• Author / Uploaded
• permafrostXx

• Categories
• Oferta pública inicial
• Valoración (Finanzas)
• Acciones
• Ratio precio-beneficio
• Cervecería

Citation preview

BOSTON BEER COMPANY Initial Public Offering

Company Background • The Boston Beer Company: – largest company in the craft beer segment in 1994 – shares astonishing growth with others in the specialty beer industry in the early 90s – currently in the process of going public, following its competitors, Redhook Brewing and Pete‟s Brewing, in an Initial Public Offering (IPO) • The case study is set in 1995, all ‘current’ data would be as of Dec 1995

Business Models • Main Competitors – Redhook Brewing and Pete‟s Brewing • Regional Brewers – Redhook – Owned and operated production facilities – Large capital investment – Little expenditure on sales and marketing

• Contract Brewers – Boston Beer and Pete’s – – – – –

Outsourced the brewing of their premium beers to contractors Intensive sales and marketing Lower capital and overhead costs Lower transportation costs Greater manufacturing flexibility

Operating Strategies • Brewing Strategy – Boston Beer is exclusively a contract brewer – Redhook possesses and control its own brewery – Pete‟s (in a newly negotiated agreement with Stroh‟s Brewery) produces its products at both company-owned and third party breweries.

• Production Strategy – Boston Beer focuses on producing the highest quality beer products in its industry – Select rare breeds of ingredients in Europe to differentiate from mass beer producers. – Use of product freshness stamps

Operating Strategies • Product and Distribution Strategy – Intensive advertising to raise brand recognition – “Educational marketing” – to teach distributors and retailers about the virtues and characteristics of quality beer – Redhook has a larger distribution networks which involved a long-term distribution arrangement with Anheuser-Busch – Diversified and innovative product line - Boston Beers has a variety of 14 products while Pete‟s and Redhook‟s only have 6 varieties.

Ratio Analysis Redhook Year ended 1993

1994

9mths ending 1995

Profit before taxes/NetSales(%)

27.8

22.2

Net Sales/Assets

0.8

Assets/Equity Return on Equity (pre-tax%)

Pete’s Brewing Year ended 1993

1994

9mths ending 1995

18.0

1.1

1.7

0.6

0.3

5.7

1.5

1.3

1.2

32.0

16.0

Gross Profit Margin (GP/Net Sales %) SGA/Net sales(%)

46.3

Boston Beer Year ended 1993

1994

9mths ending 1995

3.5

6.3

7.9

7.6

6.8

4.4

3.2

3.6

3.3

6.7

6.2

6.2

2.7

4.8

2.5

6.4

41.1

70.8

97.0

55.3

137.7

62.4

41.8

34.4

47.0

45.0

49.7

54.0

54.0

46.2

17.4

18.8

17.6

45.5

43.2

42.8

47.6

46.2

44.8

Operating Profit/Net Sales (%) Interest Exp/Net Sales (%) Aggregate Size Measures Net Sales (000’s)

28.9

23.1

16.8

1.4

2.0

3.9

6.3

7.7

6.8

1.4

0.9

N/A

0.3

0.3

0.4

0.0

0.2

0.2

11484

14929

17929

12236

30837

41988

77151

114833

108905

Total Assets (000’s) Barrels Sold(000‟s) Growth Rate (of Barrels) Total Shareholders

20044

34689

84553

3118

5918

12983

24054

31776

31846

74

94

111

69

180

246

475

714

688

48%

27%

138%

161%

62%

50%

15000

26059

400

1040

8854

6600

Year Return on Equity

Margins

74372

1987

13229

Size Measures Pete’s Brewing

Redhook Year ended 1993 11484

1994 14929

9mths ending 1995 17929

20044

34689

84553

3118

5918

12983

24054

31776

31846

Barrels Sold(000‟s)

74

94

111

69

180

246

475

714

688

Growth Rate (of Barrels)

48%

27%

138%

161%

62%

50%

Total Shareholders Equity(000‟s )

