Contents
Page
Question One
Question Two
Calaveras Vineyards Report
Contents
1. Executive Summary
2. Background
3. Qualitative Analysis
4. Quantitative Analysis
5. Appendices
6. Conclusions and Recommendations
3
3
4
5
6
7
9
13
17
20
Question One
1.1 E
1.2 C
1.3 D
1.4 D
1.5 E
1.6 B
1.7 B
1.8 B
1.9 D
1.10 A
1.11 D
1.12 C
1.13 C
1.14 E
1.15 D
1.16 C
1.17 A
1.18 A
1.19 B
1.20 C
Question Two
Calaveras Vineyards Report (below)
Calaveras Vineyards
Report
Contents
Page
1. 1. Executive Summary
2. 2. Background
3. 3. Qualitative Analysis
4. 4. Quantitative Analysis
5. 5. Appendices
6. 6. Conclusions and Recommendations
6
7
9
13
17
20
1 Executive Summary
This report investigates whether NationsBank should approve the loan application of
$4.5 million to purchase Calaveras Vineyards. The method of investigation entailed
reviewing the historical data provided. A Discounted Cash Flow (DCF) was
formulated, NPV and Payback was also calculated.
The three main factors considered in the estimates were case sales trends and
demand, inflation and real price increases reflect Calaveras strengthening their
brand recognition. The first assumption is that the prices will increase 2% before
inflation. The production per ton of grapes and yield per acre increased in 1992 due
to the new market strategies. Sales are expected to grow 13% in 1995 after which an
estimate of 12%, 6%, and 8% for 1996, 1997 and 1998 respectively, show growth
while recognising a shift toward white wines – translating into an annual projection of
10% per for the forecast period – Appendix 5. The tax rate of 37% and inflation rate
of 2% is taken into account in the forecast. Therefore the prices per case for each
category has 2% price growth as well as 2% inflation rate, the total of 4% is reflected
in the forecasted income statement. The key drivers of this model are Gross margin
on each of the 5 main product groups, tax rate, inflation rate, real-price growth level,
interest rate, Accounts Receivable to Sales ratio.
NPV and Payback was favourable as a positive NPV indicates that the investment is
a good one. Payback was calculated to be 1.07 years and this means that the bank
would easily make their money back. The IRR was approximately 93%. This deal
should be approved.
The final recommendation supports the application. Also contained in the final
recommendations, the reader will be able to observe a wider, marketing – customer
centric approach to business practice and marketing efforts to control costs and
encourage business growth.
2 Background
An internal assessment of Calaveras Vineyards indicates a relatively stable going
concern, which is stable in the alcoholic beverage industry as a wine producer and
supplier. The company was originally started by Estaban Calaveras in 1883 and has
since expanded its supply market from the focus church wine consumption to
retailing, wholesaling and specialised customer supplies (Gigantic Airlines). It offers
a full range of wines by product range and price positioning, including Chardonnay,
Sauvignon Blanc and Cabernet Sauvignon, and some lesser quality products which
provide reach.
The recent management buyout proposal, considered in this document, indicates
the confidence of the management team, who know and understand the market
particular to both the company and its specific trading activities. The buyout team
consists of Dr Lynn Martinez, who has been working in the company since 1987 and
aims to own 85% of the business. Newsome, the current operations manager will
buy the remaining 15%. Martinez and Newsome intend to recruit the marketing
service to Winston-Fendall (who has recently lost their flag-ship account) as their
marketer. Besides being a strong marketer, Winston-Fendall will also offer collection
service for payables, offering to pay a receivable unpaid after 90 days – providing a
strong mechanism to secure Calaveras cash-flow position, Calaveras Vineyards
operates off 220 acres of land, sourcing the majority of its grapes off 175 acres of
this land. The remaining land is used for operational plants and processing functions
of the business, as well as a winery for public visits, where they also sell products
direct to the public at maximum margins. Additional incomes stem from direct supply
accounts they serve, representing yet again greater margin as compared to their
wholesale channels. Gigantic Airlines have guaranteed their demand at a minimum
of 16500 cases for the next periods, while the hotel channel has grown considerably
over the past three years to 2090 cases, expected to stabilise at 4000 cases for the
next five years. Essentially, sales are projected to grow at an average of 10%
annually over the next 5 years.
