BACKUS & JOHNSTON Case Study Analysis Help With Solution
The global beer industry is experiencing subdued growth in the mature markets of Europe and North America and high growth in emerging countries. The industry is also in a process of consolidation as market leaders such as Heineken and Anheuser-Busch are expanding their businesses abroad. The most desirable targets for mergers could be firms which dominate their local markets and have a potential for high growth. Many firms in Latin America fit this pattern. The region is also characterized by demographic and socioeconomic indicators that suggest a potential for rapid growth in consumption. Moreover, Latin Americans drink relatively small quantities of beer compared to their European and North Americans, suggesting that there is also ample room to increase consumption per capita.
The Union de Cervecerias Perunanas Backus y Johnston S.A. (Backus), a 123-year-old Peruvian brewery, became the center of attention in the competition to dominate the Latin American beer market. Much was at stake, as the feud spans three countries, exposes deep corporate rivalries and implicates some of Latin America’s most powerful business clans in accusations of fraud, extortion and collusion.1 The story begins in July 2002, when the industry was abuzz with rumors that Bavaria S.A. (Bavaria), Colombia’s largest beer company, was about to buy a major stake in Peru’s dominant brewer, Backus. Coincidentally, The Cisneros Group from Venezuela decided to make a similar move. In 1999, Cisneros had made an unsuccessfully bid for a smaller Peruvian competitor but lost out to Backus and since early 2002 the Venezuelan group had been eyeing Backus itself. Cisneros’ archenemy, Empresas Polar de Venezuela (Polar), already had a minority stake in Backus. Bavaria’s pending purchase meant that two of Polar’s biggest competitors in Latin America would acquire strategic shareholdings in Backus, securing a stronghold in the Peruvian firm and complicating Polar’s potential plans to expand beyond Venezuela by acquiring control of Backus.
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1. (a) Do a DCF of Backus. Spell out your assumptions about the company, the industry and Peru. In addition to assumptions about the growth of beer demand in Peru, you will need to use information about price and income elasticities to make your projections.
(b) Can you think of an alternative way to value Backus based on the information of the case? Explain how you would do it, what the value would be and how it would differ from the DCF results.
2. Based on your valuations, can you make sense of the market price of Class A shares? Is that price the right one? How could you make sense of that price compared to the price of your valuation?
3. The value of Class A shares and Class I shares differs. How would you explain this difference? Provide corporate governance reasons and also consider the impact of the level of efficiency of stock markets in emerging countries.
4. The report commissioned by Polar argues that “premiums of 30%-50% are typically paid for control of a company and substantially smaller premiums are paid for acquisitions of minority blocks.” In your opinion, is the premium on Class A shares paid by Bavaria and Cisneros a “premium for control” that reflects an act of collusion on the part of these two firms, as the report seems to suggest? Are there any corporate governance reasons that could justify this premium if it is not a premium for control of the firm?
5. Besides the corporate governance reasons that you have thought of in questions 3 and 4, what other reasons could Bavaria or Cisneros have for paying such a high premium?
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