Scribd Logo
Carica

Benvenuto in Scribd!

  • Caso 03 - Brahma

    Caricato da

    Rodrigo López
    21 visualizzazioni30 pagine
    .

    Copyright

    © © All Rights Reserved

    Formati disponibili

    PDF o leggi online da Scribd

    Hai trovato utile questo documento?

    Questo contenuto è inappropriato?

    Segnala questo documento
    .

    Copyright:

    © All Rights Reserved
    Scarica in formato PDF o leggi online su Scribd
    Segnala contenuti inappropriati
    21 visualizzazioni30 pagine

    Caso 03 - Brahma

    Caricato da

    Rodrigo López
    .

    Copyright:

    © All Rights Reserved
    Scarica in formato PDF o leggi online su Scribd
    Segnala contenuti inappropriati
    di 30
    DARDEN fit uvor77 BUSINESS PUBLISHING Version 4.0 ‘UNIVERSITY VIRGINIA BRAZILIAN BEER MERGER NEGOTIATIONS COMPANHIA CERVEJARIA BRAHMA, S.A. In May 1999, Marcel Herrman Telles, Chairman of Companhia Cervejaria Brahma (“Brahma”), gathered a team of executives and advisers to outline bargaining goals and prepare to negotiate a merger with Antaretica Paul (“Antarctica”), A merger of the two firms would be the largest in Brazil's history. ‘The resulting company (“Newco”) would hold almost a 70 percent share of the Brazilian beer market and would be the third-largest brewer in the world, Though Antarctica enjoyed a strong brand franchise, its recent financial performance had been disappointing, owing (o stagnant growth in consumer beverage consumption in recent years and to the recent devaluation of the Brazilian real (R$)', causing Antarctica’s margins to erode further because of the rising cost of imported ingredients, ‘The devaluation triggered a wave of speculation about restructuring in the Brazilian brewing industry and the possible entry of foreign firms. ‘The possibility of acquisition by a well-financed foreign firm was not lost on the executives of Brahma, who understood the strategic challenge that might ereate, ‘The executives of Brahma believed that a combination with Antarctica could generate large synergies. In the next few days, Brahma’s negotiating team would need to prepare a bargaining strategy to guide negotiations. Key to this strategy would be an outline of important terms and a range of values with which to conclude a deal. Any negotiation guidelines would need to gain the approval of Brahma’s CEO, Market for Beer and Soft Drinks in Brazi Brazil was the world’s fourth-largest beer market, ranking behind the United States, China, and Germany, However, on a per-capita-consumption basis, Brazil ranked only 16" in the world, suggesting to many observers that the country offered serious potential for growth in unit volume of beer sales. They pointed to the country’s tropical and subtropical climate and its “The monetary unit of Brazil is the real; the plural of rea is reais. On May 31, 1999, the foreign eurreney ‘exchange rate of the Brazilian real (RS) to one U.S. dollar (USS) was 1.73:1.00 ‘This ease was prepared by Robert F. Bruner from public information, Jessica Chan and Oscar Carbonell provided research assistance. For brevity and clarity, some details about financial results and synergies have been altered ‘without affecting the substance of the managerial issues. This ease was written as a basis for elass discussion rather than 10 illustrate effective or ineffective handling of an administrative situation. Copyright © 2003 by the University of Virginia Darden Schoo! Foundation, Charlottesville, VA. All rights reserved, To order copies, send an e-mail to sales@dardenpublishing.com, No part of this publication may be reproduced, stared in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—elecironic, mechanical, photocopying, recording, oF otherwise —withou the permission of the Darden School Foundation. Rey. 10/0, UVv0277 relatively young population, ‘There was little traditional basis for other forms of alcohol consumption, such as wine, In addition, analysts believed that, as income levels rose, demand for consumer produets such as beer would also rise. One analyst projected growth in unit volume of beer sales of 4.0 and 6.0 percent in 2000 and 2001, and, for soft drinks, 1.7 and 3.0 percent, respectively? Femando Cardoso was elected president of Brazil in 1994 and again in 1998—he had served as minister of Finance in 1993 and 1994, when he supervised the creation of the Real Plan, an anti-inflation program that reduced the inflation rate from $0 percent a month to less than 1 percent, an achievement that made him popular with foreign investors and that contributed toa buoyant economic outlook. Following the shock of the 42 percent devaluation of the real in January 1999, inflation and interest rates surged and the economy began to recede, Over the past 10 years, Brazil’s real gross domestic product (GDP) had grown at an annual rate of 2.0 percent. The future GDP growth rate for Brazil