The external forces affecting this market, and therefore ultimately Calaveras
Vineyards is affected by its competitors from local and international brands. The
American population is said to have taken kindly to the general opinion that drinking
red wine is good for people’s health. This market is therefore expected to grow at a
higher rate than the expected permissible price increases with-in this market. Market
share is therefore imperative, as profits will be affected by a reduction in share
because prices do not cater adequately for inflationary increases that they would be
subjected to. Wine sales are expected to maintain its volume growth of 7.4% v/s
other spirits averaging at 2.2% annually.
3 Qualitative analysis
Calaveras Vineyards is a much smaller entity as compared to its competitors, who
celebrate much higher revenues while having brands which are comparable with
Calaveras Vineyards products, yet trade more volumes than Calaveras Vineyards
does. It is understood though, that with such competition, that Calaveras Vineyards
would have to expand its share by volumes by ensuring market positioning in the
hearts of consumers. Building brands and demand will challenge their current supply
chain of grapes; the company already sources approximately 50% of their raw
products from long-term contracts. These contracts are fixed-term and would require
urgent security to ensure supplies. A previous shortage, due to crop infestation
taught the lessons of how significantly carefully the team would need to manage their
risk mitigation.
A further consideration of the external market factors recognises that wine sales at
supermarkets have shown a significant increase as compared to beer. This presents
an opportunity for Calaveras Vineyards, while it will also strain relationships if the
expansion excluded Winston-Fendall. Though internal by contract, we urge
consideration of the exposure to wholesale commitments because of 50 percent of
their total volume is handled by 2 of their 9 distributors. Calaveras Vineyards is
therefore to be considered as either exposed or reliant on dedicated partners. This
security requires evaluation, yet at this stage appears stable.
Expansion scope in the retail stores is consider highly competitive, and strongly
brand centric. Though the Calaveras Vineyards brand positioning is stable and
secure, owing to the range of products which have been carefully crafted, with peer
pressure on market share playing a vital role in expanding the Calaveras Vineyards
share. This raw material demand therefore remains increasingly strained if
Calaveras Vineyards should succeed in increased supply to demand, but more
importantly, to increasing sales relative to maintaining strategic advantages in the
niche’ (by volumes) business.
Strengths
1. Small company – able to be
dynamic and flexible.
2. Strong brand position.
3. Stable high volume customer
base.
4. Experienced owners, who relate
passionately to their company.
5. Entrepreneurial intentions of new
owners.
Weaknesses
1. Size and security may limit reach
and sales volumes – thereby
revenues.
2. Supply agreements with future
competitive suppliers to supply
grapes.
Opportunities
1. Increase high margin sales
channels without reducing other
volumes.
2. Brand position stable: marketing
activities required to build demand
and testing of new sales markets.
3. International sales will provide the
greatest range of expansion
potential.
4. Cash-flow security in receivables
collection by marketing company.
5. Loan facility will support inventory
volumes, to increase stock holding
and supply rates, top major
accounts who buy greater
volumes.
6. Expansion along airlines routes.
Threats
1. Cash flow limitations may come
into the spot-light as the company
pursues the proposed 2.5 million
dollar revolving loan, to fund
inventory and other expenses.
2. Supply of grapes for making
wines.
Table 1: SWOT Analysis
Exploiting Strategic Opportunities and mitigating Threats
The loans applied for by the future owners’ demands focussing on improved cash
flows in the business. This threat governs their future ability to pay debt while also
highlights the need for them to increase brand positioning in a growing market
segment – wines. This area of the business will demand greater amounts of
contractual securities and possible management controls over the supply network –
potentially introducing leasing options of the land to ensure securities.
This approach will serve well to defend against sales volumes growth being limited
by the supply chain and ultimately may become a source of expertise development
into improved farming methods to increase yield and quality. The options of leasing
may even work well if employees are better incentivised to work toward achieving
these standards and objectives.
