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Acquisitions
PART A: QUAKER OATS’ ACQUISITION OF SNAPPLE
PART C: CONCLUSION
KEY LEARNINGS
ANNEXURES
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PART A
QUAKER OATS’ ACQUISITION OF SNAPPLE
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supermarkets and convenience stores. Snapple products were sold largely through independent
retailers, vending locations, and restaurants. Quaker Oats expected to utilize each of these 3
distribution channels to bolster the sale of the other product.
¾ Learning curve effects: With the sales of Gatorade rising from $122 million in 1984 to
about $1.20 billion in 1994 (22% compound annual growth rate), Quaker Oats felt that it could
use economies of scope from its Gatorade experience to boost sales for Snapple.
¾ Common activities: The Quaker Oat management believed that there were significant
synergies to be achieved in common areas such as R&D, manufacturing and marketing.
¾ Geographic expansion: Snapple generated only 1% of its sales outside North America,
while over 31% of Quaker Oats’ sales revenue came from its foreign operations. This provided a
strong platform for Quaker Oats to offer Snapple products to a wider customer base.
SOURCE OF
EXPECTED SYNERGY DESCRIPTION
SYNERGY
International launch of Snapple would
Revenue
18% sales growth generate significant revenues (0% for
improvement
Snapple currently vs 31% for Quaker).
As manufacturing facilities and
Operating margin distribution networks are merged, costs
Higher EBITDA Margin
improvement would reduce and profit margins would
increase
DEAL VALUATION
Quaker paid $1.7 billion to acquire Snapple in December 2004. Snapple, at that point was trading
at $14 per share. Its market capitalization was $1.7024 billion. For a 96.50% shareholding, the
Quaker Oats paid $1.642 billion. The effective premium to market valuation was 3.00%.
However, on calculation of intrinsic value, we find that the market had overvalued the stock.
Further, the market was in a correction phase. The price of Snapple stock oscillated from $9.38
in June 1993 to $32.25 in March 1994 to $13 in Sept 1994.This volatility reflected the inherent
changes in the industry and consequently the market reaction to these fundamental changes;
namely increased competition and potential slowdown in the revenue growth rate and margins
and therefore the outlook on Snapple.
Our basic assumption for valuation is that
since the industry is in a highly competitive
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phase, the Free Cash Flow for the next year
would decrease and then get into a stable
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growth rate of 15% for the next five years.
The terminal value is calculated at 5.00%
growth rate. A sensitivity analysis on the
growth rate predicts a valuation in the range of Source: www.optimumcapital.com
$1.186 billion $1,418 billion. Clearly, the
future decline in growth of the company was not yet completely factored in the market value
since the market was in the correction phase. As per our valuation, Quaker Oats expected
operational synergy of greater than $600 million in the optimistic scenario and greater than $300
million in the alternative scenario from the acquisition of Snapple. See Annexure A2 for the
valuation model.
3. Management hubris
As per a study conducted by Mathew Hayward and Don Hambrick of Columbia University,
managerial hubris was a major cause of the high premiums that was paid for the acquisition.
Under the leadership of CEO William Smithburg, Quaker Oats made a successful buyout and
integration of Gatorade in 1983. Smithburg was convinced that he could recreate the magic with
Snapple as well. Due to this confidence, he disregarded many of the above-mentioned
dissimilarities between the products and acquired Snapple at a price which, as per Wall Street,
was at least $1 billion above the intrinsic value.
PART B
TRIARC’S ACQUISITION OF SNAPPLE
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ABOUT TRIARC COMPANIES INC
Triarc was a consumer products company with operations in beverage and restaurant businesses.
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Triarc was formed when the New York-based investment partnership led by Nelson Peltz and
Peter May acquired DWG Corp which comprised a jumbled mass of unrelated businesses.
Triarc’s new management brought in strategic focus and created a much narrower operating
scope. By 1997, Triarc operated well known beverage brands such as Mistic and Royal Crown
Cola, and the fast food restaurant chain, Arby's. The company was acclaimed for its relations
with distributors, its flair for marketing, and its shrewdness in developing new products for an
established brand.
