Merger & Acquisition

Final Report

M&A Target for

Submitted to:

Prof. Utkarsh Majmudar

by
Timo Bluemer 11E5110
Julien Bourhis 11E5018
Benjamin Heymans 11E5206
Ralf Meinhardt 11E5103
Alfons Priessner 11E5202

November 18th, 2012

PepsiCo: Final Report M&A Advisory

Table of Content
Introduction .................................................................................................................................................. 3
PepsiCo Strategy ....................................................................................................................................... 3
PepsiCo Excess-Cash Flow ......................................................................................................................... 4
Selection Approach ....................................................................................................................................... 4
1.

Create a Long List of comparable companies ................................................................................... 5

2.

Create a Shortlist of 10 companies: .................................................................................................. 5

3.

Final Evaluation ................................................................................................................................. 6

Detail Analysis: NIPPON INDOSARI CORPINDO ............................................................................................. 7

Strategic Fit ............................................................................................................................................... 7
Operational Synergies ............................................................................................................................... 9
Financial synergies .................................................................................................................................... 9
Ownership structure ................................................................................................................................. 9
Financial Analysis ...................................................................................................................................... 9
Market price............................................................................................................................................ 11
Key Value Drivers .................................................................................................................................... 11
Value growth duration ........................................................................................................................ 11
Sales Growth ....................................................................................................................................... 12
Operating Profit Margin ...................................................................................................................... 12
Capital Expenditures ........................................................................................................................... 12
Debt Structure & Interest Rates.......................................................................................................... 12
Additional consideration: Exchange rate ............................................................................................ 12
Valuation of NIC .......................................................................................................................................... 12
Standalone valuation: Three-Stage DCF ................................................................................................. 12
Valuation of synergies............................................................................................................................. 13
Sensitivity analysis .................................................................................................................................. 15
Deal structure ............................................................................................................................................. 16
Negotiation strategy ................................................................................................................................... 16
Appendix ..................................................................................................................................................... 19
References .................................................................................................................................................. 23

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PepsiCo: Final Report M&A Advisory

Introduction
PepsiCo, Inc. (headquarters located in Purchase, New York, United States) is a multinational corporation
and operates in beverage and snack businesses all over the world. The American company was formed
in 1965 with the merger of Pepsi-Cola and Frito-Lay, Inc. The company uses contract manufacturers or
manufactures their products by their own and sells a variety of grain-based snacks, carbonated and noncarbonated beverages and foods, distributed in across more than 200 countries.
The product portfolio includes 22 major brands, each generating more than a billion USD revenues. The
largest brands are Pepsi, Lays, Mountain Dew, Gatorade and Tropicana Beverages. With a net revenue
of USD 66,5bn (2011) and a market capitalization of USD 109bn (September 2012) PepsiCo is the biggest
company in their market behind its main competitor The Coca-Cola Company.
Snapshot of PepsiCo Major Brands

PepsiCo Strategy
PepsiCo elaborated a framework for growth that focuses on extending its macro-snacks portfolio and
expanding its nutrition business (dairy, good-for-you products), while increasing profitability of the
beverage business. PepsiCo forecasts an increasing share of the snacks category in its net revenue (table
1) and perspectives for future growth might be outside of the beverage category.
Emerging markets have also represented an increasing share of PepsiCos net revenue from 21% in 2005
to 34% in 2011. In 2021, PepsiCo forecasts that developing and emerging countries would stand for half
of the groups net revenue.

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Table 1: PepsiCo Portfolio Evolution

Source: Consumer Analyst Group of New York Conference Presentation, 02/23/2012

Therein, the acquisition of Wimm Bill Dann Foods, Russias leading branded food and beverage
company, in 2011 illustrates this strategy on two fields: one geographic and the second one in nutrition
and snack. Indeed, this acquisition increased PepsiCos revenues in nutrition and functional foods from
USD 10Bn to USD 13Bn, particularly in Dairy products and significantly advanced PepsiCos global
nutrition strategy. (Source: Press Release PepsiCo September/2011)

PepsiCo Excess-Cash Flow

In the Q3 2012 PepsiCo Earnings Conference Call held on October 17th, 2012 PepsiCo announces a
target of approximately $8 billion in cash flow from operating activities but anticipates more than $3
billion in share repurchases for 2012, and expects to pay $3.3 billion in dividends, reflecting its
commitment to return capital to shareholders. The company also made a pre-tax discretionary pension
and retiree medical contribution of $1 billion in the first quarter of 2012, which leaves $700 million as
cash flow that can immediately be used for acquisitions.

TASK: PepsiCos internal corporate development department is required to prepare a deal

concept proposal for a Target Company for which some strong strategic rationale exists

Selection Approach
Our approach of creating a short list of potential acquisition targets can be divided in 3 steps:

1.Long List

2. Short List

3. Final
Evaluation
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1. Create a Long List of comparable companies

Our main source for the Long List of potential acquisition targets was Bloomberg.
The result of this step was a Long List of 350 companies operating in food and beverage industry.
We used the following criteria to create our Long List:

Industry Definition: Food and Beverages

Reason: Since the late 90 PepsiCo exclusively focuses on its core business: snack food and beverages.
Hence we did not go beyond their industry definition and just chose F&B companies in order to be in
line with PepsiCos strategy. We also followed PepsiCos approach and did not look for vertical
integration along the value chain.