Appraisal of functional competencies of strengths and weaknesses
Being a relatively smaller entity in the market can be a position of strength, offering
the flexibility and specialisation alternatives giants may be slower to move on. As
these will be owner run businesses, they are more likely to be more entrepreneurial
and dynamic in handling marketing efforts on a one-on-one basis with potential
buyers in retail stores and hotels. The niche profile they may retain (a volume-based
argument) could allow them personalisation opportunities which larger entities may
be slower to move on.
Personalisation of particular products may be limited, while Calaveras Vineyards
also needs to ensure that such actions do not dilute the brand. The stable high
volume customer base will ensure future sales volumes and direct marketing
methods can be tailored made to meet these sectors head-on to increase volumes. It
may be an ideal breeding ground for promoting the health benefits of wines in adults
while promoting a youthful adult lifestyle which is supported by natures own anti-
toxins to stresses and the challenge of aging and chronic health risks.
Brand position will therefore need to be moved up a scale, to ensure long-term retail
price levels at higher margins and volumes. Calaveras Vineyards future owners are
experienced players who know there business. They are bound to have the
networking savvy which will be capitalised on in future branding and market
expansion efforts. International marketing efforts may also be able to capitalise on
the Californian wines acceptance levels in global markets. Recognising the scale of
supply, makes it prudent that such activities should focus yet again on niche
positioning at upscale hotels which serve their current airline destinations and
partners.
4 Quantitative Analysis
Quantitative analyses focuses on the formulation of financial information in an effort
to evaluate the business and pending deal in view of the previous financial data, to
determine its applicability, evaluate proposed growth aspects in relation to forecasts
and projections as compared to trends and norms of the industry. The objective is to
make sense of these facts from the perspective of the risk to the funders and to
determine whether the new owners would be able to meet the obligations of this
loan. This section looks first at current information to determine the going concerns
liquidity, then forecasts in relation to benchmarked capacities.
The weight of products and the comparable companies’ unlevelled beta was used to
calculate the cost of capital. With these assumptions, WACC was calculated to be
16.17%. Free cash flows (FCF) were determined while discounting FCF at a WACC
(16.17%), the value of Calaveras Vineyards was calculated to be $3 647 000.
Risk mitigation considering bankruptcy:
Bankruptcy in business, due to changes in markets or ineffective marketing methods,
is any entrepreneur or investors reality. Even destroyed crops are a reality in this
business. Therefore assessing this undesired ultimate exit is prudent. In this stage of
the analysis, we consider valuing the operation to determine the fair-market value of
Calaveras Vineyards and to mitigate risk in a case of forced liquidation.
There are two types of liquidation values, depending on the time available for the
liquidation process, Orderly liquidation value and Distress liquidation value.
Orderly liquidation value - assumes that the enterprise can afford to sell its assets to
the highest bidder. It assumes an orderly sale process to sell each asset in its
appropriate season and through channels of sale and distribution that fetch the
highest price reasonably available – (Orderly liquidation value = Net working capital
+ fixed assets – long-term debt).
Ratios Meaning
Comparison to Industry norm
Solvency
Quick ratio (x) CA-Inventory / CL Firms ability to pay CL without relying on the sale of it inventories
190 649.00
0.51
Falls into the category higher than the median but lower than the Upper Quartile
Current ratio (x) CA / CL Firms’ ability to pay CL using assets that can be converted into cash in the near term.
2.00
Fall into the category higher than the lower quartile but lower than the median
CL to net worth (%)
29.20
Lower than the median but higher than the upper quartile
Efficiency
Collection period (days)
Accounts receivable / (Total sales / 365)
Length of time to receive money from debtors after the sale is done
99189/(752554/365)
Lower is better. Higher than upper quartile but lower than median
48.11 days Sales to inventory (x)
1.34
Lower than median but higher than lower quartile
Asset to Sales (%) 171.17
Between lower quartile and median
Acc payable to Sales (%)
12.67
Higher than median but lower than lower quartile
Table 2: Liquidity Ratios: 1993 evaluates going concern as an investment
As observed in table 2 above, the liquidity of the going concern is on par or better
than norms. Indicating financial confidence is justified. It does matter to consider the
impact of the proposed funding plan to determine the liquidity of the future operation.
