Strategy & Valuation Memo - Morgan Stanley | International Liquor

The Board of International Liquor is considering acquiring the National Distilleries Corporation, having the belief that consolidating both companies will bring great value. The rationale behind this is that International Liquor wishes to use NDC’s current position to enter into new markets such as South America. It could use NDC’s market share and distribution network to introduce existing IL brands into the NDC network, and likewise introduce NDC brands to Europe in order to increase growth opportunities there. Although it is not the main objective, merging with NDC would also help to increase market share in the U.S., where IL already has a solid existing base. Given the focus on different geographical markets, there would be a minimal overlap between the target and the bidder. On the contrary, both companies could benefit from the synergies resulting from a merger. Doing this would help maximizing the attractiveness of an IPO for International Liquor, which is planned for the end of next year.

Assuming a discount rate of 14%, DCF-driven valuations including the benefits arising from synergies range from $6 to $6.2 million, with a share price between $17.14 and $17.71. NDC’s stock currently goes for $15 on the market. The synergies are estimated to amount to as much as $550 million per year, with $450 million coming from enhanced revenue opportunities and $100 million coming from cost savings. The present value of these synergies would be about $3.9 billion. However, since these synergies are uncertain the CEO and the venture capitalist shareholders do not want to consider them in the form of a higher valuation. International Liquor wishes to collaborate with NDC in order to maximize the synergy gains. Hence, the company will try to avoid doing a hostile bid. (...)

(something about whether the decline in stock price is relevant - I guess we shouldn’t hesitate because otherwise NDC could close a deal with LA, which is our main concern)

There are no regulatory approval concerns regarding a deal between IL and NDC. However, if NDC would choose to merge with LA this might raise some issues, with the possibility of such a merger being blocked. Thus it is strategically beneficial for International Liquor to lobby for the antitrust authorities to block a NDC / LA deal. The CEO also must consider the demands of the venture capitalist shareholders, which own 49% of outstanding shares. These will only accept an all-cash transaction as they do not want their investment to be diluted. Nonetheless, the company could potentially include some ‘sweeteners’ in the deal that do not dilute ownership. For instance, it could offer the target’s shareholders call options for IL’s stock that can be exercised after the IPO. In this case the venture capitalist shareholders will not have their ownership diluted (as they will use the IPO to exit their investment), while the target’s shareholders can still benefit from the anticipated increase in the value of the firms.

The IL being a leader   of the market share in Europe and from the last few years the overall share of the company is increasing, specifically because of the expense of by NDC.  So it can say that if IL win at the acquisition negotiation with the NDC it can prove lucky for the company in future. The IL Company is bit secretive about its personal information but the size of the company seems similar to the American Liquor.  It is the time of the IL to make a good buy and acquisition deal with to grow their business because they have the potential to expand their business as in Europe they are already have a good stand in the market.  This acquisition of IL with NDC can increase the market opportunity for the IL to only increase its share but also expand its brand to other countries other than Europe. By seeing the current market share condition of NDC, it is estimated that the stock share of the company is falling each month by 5 % and for both of the company it is an opportunity to make a good deal.

Other options

•              Plenty of upside market-share room left in the US geography

•              Acquiring a few smaller distilleries in Eastern Europe

•              IPO will give additional financing to expand international market share.

Leadership & HR

Keep Miguel Silva in the company since he is more familiar with the South American and US markets. However, you would need to rein him in somewhat. Make Silva head of South American department. Make him protégée. Only buy 50.1% of NDC shares?

Summing up the discussion it can be said that the by acquisition IL with NDC, there are a lot of possibilities that the brands of IL become more visual not only in the market of Europe but also in the international market through the network of NDC. Evaluating the current market share situation of the NDC, it is very good opportunities for the IL to make a deal to give more exposure to their brands and also become more visual in the marketplace. All in all it can be said that the IL must go for this offer by NDC and this buy will prove very beneficial for the company brand and market share.