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Source of Synergy Expected synergy Description
Mistic sales had seen improvement 7
of 12% in past 2 years. Also,
Revenue improvement 12% sales growth
beverage industry was expected to
grow at an average of 15%.
Triarc expected to extend its
Operating margin improvement 10% EBITDA margin improved margins to the entire
beverage line
DEAL VALUATION
By 1997, Quaker had racked up roughly another estimated $90 million in Snapple losses, further
cutting the unit's value. Snapple sold out to Triarc for a stunningly low price of $300 million.
The deal value was just over half of Quaker’s Snapple unit's $550 million in sales. Most industry
experts considered the final deal value a fire-sale price and not to be based on actual valuation.
Triarc's offer represented not only the highest bid to buy Snapple outright but one that brought
with it substantial cash and no antitrust problems. Facing stiff shareholder pressure to put the
debacle behind them, Quaker went with the sure thing. Triarc had plans to issue an IPO for its
beverages division before the acquisition of Snapple. Hence it would be reasonable to assume
that the investment partnership that owned Triarc was interested in the exit value of the business
at the end of 3-4 years, rather than in its value as a going concern. Thus the expected returns
from the deal to Triarc is done using EV/EBITDA multiples. See ANNEXTURE B2, B3
Value of control: To determine the terminal value of Snapple Cost of equity IRR
business at the end of 2000, revenue and cost synergies are 22.13% 37.08%
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$75.0 million of cash and cash equivalents on hand and contributed by Triarc to Triarc Beverage
Holdings Corp. ("TBHC"), a wholly-owned subsidiary of the Company and the parent of 8
Snapple and Mistic, and (ii) $250.0 million of borrowings by Snapple on May 22, 1997 under
a $380.0 million credit agreement, as amended (the "Credit Agreement"), entered into by
Snapple, Mistic and TBHC (collectively, the "Borrowers").
Triarc’s decision to make an all-cash purchase offer for full equity holding of Snapple gave it a
favorable position since Quaker was looking for a quick exit. The all-cash offer also enabled
Quaker to register benefits from capital losses.
¾ DEAL RISKS
Financial risks: The financial valuation assumes YoY revenue growth of 12% and EBITDA
margin of 10%. Due to market uncertainties or other unexpected events, actual values may be
different. Sensitivity analysis is performed on these assumptions to assess their robustness.
Sensitivity is assessed for revenue growth projections and EBITDA margins to see its impact on
the expected IRR. See ANNEXTURE B5
Beverage industry overall growth rate for the period 1997-2005 was expected to be 18%. Also
Triarc had EBITDA margin of 40% for its Mistic line of beverages. From the analysis, it is clear
that even with very conservative assumptions, the deal for Snapple at $300 million is highly
attractive for Triarc.
Integration risks: Operational synergies originate by integrating sources of value of the acquirer
and the target. The success of an acquisition would ultimately depend upon the degree of
integration achieved between key sources of value. The complexity involved in integrating these
sources of value is analyzed in ANNEXTURE B6
Market risks: The competition in the non carbonated segment was consolidating with the
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leading players focusing on groundbreaking innovation to meet consumer demands for hydration
and variation in taste. Snapple had a competitive edge due to its substantial market share. 9
In June 2000, Triarc Management announced an initial public offering (“IPO”) of the beverage
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group. When they were contemplating this decision Cadbury Schweppes plc offered to buy the
Snapple Beverage Group. As Cadbury’s purchase price included a significant premium over the
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value that they had expected to achieve through the IPO, they accepted Cadbury’s offer and
completed the sale of the Snapple Beverage Group in October 2000.
The deal was successfully completed at a price of 1,725,779.58 Euros. This definitely is a very
successful deal as the turnaround was executed out in less than 3 years time and especially of a
company which was in distress and bought at $300 million. Minus all the debt a pre-tax gain in
excess of $ 700 million was recorded.