Appendix 2 - NPV: The Net Present value analysis indicates positive results which
support the qualitative assessment into the viability of this venture and safety
margins to the funders. This result is pleasing and assertive.
Distress liquidation value - this is an emergency price. This assumes that the
company must sell all its assets at or near the same time, to offer the assets is a
dealer who specialises in the liquidation of the entire assets of a company
We know Calaveras can sell Accounts Receivable at 85% of the face value and
Inventory 75% of book value and Equipment 40% of book value in a forced
liquidation.
Table 2: Reduction in future collections periods require: administrative and fiscal
discipline to ensure cash flow benefits and loan servicing.
Using the discounted cash flows, P/E ratios and the liquidation method, $3.66 million
is a good price. What is even more important is that cash flows generated by the
forecasted revenues supports fully paying off the term loan by paying off principal
payment of 60,000 per year for the next five years while at the end of the 5th year
revolving line credit could be reduced to 0.4 million and Debt Ratio was reduced from
75% in 1994 to 44% in 1998. This allows the Calaveras Vineyards to assume more
funding for expansion and/or reduce the interest expenses while increasing the
return on investment.
Est
ates
Sel
ect
Vin
eyar
ds
Cal
iforn
ia
Gen
eric
Spe
cial
Acc
ount
s
Win
ery
-
200,000
400,000
600,000
800,000
1,000,000
1,200,000
1,400,000
1,600,000
1,800,000
2,000,000
1994 1995 1996 1997 1998
Projected revenue from wine types per sales channel / annum
Figure 1: Projected revenue from wine types per sales channel / annum
Figure 1 above, highlights the dependence this business has on revenue fulfilment in
estates and “select vineyards” product-lines. The sourcing of grapes from selected
vineyards which stands out in relation to the sales and margin gains from this
product line. It implies a strong dependence on the acclaimed product and
encourages the new owners to re-visit the supply chain supporting these lines
continued success as a contributor to the bottom line and ultimate survival of the
business. Certainly, it therefore also remains comforting that continued security and
market share will contribute tremendous value to long-term brand building among
enthusiasts of this brand from Calaveras Vineyards.
Needless to say, are the gains from “estate wines” and “special accounts”, which
have a certain future for volume creation and facility utilisation and deserves special
attention as their combined value surpasses the “select vineyards” range volumes.
5 Appendices
Appendix 1
Appendix 2
Appendix 3
6 Conclusions and recommendations
Observations of the revenue streams in the sales per channel does not reflect the
turn-over projected by the future owners, this is a concern and requires discussions.
Yet leading the discussion from the information provided, we strive to recommend
that the transaction has reached its ‘go’ point and deserve consideration.
The 110 000 maximum capacity may support the projections, yet in the nature of
such useful land, it could be considered that the lost space used for offices and other
winery function, may well be considered to be relocated to increase capacity. The
objective should be minimising other uses for this land – supports concept of investor
confidence.
Liquidity of the going concern is reassuring. The future ratios may not be as
impressive and may demand more prudence on the part of the funders, to increase
the returns and offset future risks in this profile. Security from Winston-Fendall is
reassuring when considering the new owners capacity to repay debt. This author
suggest that controlling the debt ratios may assert the relevant controls on the
owners management functions to improve collections and cash flows, reduce
expenses and capitalisation to avoid increased exposure and delays in repayments.
Fiscal discipline is called for.
As may not be common to the entrepreneurs spirit, the funder should curtail
overzealous marketing activities, thereby setting relevant, negotiated, limits on this
expenditure and drive home a greater willingness to use modern direct marketing
methods which consist of networking with existing suppliers and consumer groups
which may yield suitable sales volumes at lower costs – the effect of targeted
marketing.
As is also common, focussing still on expense management, it is encouraged yet
again that the new owners consider a customer centricity program to improve the
over-production process, image building culture and marketing theme which is more
cost effective and builds long-term sustainability and trust. The product range is
diverse, and this is acknowledged, yet customer centricity at all levels of the value
chain produce competitive advantages.
These recommendations are seen from a financial prudence perspective as well as
the business growth perspective, not commonly considered relevant to financial
analysis yet ultimately essential to ensuring success in business.
Top Related