Transcript Class 2 - University of Southern California

Hostile Bid for Red October
February 2, 2006
J. K. Dietrich - FBE 532 – Spring 2006
Sources of Value to Acquirer
 Cash:
$ .70 per share
 Land: $ 9.44 per share
 Brand name Red October
– Lack of national distribution
– Lack of growth
 Cost
efficiencies
– Rising costs, falling profits projected
– Rising SG&A (management comfort?)
J. K. Dietrich - FBE 532 – Spring 2006
Valuation Analysis
Valuations of Red October
(Million $)
Book Value 1994 $
23.4
BV + Est. Land Value $
84.3
Market Value at $5.50/Share $
35.0
Comparable using '96 Est. EAC and PE = 3 $
98.1
Comparable using '96 Est. EAC and PE = 1 $
32.7
Value Using PV of FCF @ WACC=40% + CV PE 2.5 $
32.2
Value Using PV of FCF @ WACC=23% + CV PE 2.5 $
58.6
J. K. Dietrich - FBE 532 – Spring 2006
Using Comparables
 Differences
–
–
–
–
in multiples
Currencies
Risks
Product and brand names (Red October)
Marketing strategies (global versus regional)
 Russian
stock market conditions
– Low multiples
– Thin markets, low liquidity
J. K. Dietrich - FBE 532 – Spring 2006
Sources of Value
 Cash
flows
– Why no growth in production
– Effect of translation to dollars (ruble inflation
in 1993 = 900%, 1994 = 210%
– What happed to $12 million and why future
planned capital expenditures with flat sales
 Discount
rate
– Dollar rate versus ruble rate
– Problems with beta estimate (index used)
J. K. Dietrich - FBE 532 – Spring 2006
White Knight and Defense
 Realizing
value from Red October assets
– Foreigners may be limited due to political
questions, e.g. use of land
– Management and cost structure definitely
threatened if foreign acquirer to realize value
– Brand is national and that is probably important
 Poison
pill and white knight strategies work
in highly developed markets
J. K. Dietrich - FBE 532 – Spring 2006
Outcome
 Less
than 10% of shares tendered
 Red October offered Menatep two seats on
the board and they called off bid
 Company sales still around $50 to $60
million in 2000, dropped in 1998 crisis,
steadily losing market share, production
cuts planned in 2001
 Share prices traded $2.65-$5.25 in 2000 in
very illiquid market
J. K. Dietrich - FBE 532 – Spring 2006