depended on the agility with which the Brazilian economy responded to the shock of devaluation, It could be expected that consumer spending and real wages would fall. But how long the trough of activity would last depended on the robustness of the economy. One investment bank forecast Brazilian real GDP growth of 4.1 percent in 2000 and 6.0 percent in 2001.” It also projected inflation of 5.5 and 3.8 percent for those two years, respectively. ‘The average annual rate of population growth for Brazil aver the past five years was 1.3 percent. Exhibit 1 gives macroeconomic trends and forecast statistics across @ range of measures. Exhibit 2 presents information on inflation and real GDP growth rates in recent years. In 1995, the Mercosul common market eliminated tariffs on trade among Brazil, Paraguay, Uruguay, and Argentina, This move held two significant implications for Brazilian beer companies. First, it opened up a new and attractive market, Argentina, which had a per- capita GDP that was almost double that of Brazil’s. Second, Brazil would now be accessible to such Argentine brewers as Quilmes Industrial, Three firms accounted for 90 percent of Brazil’s beer market at the end of 1998: Brahma (47 percent), Antarctica (23 percent), and Kaiser (16 percent). Historically, Antarctica was Brahma’s major competitor. Kaiser was a joint venture created in 1982 by Heineken, Coca- Cola, and Brazil’s Coca-Cola bottlers to compete with Brahma and Antarctica, Several small niche players composed the balance of the market, Beer-sales volume grew at a compound rate of 11.3 percent from 1993 to 1998, compared with average GDP growth of 4.2 percent, But in the past three years, sales-volume growth had been zero, Also, unit-volume inereases had been volatile over the decade, ranging from a high of 18 percent, in 1995, to -17 percent, in 1992 (during a sharp recession in Brazil). Exhibit 3 presents the annual growth rate in beer shipments, “The surge in volume growth in 1994 and 1995 added as much volume demand as the entire beer market in Argentina, which was a major factor in stimulating the huge expansion in the industry, Each of the major brewers had increased their production eapai 2-prahma/AmBev Swallowing Market Share,” BBV Securities, In, February 9, 2000, “Carlos Laboy, “Brazilian Beverage Industry,” Bear, Stearns & Co,, July 19, 2000. uvo277 more than a thirel in the past three years. ‘The slump in growth in recent years meant that the Brazilian brewing industry faced nearly 50 percent excess capacity. Imported and premium beers accounted for merely 4 percent of industry sales, of which imports accounted for half, ‘The low share reflected the effect of a 23 percent tariff on imported beers that placed them out of reach of the mass of consumers. One of the keys to success in the global beverage business was obtaining proprietary channels of distribution. In Brazil, beer and soft drinks were distributed together through the same channels, A distributor was dedicated to the entire product line of one major firm. Over the past five years, the highly fragmented system of beverage distribution had become consolidated, driven largely by the need to obtain economies of scale in distribution, ‘The major producers had cut their number of distributors by almost half in the late 1990s. Among soft drinks in Brazil, Coca-Cola was the dominant brand, with 36.3 percent of the market; other Coca-Cola brands (Fanta, Sprite, Tai, and Diet Coke) accounted for another 11.3 percent, giving Coca-Cola a total market share of 47.6 percent, In contrast, Antaretica’s brands accounted for 11.5 percent of the market; Brahma’s soft drinks accounted for 6.6 percent, But the comparison of market shares of leading firms ignored the rising importance of subainas, small regional producers of non-cola soft drinks who sold their products at about half the price of the leading brands—these producers had increased their market share from 12.2 percent, in 1992, to 33 percent, in early 1999, The regional players had reduced the share of the total market held by major brands from 1992 to 1999, causing a price war that depressed profitability in the soft drink segment. The globalization of the beer industry through multinational brands and the creation of regional common markets, such as Mercosul, suggested to many observers that the peers in any one national market were no longer the relevant standard of comparison, Concentrated competition might prevail only temporarily, until entry by other regional or global peers conrected the situation. A growing market like Brazil might attract other players. Antaretiea Paulista, S.A. Founded in 1885, Antarctica was the second-largest competitor in the Brazilian beer market and a major participant in the soft-drink segment, At year-end 1998, Antarctica had sales {net of sales taxes) of RS1.38 billion and assets of R$3.4 