15000

26059

400

1040

8854

6600

Year Net Sales (000’s) Total Assets (000’s)

74372

Year ended 1993 12236

Boston Beer Year ended

1994 30837

9mths ending 1995 41988

1993 77151

1994 114833

9mths ending 1995 108905

1987

13229

• Boston Beer enjoys impressive sales performance, ranking it the leading craft brewer in the industry • Redhook appears to stagnate in sales growth • Boston Beer sold almost 4 times the volume of Pete‟s and more than 6 times the volume of Redhook

Profitability Pete’s Brewing

Redhook

Year ended

Year ended 1993

Boston Beer

Year

1993

1994

9mths ending 1995

Year ended

1994

9mths ending 1995

1993

1994

9mths ending 1995

Gross Profit Margin (GP/Net Sales %) SGA/Net sales(%) Operating Profit/Net Sales (%)

46.3

41.8

34.4

47.0

45.0

49.7

54.0

54.0

46.2

17.4

18.8

17.6

45.5

43.2

42.8

47.6

46.2

44.8

28.9

23.1

16.8

1.4

2.0

3.9

6.3

7.7

6.8

Interest Exp/Net Sales (%)

1.4

0.9

N/A

0.3

0.3

0.4

0.0

0.2

0.2

• Redhook has higher operating profit margin due to its operating strategy of a company-own production capacity • Boston Beer and Pete‟s has higher Selling and General Administrative expense • Pete‟s Brewing is least profitable • Gross profit margins of contract brewers are also higher and more stable

Return On Equity Redhook Year ended Year Return on Equity Profit before taxes/NetSale s(%)

1993

1994

9mths ending 1995

27.8

22.2

Net Sales/Assets Assets/Equit y Return on Equity (pretax%)

0.8

Pete’s Brewing Year ended 1993

1994

9mths ending 1995

18.0

1.1

1.7

0.6

0.3

5.7

1.5

1.3

1.2

32.0

16.0

6.4

Boston Beer Year ended 1993

1994

9mths ending 1995

3.5

6.3

7.9

7.6

6.8

4.4

3.2

3.6

3.3

6.7

6.2

6.2

2.7

4.8

2.5

41.1

70.8

97.0

55.3

137.7

62.4

• Boston Beer and Pete‟s have higher ROEs due to lower asset holdings and shareholder equity • Redhook has much lower ROE due to heavy capital investment. ROE has declined approximately 50% of previous year • Redhook has lower asset turnover

Disadvantage of Contract Brewing Strategy • Downside risk of financial distresses in second-tier brewers which were contracted for brewing • Risk of interruptions to Boston‟s product supply • Inconsistency in premium beer image as premium beers are brewed in the same facilities as lower quality brews of second-tier beers

Initial Public Offering • Boston Beer has a promising future prospect. • To take advantage of favourable market conditions the company has decided to go public.

• Going public: selling the company‟s shares to outside investors and allow the shares to be publicly traded. • It is a value judgment based on a balance between the COSTS and BENEFITS of going public.

Advantages of an IPO • Enhances liquidity and allows existing private investors to harvest their wealth • Permits diversification for founders • Facilitates the raising of new capital (corporate cash) • Establishes a value for the firm • Facilitates merger negotiations • Enlarges potential markets for the company‟s products

Disadvantages of an IPO • It is a complicated, expensive and time-consuming process • High cost of reporting • The need to abide by disclosure requirements • Increasing agency issues caused by managers‟ selfdealings • The result of a low share price due to inactive market • The need to maintain control by the management • The need to maintain a good relationship with investors

Boston Beer’s IPO • Rapid growth in the Craft-brewing segment is a positive signal for advantageous opportunity. • Conclusion: it is more profitable going public as the need for growth outweighs the costly and timeconsuming process. • Competitors‟ IPOs have been successful – Redhook‟s and Pete‟s.

