Grand Metropolitan PLC Essay

Company Background and IssuesGrand Metropolitan PLC was a multinational holdings company that brass instrumentd a hostile takeover threat in the late 1980s and early 1990s. The company specialized in wine and spirits. The headquarters for operation was in London, England at the beat of this case.The major dilemma at hand is avoiding a takeover. The economy was bad at the time, and the companys stockpile price was thought to be undervalued, as their low P/E ratio of 13.3 indicated. Management needs to attend out why their stock price is so undervalued.A newfound st placegy of Grand Metropolitans was to niftyizing brand value on the balance sheet. An other(a) strategy of management was to divest in low step-up areas and invest heavier in projects that meet a certain growth criteria. The CEO stated, In addition to brewing, we view as continued to exit those businesses whose failure electric potential gain do not meet our growth criteria All those decisions were driven by a th orough analysis of income growth prospects. Senior management is committed to diminution debt. In 1991 alone the debt to capital ratio fell by 9%. Management has shown to be committed to these goals into the future. One of the issues management will have to face is how to tell which business units are outperforming others.Despite the gravid performance of Grand Metropolitan as a company during the 1980s, the stock was undervalued in the early 1990s. This is the immediate issue management must address to avoid a takeover.Financial AnalysisCost of CapitalOur estimate of the pound-based burthen average cost of capital for Grand Metropolitan was 16.433862%. We used the weights from exhibit 6. The tax rate was given as 35%. We used the weighted average costs of debt and preferred stock from exhibit 7. We then discounted the flow of future dividends to find the cost of common equity. We also used the three strategic business units to find the approximate weighted average cost of capit al for each unit. We found that WACC for Restaurant-Retailing came to 12.8876%. The WACC for Food Processing came to 12.12%. And the WACC for Drinks came to 11.5513%. We used exhibit 8 to find the average cost of equity and debt for the similar companies in each business segment and forecasted it on to Grand Metropolitan.We noticed a high cost of equity for Grand Metropolitan. This comes at a time when the company is trying to reduce its debt. The cost of equity was found to be 16% in the U.S. and about 18% in Great Britain.Cost of DebtTo find our cost of debt we took the market value of debt to capital ratios for each segment, found on exhibit 8, for our weights. Our assumptions to find the cost of debt, since it was not explicitly given, were as follows we used the hamper ratings given under each segment, we then used the yields by rating category chart on exhibit 9 to find the appropriate judge and found an average of the ratings assigned for each segment. Now having found ou r weights and rates we are able to with the tax rate found within each segment find our cost of debt.Currency rate riskDue to the diversity of markets that Grand Metropolitan operates within, the company is inherently exposed to currency conversation rate risk. The majority of the subsidiaries of Grand Metropolitan operate within the United Kingdom and the United States markets, which utilize the Great Britain Pound and the U.S. Dollar respectively. With Grand Metropolitans headquarters in London, England, they have a large number, 77%, of their Debt currency in U.S. dollars. We think this is due to their ability to access a much pooh-pooh debt rate within the U.S. market, so they can finance their projects with the cheapest debt available.Market AnalysisGrand Metropolitans P/E ratio is noticeably overthrow when compared to the other companies within its segmented segments. We found that these low P/E ratios combined with increased remuneration made Grand Metropolitan a potential target for corporate raiders, i.e. takeover risk.RONADuring our analysis of individual segments, exhibit 2, we found that the RONAs for the Retailing and Food were lagging behind that of the Drinks segment. Furthermore, the Drinks segment only has 26% of union net assets, yet it provides 46% of operating profits. Comparing this to the Retailing segment, which utilizes 40% of net assets while only contributing 24% of the total profits, shows a great disparity. The Food segment represents 34% of net assets and 30% of the total profits.EVAWhen calculating EVA, our early indications that Retailing was a drain on the companys profits and growth were further confirmed. Retail had a negative EVA of -137.70. Drinks were clearly the main most efficient segment with an EVA of 135.83, and Food had a -44.04 EVA. We calculated these EVAs exploitation our segment WACCs and using Net Assets as a measure of Capital. Tax Rates for each segment were given in exhibit 8, which were utilise to opera ting profit for a NOPAT of each segment. These results show how mismanaged and inefficient the Retailing segment, and to a smaller degree the food segment are.Environmental AnalysisStrengthsThe force of Grand Metropolitan is its drink segment. The operating profit in the United States has been grown from $185 to $517. The UK and Ireland are using only 30% of net assets, but make for 36% of the operating profit.WeaknessesRetailing appears to be a weakness for Grand Metropolitan. The return on net assets and operating profit has been consistently lower than the other segments. The companys capital structure is set up with a heavier than average amount of debt. Grand Metropolitan carries 43% debt to capital, while the average for comparable to(predicate) companies is between 28-34% depending on the segment.OpportunitiesGrand Metropolitan has an opportunity to increase profits by investing in current successful brands. The brands that fall under drinks have proven to give the highest return on net assets.RecommendationFrom our results we can conclude that the Retailing and Food segments are not adding value to the firm and are bringing down the value being added by the Drinks segment. While Foods EVA of -44.04 isnt nearly as bad as Retails -137.70, both are bringing down the companys growth opportunities. These segments are either ripe for a selloff or restructuring. The food segment oddly seems like it needs just a management change since its close to being positive EVA but return on net assets has dip in the last few years, leading to the low EVA.