billion, Antaretica was Brazil's second- largest brewer and its largest soft-drink producer, dominating the market in guarana, a sweetened soft drink indigenous to the Brazilian market, The firm's flagship brand, Cerveja Antarctica, was Brazil’s second-ranked beer brand and the fourth most popular in the world. Antaretica sold 18 brands of beer, 12 brands of soft drinks, and 30 other beverage products, Antaretica’s net sales for 1996-1998 had declined, reflecting deterioration in all categories, Beer accounted for 73 percent of sales in 1998, ‘The sales decline in recent years was oo UV0277 part of a long-term trend for Antarctica: the firm had lost 18 percent of the beer market in 10 years, in contrast to Brahma, which had held its share, as shown in Exhibit 4. This decline reflected the lack of a customer focus, failures in the distribution network, and rising competition, Antaretica’s brands were viewed as antiquated; younger consumers preferred other brands. Also, Antarctica continued to rely on regional distributors rather than move foward direct distribution, as Brahma had done, In 1996, Antaretica introduced a new brand, Bavatia, to target a younger segment of the market. This move mirrored Brahme’s roll-out of Skol. Bavaria established a solid $-6 percent market share, but was unable fo stem the loss of market share overall, Antaretica was the second-largest producer of soft drinks among the leading firms. Antarctica had given up only two percentage points in market share to PepsiCo over the past seven years, Antarctica produced four of the 14 best-selling soft-drink brands in Brazil A foundation formed by the founders of the firm, Fundagao Antonio ¢ Helena Zerrener (FAHZ),' held 88.1 percent of the firm’s voting common stock. Asa charitable foundation with ‘a mission in the field of health care, FAHZ was exempt from taxation. Victorio de Marci was Antaretica’s CEO and a member of the board of directors. Antarctica’s board consisted of six directors, two of whom were also directors of FAHZ. Exhibit 5 summarizes the distribution of common shares in Antarctica and Brahma, In 1997, Antarctica entered into a strategic alliance with the U.S. firm Anheuser-Busch (“AB”), in which A-B acquired 5 percent of Antarctica’s equity; under the alliance agreement, A-B was scheduled to make a US$70-million investment in September 1999 to increase its stake to 10 percent of the common stock, A-B also held an option to increase its stake to 29.86 percent within six years, which would bring A-B’s total investment to US$407 million by 2002, A-B would also provide technical and marketing support to Antarctica, Finally, A-B and Antarctica entered into a joint venture (o distribute Budweiser in Brazil—unfortunately, the antitrust regulators in Brazil deemed their joint venture to be anticompetitive, and gave the firms until the end of 1999 fo end the arrangement, At the end of May, 1999, Antarctica’s market capitalization was R$475.2 million. ‘Though its stock was publicly listed for trading on the BOVESPA stock exchange in Sao Paulo, the thin “float” in daily trading of shares meant that prices were quoted infrequently. Responding to strong growth in 1995 and 1996, Antarctica’s management undertook a major expansion of production capacity, spending R$1 billion to replace aging facilities and gain a 60 percent increase in capacity. The subsequent slackening of séles produced idle capacity of 4 percent in beer and 47 percent in soft drinks by the spring of 1999, Antaretica had six soft- drink manufacturing plants, seven breweries, six facilities that bottled beer and soft drinks, a factory to produce concentrate for soft drinks, and a malting factory to supply the breweries. ‘EAHZ owned and operated a hospital and a school. Dividends from Antarctica were used to finance the Foundation's activities. Two of the foundation’s six board members were also directors of Antarctica, uvo277 s products were distributed by franchise bottlers who, in turn, sold the produets to local distributors. Half of Antarctica’s beer was sold to bars, restaurants, and hotels, and the remainder to groceries and other retailers. About 70 percent of Antarctica’s beer sales were for on-premises consumption. Soft drinks were sold more evenly across categories of end-point retailers. In 1999, Antarctica had seven regional franchise bottlers, which the company planned to reduce to four by mid-2000 in an effort to promote economies of scale—analysts expected Antarctica to eliminate its system of franchise bottlers entizely by 2001, Antaretica’s system of distributors included about 400 firms that handled the entire beverage portfolio; the number of distributors had fallen in recent years as Antarctica encouraged mergers among the distributors to achieve economies of scale, The firm provided training to its distributors, and spent R14 million to computerize its distribution