Determination of Price • Initial public offering: the first sale of stock by a private company to the public. • Primary step: determination of the price per share • It represents the amount of capital Boston Beer can raise from the public offering. • The market value of the company may be determined using comparable financial data of its competitors.

Determination of Price • Comparable multiples analysis: using multiples from market competitors with similar growth and risk – Redhook and Pete’s. • Pete‟s is more similar to Boston Beer. • Pete‟s – custom (or contract) brewing companies • Redhook – regional breweries • Boston Beer – custom (or contract) brewing companies

Multiples analysis Pete’s Brewing Company

Redhook Ale Brewery

Offering price

$18.00

$17.00

1st day closing

$25.25

$27.00

Current price (20/11/95)

$24.75

$27.00

P/E ratio (20/11/95)

100

36

P/B ratio (20/11/95)

129

3

8.6%

129.3%

ROE (annualised) (1995)

Price: P/E analysis • • • • • •

P/E = Price per share/EPS EPSBoston, 1995 = 0.26*4/3 = $0.3467 Pete’s P/E = 100x Therefore P = 100*0.3467 = $34.67 Redhook’s P/E = 36x implying a price of $12.48 $34.67 is the better valuation given the operational similarities between the two companies.

Price: P/B analysis • P/B = P/E*ROE (since book value per share = EPS/ROE) • P/B = 100*0.4739 = 47.39 • Also P/B = MV of equity/BV of equity • MV of equity = 47.39*13229000 = $626.9million • Number of shares outstanding post-IPO = 19182119 • Post-IPO price = 626.9m/19.2m = $32.68 • A price of $32.68 is obtained which is fairly close to the previous price of $34.67.

Underpricing • Underpricing: the pricing of an initial public offering below its market value. Benefits for investment banks: • Increases likelihood of oversubscription hence reduces risk • Rewards the investors associated with the investment bank • Assists the collection of honest indications of interest

Underpricing Reasons as to why companies do not reject underpricing: • A price run-up immediately following the IPO will create excitement • Only a small portion of private shareholders‟ shares are sold in the IPO • A successful IPO will ensure the ease of raising capital in the future

First Day Premium • Premium = (Closing price – Issue price)/Issue price • Pete’s 1st day premium = 40% • Redhook’s 1st day premium = 59% • Expected 1st day premium for Boston Beer = 40% – 60%

Underpricing – 1st day premium • P/E analysis: a price range of $21.67 – $24.76. • P/B analysis: a price range of $20.43 – $23.34. • Appropriate price range: $20 – $25

• Offering price of $12.50 is significantly lower.

Short term Returns • 30-days return is indicative of the short term return. • In general – the IPO offer price is too low and the first day run-up is too high. • Long term: usually the returns on IPOS are lower than expected. • Short term: < 1 year, usually IPOs are profitable. • Redhook – a monthly return of 16.67% • Pete’s – a 13-days return of 37.5% • Boston Beer – likely to rise by 20% to 30%

30-days Return • Same formula as before Premium = (Closing price – Issue price)/Issue price

• 1.2*20 = $24.00 and 1.3*25 = $32.50 30 days after the IPO:

• Boston Beer‟s stock price will settle at $24.00 – $32.50.

Post-IPO Valuation • The ability to sustain growth and competitive advantage is essential to its ongoing financial viability. • Analysts will forecast Boston Beer‟s growth rate to evaluate its long term performance. • The need to determine long term value  the need to forecast growth rates  pro forma data required

Growth Forecast • •

• • • •

Factors affecting the growth forecast: Macroeconomic data – inflation rate (CPI), interest rate Market risk – degree of variation in response to market movements Likely changes in consumer demand in the foreseeable future Focus or objective of the firm in the long run Past economic data of the company The firm‟s future capital budgeting and investing needs

Valuation analysis • A valuation analysis is performed using the financial data of Boston Beer to determine the implied growth assumption based on current market valuations. • Current market valuations – the offering price of Boston based on the P/E & P/B ratios of Pete’s is the best indication of market investors‟ view of the craft brewers.

