CASE STUDY 1: BERKSHIRE HATHAWAY AND 3G BUY AMERICAN FOOD ICON HEINZ
Case Study Objectives: To Illustrate
• Form of payment, form of acquisition, acquisition vehicle, and postclosing organizations
• How complex LBO structures are organized and financed.
Discussion Questions
1. Identify the form of payment, form of acquisition, acquisition vehicle, and postclosing organization? Speculate why each may have been used.
2. How was ownership transferred in this deal? Speculate as to why this structure may have been used?
3. Describe the motivation for Berkshire and 3G to buy Heinz.
4. How will the investors be able to recover the 20% purchase price premium? Explain your answer.
5. Do you believe that Heinz is a good candidate for an LBO? Explain your answer.
6. What do you believe was the purpose of the $1.5 billion senior secured revolving loan facility, and the $2.1 billion second lien bridge loan facility as part of the deal financing package?
7. Why do you believe Berkshire Hathaway wanted to receive preferred rather than common stock in exchange for its investing $8 billion? Be specific.
CASE STUDY 2: THERMO FISHER ACQUIRES LIFE TECHNOLOGIES
Case Study Objectives: To Illustrate How Acquirers Utilize Financial Models To
• Evaluate the impact of a range of offer prices for the target firm, including what constitutes the "maximum price"
• Determine which financing structures are consistent with maintaining or achieving a desired credit rating
• Investigate the implications of different payment structures (form and composition of the purchase price)
• Identify the impact of changes in operating assumptions such as different revenue growth rates or the amount and timing of synergy.
Discussion Questions
Answer questions 1-4 using as the base case the firm valuation and deal structure data in the Microsoft Excel model available on the companion site to this book entitled Thermo Fisher Acquires Life Technologies Financial Model. Please see the Chapter Overview section of this chapter for the site's internet address. Assume that the base case assumptions were those used by Thermo Fisher in its merger with Life Tech. The base case reflects the input data described in this case study. To answer each question you must change selected input data in the base case, which will change significantly the base case projections. After answering a specific question, either undo the changes made or close the model and do not save the model results. This will cause the model to revert back to the base case. In this way, it will be possible to analyze each question in terms of how it is different from the base case.
1. Thermo Fisher paid $76 per share for each outstanding share of Life Tech. What is the maximum offer price Thermo Fisher could have made without ceding all of the synergy value to Life Tech shareholders? (Hint: Using the Transaction Summary Worksheet, increase the offer price until the NPV in the section entitled Valuation turns negative.) Why does the offer price at which NPV turns negative represent the maximum offer price for Life Tech? Undo changes to the model before answering subsequent questions.
2. Thermo Fisher designed a capital structure for financing the deal that would retain its investment grade credit rating. To do so, it targeted a debt-to-total capital and interest coverage ratio consistent with the industry average for these credit ratios. What is the potential impact on Thermo Fisher's ability to retain an investment grade credit rating if it had financed the takeover using 100% senior debt? Explain your answer. (Hint: In the Sources and Uses section of the Acquirer Transaction Summary Worksheet, set excess cash, new common shares issued, and convertible preferred shares to zero. Senior debt will automatically increase to 100% of the equity consideration plus transaction expenses.48) Undo changes to the model before answering subsequent questions.
3. Assuming Thermo Fisher would have been able to purchase the firm in a share for share exchange, what would have happened to the EPS in the first year? Explain your answer.
(Hint: In the form of payment section of the Acquirer Transaction Summary Worksheet, setthe percentage of the payment denoted by "% Stock" to 100%. In the Sources and Uses section, set excess cash, new common shares issued, and convertible preferred shares to zero.) Undo changes made to the model before answering the remaining question.
4. Mark Fisher, CEO of Thermo Fisher, asked rhetorically what if synergy were not realized as quickly and in the amount expected. How patient would shareholders be if the projected impact on earnings per share was not realized? Assume that the integration effort is far more challenging than anticipated and that only one-fourth of the expected SG&A savings, margin improvement, and revenue synergy are realized. Furthermore, assume that actual integration expenses (shown on Newco's Assumptions Worksheet) due to the unanticipated need to upgrade and colocate research and development facilities and to transfer hundreds of staff are $150 million in 2014, $150 million in 2015, $100 million in 2016, and $50 million in 2017. The model output resulting from these assumption changes is called the Impaired Integration Case.
What is the impact on Thermo Fisher's earning per share (including Life Tech) and the NPV of the combined firms? Compare the difference between the model "Base Case" and the model output from the "Impaired Integration Case" resulting from making the changes indicated in this question. (Hint: In the Synergy Section of the Acquirer (Thermo Fisher) Worksheet, reduce the synergy inputs for each year between 2014 and 2016 by 75% and allow them to remain at those levels through 2018. On the Newco Assumptions Worksheet, change the integration expense figures to reflect the new numbers for 2014, 2015, 2016, and 2017.)