network. ‘The net result of all these developments was that Antarctica sharply underperformed its peers, Exhibit 6 gives a compatison of financial performance per hectoliter between Antarctica and Brahma, The company had unhedged debt of US$610 million; with the devaluation of the real, its obligation in reais soared to 66 percent of equity and produced a foreign-exchange loss of R§285 million. In recent years, Antarctica’s strategy had been to increase its efficiency by closing small inefficient plants, modernizing other facilities, and centralizing operations. ‘The firm sought to regain market share by lowering its prices and repositioning its leading products with younger consumers. Consequently, the number of hectoliters produced per employee had risen in recent years, Still, Antarctica was significantly less profitable than Brahma. ‘The firm was more highly levered than its peers; it would need fo refinance a total of R8680 million in debt in 1999. Companhia Cervejaria Brahma Founded in 1888 as a local beer producer, Brahma gradually expanded, by acquisition, to become a regional and, eventually, national competitor. In 1989, the partners of the investment bank Banco Garantia’ acquired 51 percent of Brahma’s voting stock, They appointed Marcel Herman Telles as CEO of the firm, and launched the restructuring program that would create Brazil's leading brewer. Telles turned Brahma into the most efficient producer in Brazil, by focusing on lean operations, tight cost controls, and aggressive expansion, Under Garantia’s ownership, the firm increased sales volume by 55 percent from 1989 to 1999. At the same time, Brahma improved productivity by modernizing its plants, ‘The firm also cut its workforce from 25,000, in 1989, to 9,000, in 1994, the year Brahma began a series of foreign acquisitions and investments that established the firm in Argentina and Venezuela. Brahma established strategic alliances with foreign producers, An agreement in 1995 created a 50-50 joint venture with Miller Brewing, owned by the U.S. firm Philip Morris Corporation. In 1996, Brahma reached an agreement to produce and distribute the Carlsberg and Skol brands of beer in Brazil and the rest SBonco Garantia was one of the leading investment banks in Brazil, Credit Suisse First Boston had recently acquired Garantia, though the partnership that controlled Brahma was not part of the acquisition. 6- UVv0277 of Latin America, The following year, Brahma reacquired’ the right to distribute the Pepsi brand in Brazil. That same year, Brahma formed a joint venture with Unilever to compete in the iced- tea market in Brazil. The firm’s shares were listed for trading on stock exchanges in Stio Paulo and Rio de Janeiro, In 1997, Brahma issued American Depositary Receipts (ADRs) on the New York Stock Exchange, As of May 31, 1999, Brahma’s market capitalization was R$4.628 billion. In 1999, Brahma ranked fifth among global brewers on the basis of output, behind Anheuser-Busch, Heineken, Miller, and South African Breweries. Brahma operated 13 breweries (11 in Brazil and one each in Argentina and Venezuela) and seven soft-drink plants. ‘The company operated a “megabrewery” in Rio de Janeiro that was the largest in Brazil and the second largest in the world. Brahma’s product portfolio reflected a strategy of becoming a “total beverage company,” selling, in addition to beer and soft drinks, bottled water, sport drinks, and iced tea. The firm produced 11 brands of beer and 17 brands of nonalcoholic beverages. ‘The feading beer brands were Brahma Chopp, a draught beer that was the third-best-selling beer in the world, and Skol, the sixth-best-selling beer in the world, Beer accounted for 78.5 percent of the firm’s revenues and 94,7 percent of its EBITDA (earnings before interest, taxes, depreciation, and amortization). The low volume of sales of nonbeer products precluded economies of scale, and adversely affected the level of profitability of the beer operation. ‘The firm maintained two independent distribution networks. In 1998, Brahma’s beer was sold predominantly to bars and restaurants (78 percent), with the balance to supermarkets, Soft drinks had a lower reliance on bars and restaurants (52 percent), Brahma was pursuing a strategy of increasing its direct distribution (ie., ditect to point of sale), This move reflected the narrowing margins at the distributor level and the opportunities to gain efficiencies and economics of scale in distribution. In 1998, 46 percent of soft-drink sales were directly distributed. Including beer, the total percentage of direct distribution was 27 percent—Brahma aimed to raise that percentage to 40 percent within a few years. At present, Brahma’s distribution system serviced more than one million points of sale. Brahma’s strategic aim was to increase shareholder wealth each year by growing economic value added (EVA) and market