Geographical Definition: Emerging Markets

Reason: According to PepsiCo Emerging Markets have great growth potential and therefore it is one of
the companys goals to increase their presence in these markets. We only selected companies which
make at least 25% of their revenues in emerging markets.

Corporation Size: > USD 100mn Revenue 2011 & max. market capitalization of USD 5bn

Reason Revenue:
The PepsiCo M&A department has an internal policy that they only target companies which have a
revenue larger than 100mn (Source Interview Melissa Bailey, Director M&A Department PepsiCo in
Oct.2011).
Reason Market Capitalization:
PepsiCo's USD 5.4bn acquisition of Russian-based dairy products company Wimm-Bill-Dann Foods OJSC
in 2010 was used as a benchmark for the max. price (excl. premium) which should be paid for a potential
acquisition target. Therefore we were looking for companies with a market cap below USD 5bn.

2. Create a Shortlist of 10 companies:

The following criteria were selected to reduce the Long List to a Short List of only ten companies:

Tighter Industry Definition: Snacks, dairy products and non-alcoholic beverages

Reason: PepsiCo is experienced with these products and identified these as crucial for future growth.
Diversification into other food products and alcoholic beverages was therefore excluded.

Profitability: Operation Margin >6%

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Reason: PepsiCo is only investing in a profitable business and therefore a 6% operating margin (37.5% of
PepsiCo OM: 16% (2011)) was fixed as an initial benchmark.

3. Final Evaluation
As a final step the short list companies were filtered a second time by key financial indicators, their
availability of sale, their strategic fit and potential other issues. This was done by looking at the
ownership structure, their strategic goals and country risk ratings. Moreover the availability of data was
done as a last check, because it is crucial for further valuation steps. For each criterion, the companies
were sorted in two groups relatively to their peers using the following table:

Company

Country

Market
Segment Cap
(MUSD)

Revenue
(T12M)
(MUSD)

Rev.
Operatin
Growth
g Margin
(1Y)

Alaska Milk Corp

Philippines

Dairy

498

321

11,9%

29,8%

0,2%

68% held
by MNC

No

Kinh Do Corp

Vietnam

Baked
goods
and
Candy

213

205

9,9%

-4,4%

1,9%

35% held
by 4 inv.

Yes

Yes

LT Debt/
Equity

Ownership

Zydus Wellness

India

Dairy

307

69

22,3%

-0,9%

0,0%

70% held
by Cadia
Healthcare

Juhayna Food
Industries

Egypt

Dairy,
Juices

666

418

14,1%

23,3%

14,8%

N.A.

Kwality Dairy

India

Dairy

94

451

6,6%

48,6%

ATLANTIC GRUPA

Croatia

Food &
Bev

282

878

8,6%

5,6%

Nippon Indosari
Corpindo

Indo-nesia

Baked
goods

113

16,9%

52,9%

M Dias Branco

Brazil

Cracker,
cookies,
pasta

3.690

1.810

16,4%

21,5%

Vinamilk

Vietnam

Dairy
prod-ucts

3.110

1.180

23,7%

29,3%

Strauss-Group

Israel

Food &
Bev

1.140

2.180

6,9%

5,2%

578.41

75%
owned by
family
Founder
166,3%
holds
50,20%
94,6%

20,9%

76% held
by 3 IBs

63.1%
held by
founder
47% held
0,0%
by
govnmt.
Founder
107,9%
holds
+50%
20,5%

Other
issues

Political
risks

Target
company

No
No

No

Yes

No

No

No

It turned out, that ownership structure was the most important knockout-criteria. In five cases, the
founder or the founding family holds a majority stake in the company which they are probably not
willing to sell. In one more case, the Vietnamese government holds almost 50% of the shares which
makes the possibility of a takeover by a foreign company very unlikely. Another potential target is
located in Egypt where the political risk for PepsiCo is still prohibitively high.

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As a result, three potential acquisition targets remain. Based on the financial criteria, Nippon Indosari
Corpindo looks most promising, followed by Zydus Wellness and Ninh Do Corp. However, further
strategic and financial analysis is required to decide upon the final target. Therefore we briefly introduce
each of the three remaining companies:

Nippon Indosari Corpindo Limited

Nippon Indosari Corpindo is an Indonesia-based company engaged in the production of breads and
cakes. The Company markets its products under the brand names Sari Roti, Boti and Sari Cake. Its
products are categorized into three types: white bread, cake and sweat bread.