PART C
TRIARC-SNAPPLE
KEY LEARNINGS
The deals studied in this report provide an excellent contrast to understanding the strategic and
financial aspects of implementing M&As. The best practices to be followed in various stages of
the deal can be summarized as follows:
Pre-merger
Strategic due diligence: This involves clear understanding of the sources of value that contribute
to operating synergies of the combined firm. The complexity involved in integrating the sources
of value should be carefully analyzed and market uncertainties that may hamper key synergy
expectations should be factored in.
Financial due diligence: This involves clear understanding of the sources of financial synergies
like debt capacity, tax benefits etc. The intrinsic value of the firm and the value from synergies
should be carefully modeled and the premium offered should not exceed the synergy value.
Post-merger
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Integration Strategy: The integration strategy should determine the level of integration for assets,
processes and human resources of the acquirer and target firms. The strategy should be designed
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to extract synergies while preserving the key sources of values of the combining firms.
ANNEXURE A1: ABOUT THE COMPANIES
Quaker Oats actively managed its acquisitions: it sold its stake in its subsidiaries involved in
businesses such as cookies, restaurants, toys, chemicals and the specialty retailing space. The
company exited its investments at high valuations. By 1987, Quaker Oats’ return on shareholder
equity matched Kellogg's. In 1983, Quaker Oats acquired Stokely-Van Camp, the maker of
Gatorade sports drink. The company concentrated on three major divisions: American and
Canadian grocery products; international grocery products; and Fisher-Price toys. The company
hived off Fisher-Price Toys in 1991. Sales that year reached a record $5.50 billion. The
company’s international sales continued to be a significant percentage of the company's total.
In 1994, Quaker Oats was a strong player in the global food industry. Gatorade had been a star
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performer for the company. The company saw a unique opportunity to expand its presence into
the non-alcoholic beverages by acquiring the Snapple Beverage Corporation. The acquisition
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would launch the company in the league of the largest manufacturers of non-alcoholic beverages
in North America.
In 1982, the company forayed into selling natural sodas. By 1986, the company had started
distributing juices and health drinks through health stores. In 1987, the company introduced
Snapple iced tea, manufactured using a unique process, which became an instant success. In
1991, Snapple's revenues more than doubled to $95 million, with 55 percent of its sales coming
from the iced tea segment. The company had attained a solid second place in this market with
19.30% of sales, closing behind long-time market leader Lipton, with 37.20% of the market.
In January 1992, the investment banking firm, the Thomas H. Lee Company invested in Snapple.
With this deal, Snapple gained the resources to pay for nationwide distribution of its products.
Snapple expanded its distribution to every major city in North America. It also launched an
initiative to sell its products in foreign markets. By the fall of 1992, Snapple pulled ahead of
Nestea to become the leader in the ready-to-drink iced tea market.
Snapple announced its IPO in December 1992. On December 15, the stock was offered at $20 a
share. The four million shares were quickly bid for, and the stock price quickly rose to $33. In
1993, sales were up 119% from the previous year - the third year in a row in which sales of
Snapple drinks had more than doubled. By 1994, sales had begun in Canada, Mexico, the United
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Kingdom, Greece, Norway and Hong Kong. Snapple was considering investing in Australia,
Singapore and the Philippines for expansion. At this point in time, the stock of the company was 13
trading at around $30 per share, nearly half of its price of about a year ago, and was considered
an attractive takeover target by the industry.
Calculation of WACC
Value per share based on DCF
Projection 14.96
Cost of Debt 0.05
After Tax cost of Debt 0.0325
Cost of Equity CAPM 0.1389
Rf 0.05
Market Premium 0.07
Be 1.27
Value of Debt on the books 69.5
Market Value Equity @ USD 14
per share 1702.4
Enterprise Value 1771.9
WACC 0.135
Beta Equity taken at 1.27 as the stock was very volatile compared to
the market
Valuation of Snapple in
December 2004
Growth Phase for 05 years
at 20%
Pre Acquisition Post Acquisition Analysis
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
$95.0 $231.9 $516. $697. $837. $1,004. $1,205. $1,446. $1,735. $2,083.
Net Sales 0 0 00 60 12 54 45 54 85 02 TV
244. 222 135.
% Increase 11 .51 19
Cost of Goods $502. $1,041. $1,249.
Sold 58.9 143.2 298.7 402.9 27 $602.73 $723.27 $867.93 51 81
$334.