share, ‘The growth in value and market share had been the context of profit pressures in the industry and the recent devaluation, Though the firm had outperformed its industrial sector, its soft-drink division and foreign acquisitions were only marginally profitable. Its engine of profitability was beer. Brahma's voting stock was dominated by the Garantia interest (51 percent), Marcel Herrman Telles held 6.7 percent of the shares, He had served as its CEO sinee 1989. In 1998, he assumed the role of chairman of the board, and appointed Magim Rodriguez as CEO. Teles “Brahma had originally acquired the right to distribute Pepsi in 1984, The distribution arrangement. was terminated in 1994, uVvo277 continued to focus on strategic issues, while Rodriguez addressed operational concerns, Of the firm’s 12 senior executives, eight were under the age of 50, Brahma’s strategic outlook Telles and Rodriguez, reflected on the growth prospects for Brahma and for the new company that would emerge fiom a combination with Antarctica. On the one hand, stan alone, Brahma had a coveted position within Brazil and Latin America: a dominant market share in Brazil, which itself had a strong growth outlook for beverage sales; promising entries into Argentina and Venezuela; relatively low operating costs and financial leverage, which might prove decisive in price wars and in meeting new entries by other firms; and strong channels of distribution, which would give Brahma a strong defense against competitors. On the other hand, Brahma’s investors and managers had ambitious expectations for the firm, ‘The management and directors of Brahma wanted to capture 50 percent of the Latin ‘American beer market within the next 3 to 5 years; the acquisition of Antarctica would lift the firm to @ 30 percent share, Further expansion of its market position would entail growth by acquisition outside Brazil to create a portfolio of truly global brands—other possible targets were Quilmes (Argentina), CCU (Chile), Bavaria (Colombia), Cervesur (Peru), and Backus (Peru). In addition, it seemed appropriate to broaden Brahma’s product portfolio into related products in order to become a “global total beverage company.” Expansion along these lines—always aimed at maximizing shareholder value—would require capital. Accordingly, Brahma had listed its shares for trading on the New York Stock Exchange, and had begun the process of presenting its financial results according to international and U.S. accounting principles. Ultimately, the ability to attract capital for expansion would depend on Brahma’s performance in its core markets. Unit demand in Brazil had grown at 5-6 percent for the past three years—though respectable by international standards, it was much less than the double- digit volume growth of the mid-1990s. With so much surplus capacity in the industry, a fature ‘of sharp price competition seemed certain. To achieve steady revenue gains in reais would mean taking market share from competitors, which would be costly and slow and might be constrained by antitrust authorities as Brahma was already the largest player in the market. ‘The worst-case scenario would be the entry of a well-capitalized foreign firm that might acquire Antarctica or Kaiser and then initiate a costly and protracted price war to build market share. Fight difficult battle for Brahma’s home market would sap resources from Brahma’s. planned expansion internationally and into related product lines. Did Brahma really need Antarctica? Antarctica was a poorly performing second-place competitor. Acquiring Antarctica would be an audacious move in terms of antitrust issues. But viewed in terms of the strategic alternatives, there was no other comparable course of action. Brahma could “go it alone,” which would leave the firm exposed to aggressive foreign entries into Brazil and, especially, the worst-case scenario, Brahma could try to acquite the third-largest beverage company, Kaiser, but would confront a tangle of conflicting interests: Brahma would need to choose between Coca-Cola and Pepsi as soft-drink affiliates and between Heineken and uvo277 Carlsberg as a European strategic partner. It seemed unlikely that Heineken and Coca-Cola would want to do a deal with Brahma, Finally, Brahma could sell itself to another firm, probably a foreign player—but such a move would be contrary to the vision of Marcel Telles and the partners of Banco Garanti Pr jected synergies range of brands in the combined portfolios, rationalizing the distribution network with greater emphasis on direct distribution, shrinking the administrative strueture of Newco, and generally reducing production costs at Antarctica to bring them more in line with those at Brahma. Some analysts anticipated possible revenue synergies, a delicate subject in view of the likely antitrust review by the Brazilian government, Newco would enjoy the