Valuation analysis • Setting market capitalisation = market value of equity, the resulting growth rate will be the implied growth rate assumed by market investors for the next ten years. Where: • Market capitalisation = Boston Beer‟s offering price*number of shares outstanding; and • Market value of equity = PV of the free cash flows assuming it grows at the same rate for ten years and then 5% until perpetuity.

Valuation analysis • Weighted average cost of capital = 11.84% • Cost of debt (before-tax): (7.02 + 11.50)/2 = 9.26% • Cost of equity: CAPM = 6.26 + 1.0*5 = 11.26% Bond-yield-plus-risk-premium = 9.26 + 4 = 13.26% Cost of equity (average) = 12.26% • Weight of debt = 6.20% • Weight of equity = 93.80% • Corporate tax rate = 40%

Valuation analysis • • •

• • •

Equations used in the analysis: EBIT = Operating margin (pre-tax)*Net sales NOPAT = EBIT*(1 – T) Invested capital = Net new investment in operating capital (yearly change in working capital and PP&E) FCF = NOPAT – invested capital Total value of the firm = Value of operations + Value of non-operations Total market value of equity = Total value of firm – total market value of debt

Valuation analysis

Market Share – craft brewers • Sell-side analysts forecasted a growth rate of 25% to 40% for the craft-brewing segment. • Implied growth rate from current market valuations is 50.06%. • Wall Street analysts forecasted that the craft beer segment could „conservatively‟ reach 5% of total domestic beer sales by the year 2000. • These data are comparable and can be reconciled to reveal the market sentiments and expectations of the craft beer segment in the domestic beer industry.

Market Share – craft brewers

Market Share – craft brewers

Market Share – craft brewers GROWTH RATE ASSUMPTION

MARKET SHARE IN 2000 (FIVE YEARS‟ TIME)

25%

3.62%

40%

6.38%

50.06%

9.03%

Conclusion: market investors have a more optimistic outlook of the craft beer segment (Boston Beer) than financial analysts.

Are these growth rates sustainable? • The growth rates of the companies are unlikely to sustain in the long run due to the threat of greater competition • The “Big 3” would react to seek expansion into the specialty segment to protect their market share • Expansion strategies by investing directly or indirectly in existing craft brewing companies • Existing Expansion strategies: – Anheuser-Busch‟s equity/distribution deal with Redhook – Stroh‟s equity/production arrangement with Pete‟s Brewing Company

Are the ROEs sustainable? • ROE = Operating Profit (pre-tax) Shareholder’s Equity • Competition  price reductions  slightly lower margins  lower operating profits  Lower ROEs • Return on equity of these companies is likely to be unsustainable • Excess capacity expected to diminish in time  necessity of raising capital through equity funding • Thus, the ROE of the craft brewing companies would also fall

Too Optimistic? • The craft brewing industry is likely to be overcapitalized given its total size, the abysmal growth forecast of the overall beer industry, and the rising competition from major domestic beer companies into the specialty beer segment • A hyped up reaction in the craft brewing segment • P/E and P/B multiples are overvalued

Parallels to other ‘Hot’ Industries • Beer industry is currently similar to the biotech industry in the 1970s and the dot.com internet industry in the 1990s • Shares are oversubscribed and overvalued • Hype up reaction for the IPO leading to high first day run-ups • The craft beer industry is very susceptible to shock

After Price Determination… Roles of the investment bank: 1. Help Boston Beer determine the preliminary offering price (or price range) for the stock and the number of shares to be sold 2. Selling the shares to existing clients 3. Cover the stock after it is issued – ongoing research and coverage by the analysts of the investment bank to facilitate trade in the secondary markets.

Conclusion • Final offering price range: $20 - $25 • Implied growth rate: 50% • Growth of the industry is unlikely to be sustainable • ROE may deteriorate in the future • The segment is overcapitalised and shares are oversubscribed • Potential overvaluation of Boston Beer