90 days 5 varieties High

* When using this information, assume all costs are variable

2013 2014 2015 2016 2017

Stout

Ale

Lager

5%5%

25%

7%5%

23%

8%10%

22%

10%

15%

20%

5%

10%

15%

Data sheet 4BeerCo company information

Financial Information Breakdown*

Unit InformationAle Supply Base Data

All numbers in millions of dollars (USD)

Financial Information

Lager Ale Stout

2013 2014 2015 2013 2014 2015 2013 2014 2015

Revenue 625 719 863 208 228 ? 150 158 173

COGS 400 460 552 113 124 ? 81 85 94

SG&A 125 150 195 30 30 33 23 21 23

Operating Income 100 109 116 65 75 ? 46 51 57

Operating Margin % 16% 15% 13% 31% 33% ? 31% 32% 33%

Ale Product Line

Financial Information 2014

Number of units 1000

Price/unit $0.91

COGS/unit $0.50

SGA/unit $0.12

Build Own Facility

Continue to Buy from Supplier

Number of cans in 2014 is 500 million, increasing by 200 million annually.

Variable costs will be $.05 per can.

Initial CapEx of $100 million, with additional $25 million CapEx for each 125 million volume milestone over the initial 500M (that is, $25 million at 625 million and an additional $25 million at 750 million)

Number of cans in 2014 was 500 million, increasing by 200 million annually.

BeerCo pays $0.15 per can to its existing supplier.

* When using this information, assume all costs are variable

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