benefits of reduced price competition and the absence of destructive buying of shelf space from retailers. Also, the new firm would have greater leverage to influence retail pricing through modernized cold-drink equipment for retailers and point-of-sale merehandising material. This pricing power might increase Newco’s gross margin by one to four percentage points, In addition, Newco might obiain a greater market share based on its four strong beer brands and better coordination among its distribution channels, ‘The revenue enhaneement synergies could amount to R121 million per year in added sales by the new firm, Valuation Approaches Estimating the fair value of Brahma, Antarctica, and Newco could draw on a variety of approaches. Market prices, A starting point for valuation analysis shares in Brahma and Antarctica, as well as an examination of the historical trends in those prices, Exhibits 7 and 8 present the long-term price trends against the Brazilian equity market index as well as data on recent prices. could be the currently quoted prices of Replacement cost. Credit Suisse First Boston? estimated that the replacement value of beer capacity was R855 to R§86 per thousand hectoliters, and that soft-drink capacity was worth RS43. to R864 per thousand hectoliters. Antarctica had a beer-production capacity of 32.2 million heetoliters and a soft-drink capacity of 19.8 million hectoliters, Brahma had a beer capacity of 62 million heetoliters and a soft-drink capacity of 27 million hectoliters. ‘This method of valuation would give an enferprise value for the company. Some analysts questioned whether this approach was appropriate as it ignored the value of such intangible assets as brands, “Brahma PN, Equity Research,” Credit Suisse First Boston, August 2, 1999, 12. uv0277 Valuation multiples, peer firms. The companies could be valued on the basis of average multiples of other firms in the same industry. One analyst estimated that Brahma’s enterprise value (EV) divided by EBITDA was 10x, based on historical ratios’ Another analyst estimated that the average EV/EBITDA ratio for a sample of brewers was 9.2* in developed markets and 12.2x in emerging markets.’ Exhibit 9 gives information on Latin American and global competitors in beer and soft drinks. Analysts noted that this method of valuation ignored possible control premiums and synergies. Valuation multiples, peer transactions. In Mé&A, target firms were often valued by u multiples from other transactions in the same industry. Exhibit 10 gives valuation information on transactions in the consumer-beverage industry. ‘This valuation approach included the effect of control premiums and synergies. Discounted cash flow. The valuation of either firm could be derived from a forecast of cash flows based on projections of operations over the next few years. ‘The effective tax rate for the two Brazilian brewing companies was 14 percent—the difference between this rate and the statutory Brazilian corporate tax rate of 34 percent was due to credits associated with sales taxes and investments, Brahma’s financial staff had prepared a forecast of financial statements and fiee cash flows for Antarctica (given in Exhibits 11 and 12.) Similar forecasts for Brahma are given in Exhibits 13 and 14, Regarding the rate for discounting these flows, analysts used the capital-asset-pricing model to estimate the cost of equity, and the weighted-average-cost-of- capital fornmula to estimate the discount rate for free cash flows, ‘The long-term expected mix of debt as a percentage of debt and equity was 31 percent. ‘The equity-market risk premium was 5.8 percent, Betas for the two companies are given in Exhibit 8, These methods were appropriate for valuing each firm on a stand-alone basis. But for purposes of preparing to negotiate the price and other merger terms, it would be important to consider the value of synergies. Finally, any asset divestitures imposed by the Brazilian antitrust commission would entail further adjustments, though a simplifying assumption might be that any such assets would be divested at their fair market value—thus, cash proceeds received would equal the value of assets divested. Benefits of the Merger Mr. Telles expected the merger to generate important strategic benefits for the new firm, st, it would create a near monopoly in Brazilian beer and soft drinks. Brahma’s analysts projected that Neweo would hold 70 percent of the beer market, This strong position would give it pricing power in the market and bargaining power relative to suppliers and distributors. Second, the merger would create economies of seale in purchasing, production, and distribution, Third, if Brahma’s leadership assumed executive direction of the new firm, it seemed likely that Brahma’s investor-oriented culture would extend into Antarctica, leading to more efficiencies, S

    Potrebbero piacerti anche