% of Sales 62.00 61.75 57.89 57.76 85 $401.82 $482.18 $578.62 $694.34 $833.21
Sell, Gen & $292.
Admin 20.4 66.3 115.2 168.5 99 $351.59 $421.91 $506.29 $607.55 $729.06
SGA % Of Sales 21.47 28.59 22.33 24.15
Operating $41.8
Income 15.8 22.4 102.1 126.2 6 $50.23 $60.27 $72.33 $86.79 $104.15
% of Sales 16.63 9.66 19.79 18.09
141.77 455.8 123.6
% Increase 2 04 04
EBIT(1-Tax Rate) $126. $41.8
1
61.26 20 6 $50.23 $60.27 $72.33 $86.79 $104.15
Add Depreciation 0.2 6.9 0.5
Change in WC -32.2
Capex 0 10
100.7 75.56 108.812 130.574 156.689 188.027 2322.
FCF 83.96 52 4 90.6768 16 59 51 41 69
1418. 66.57 70.388 74.420 78.681 83.187 87.952 957.2
PV of FCF 2
45 62 946 031 971 987 057 39
11.66
Value Per Share 49
Valuation of Snapple in
December 2004
Sensitivity
Analysis
Growth Phase for 05 years
at 15%
Pre Acquisition Post Acquisition Analysis
1 2 3 4 5 6 7
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
$95.0 $231.9 $516. $697. $837. $1,004. $1,205. $1,446. $1,735. $2,083.
Net Sales 0 0 00 60 12 54 45 54 85 02 TV
244. 222 135.
% Increase 11 .51 19
Cost of Goods $502. $602.7 $723.2 $867.9 $1,041. $1,249.
Sold 58.9 143.2 298.7 402.9 27 3 7 3 51 81
$334. $401.8 $482.1 $578.6
% of Sales 62.00 61.75 57.89 57.76 85 2 8 2 $694.34 $833.21
Sell, Gen & $292. $351.5 $421.9 $506.2
Admin 20.4 66.3 115.2 168.5 99 9 1 9 $607.55 $729.06
SGA % Of Sales 21.47 28.59 22.33 24.15
$41.8
Operating Income 15.8 22.4 102.1 126.2 6 $50.23 $60.27 $72.33 $86.79 $104.15
% of Sales 16.63 9.66 19.79 18.09
141.77 455.8 123.6
% Increase 2 04 04
EBIT(1-Tax Rate) $126. $41.8
1
61.26 20 6 $50.23 $60.27 $72.33 $86.79 $104.15
Add Depreciation 0.2 6.9 0.5
Change in WC -32.2
Capex 0 10
100.7 75.56 86.898 99.933 114.92 132.161 151.986 1877.
FCF 83.96 52 4 6 39 34 91 19 48
1186. 773.7
PV of FCF 2
65 66.58 67.46 68.35 69.25 70.17 71.09 6
9.758
Value Per Share 59
ANNEXURE B1: OPERATING SYNERGIES FROM TRIARC – SNAPPLE MERGER
EV/EBITDA 10
1
Source: www.damodaran.com
2
D=Long term debt for Triarc, E=Triarc share price after announcement*No.of shares outstanding
3
Assume βd=0 for Triarc, since its debt was not traded and it had identifiable assets more than its outstanding debt
ANNEXURE B4: SENSITIVITY ANALYSIS ON REVENUE GROWTH ASSUMPTIONS AND EBITDA MARGINS
ANNEXURE B5: INTEGRATION COMPLEXITIES OF TRIARC – SNAPPLE MERGER
Complexity of
Synergy Description Sources of synergy
integration
References:
1. http://www.brandchannel.com/features_profile.asp?pr_id=107
2. Paper no. 1-0041 – Tuck School of Business
3. http://www.mindfully.org/Plastic/Recycling/Noncarbonated-Beverage-Containers1feb07.htm
4. damodaran.com
5. Triarc Annual Reports 97, 98, 99, 00
6. "How Snapple Got its Juice Back," Harvard Business Review, January 2002, Vol. 80, No. 1