Zydus Wellness Limited

Zydus Wellness Limited is an India-based company that operates in the Consumer Products segments.
Its business consists of manufacturing and marketing of consumer wellness products in India. During the
fiscal 2012, the Companys EverYuth entered into the male skincare market with the launch of EverYuth
Menz. The SugarFree product includes two product types in its portfolio: Sugar Free Gold and Sugar Free
Natura. Nutralite offered by the Company is an alternative to butter.

Kinh Do Corporation
Kinh Do Corporation is a business group of Vietnam with an emphasis on food production, including
baked goods, confections, snacks and soft drinks. The corporate group also includes companies in the
fields of financial services, real estate and a retail bakery chain. Kinh Do Corporation manages a wide
variety of brand names, distributes imported brand name snack and candy goods, and manufactures
food for export from Vietnam.

Detail Analysis: NIPPON INDOSARI CORPINDO

After further strategic and financial analysis we prioritized NIPPON INDOSARI CORPINDO as main
acquisition target.

Strategic Fit
PepsiCo increases focus on Snacking Business Segment till 2020
PepsiCo current product portfolio mix split between beverages and snacks lies at 52% to 48%. PepsiCo
sees big potential in the snacking business (high growth rate and margins) and hence wants to increase
its focus on snacking products. PepsiCo forecasts an increasing share of the snacks category in its net
revenue so that the portfolio split based on net revenue in 2020 shifts to 45% Beverages and 55%
snacks. This goal is hard to achieve by organic growth of the existing snacking products. Therefore
Nippon Indosari Corpindo, which offers Snacks like Cakes and Sweet/Non Sweet Bread, has a high
strategic fit on a corporate level. (Source: Consumer Analyst Group of New York Conference
Presentation, 02/23/2012)
PepsiCo increases focus on Emerging Markets
Emerging markets have represented an increasing share of PepsiCos net revenue from 21% in 2005 to
34% in 2011. In 2021, PepsiCo forecasts that developing and emerging countries would stand for half of
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the groups net revenue. Since Nippon Indosari Corpindo is operating in Indonesia, one of the growing
emerging markets, and has the potential of entering further growing countries in the AsianPacific
Region, the acquisition target has a high strategic fit for PepsiCo. This acquisition will increase PepsiCos
revenue share in Emerging Markets.
PepsiCo enters new Snacking Segment: Cakes and Bread
This acquisition will give PepsiCo access to a totally new product line: Cakes and Bread, which has two
main advantages. First, PepsiCo can build some new capabilities needed for this specific market and
might leverage these learnings in their core markets. Second, the cake and bread market has been
growing for years. In Asia-Pacific cakes and pastries market grew from $24.4bn in 2008 to forecasted
$35.2bn in 2013 which means a CAGR of 7.6% according to Datamonitor. The bread market is growing as
well at a CAGR of 4.9% between 2008 and 2013, and will reach an expected value of $9.53bn. Growth in
these markets is also expected to come from consumers who are moving away from their well known
local breakfast foods as a result of increasing western influence. With this merger PepsiCo can anticipate
the huge growth potential in the next years.
Promising Outlook for Baked Goods Industry in Indonesia
Baked goods continue to benefit from the increasingly busy lifestyle of Indonesian consumers, which is
leading to higher demand for more practical and convenient food. Pastries Category is expected to have
a 5.9% CAGR until 2016 against 5.7% for the Bread Category and 2% for the Cakes Category. Globally,
Baked Goods are expected to grow by 5.5% a year by 2016 (Source Euromonitor).1.
More particularly for Nippon Indosari Corpindo, the Indonesian middle class expanding rapidly in
more ways than one could contribute to demand that will drive net income up 13% in 2012 (Source:
Jakarta Globe)2, according to Yusuf Hardy, the operational director of Nippon Indosari Corpindo.
The Sweet Bread Line is the largest contribution to the companys sales with 56% in 2011, which
represents $49.6 million. Moreover, consumption of breads in Indonesia is still low and a revenue
growth of 30% per year is achievable2. Indeed, according to data from Euromonitor, a market research
provider, Indonesians consume 1.7 kilograms of bread per year in 2010, far lower than neighboring
Malaysia at 5.9 kilograms.
Pastries are by far the biggest contributor to sales of baked goods in Indonesia, both in terms of volume
and value. In general, the popularity of pastries in Indonesia remains unmatched by any other types of
baked goods thanks to the more versatile image of pastries, which are popular not only as breakfast
items but also as snacks. The most popular types of pastries in Indonesia are mostly filled pastries,
especially chocolate filled buns and cheese filled buns. During the first half of 2010, Nippon Indosari
expanded its range of pastries by launching various products including chocolate and pineapple filled
buns, chocolate and blueberry filled buns and blueberry cream filled buns.

1
2

Euromonitor, October 2011 Baked Goods in Indonesia

The Jakarta Globe, Company Behind Sari Roti Keen to Grow Iconic Brand April 15, 2012

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Operational Synergies
PepsiCo already has a Joint Venture with the leading Indonesian Food Company, Indofood, for Snacking
Products. But this Joint Venture only sells PepsiCos and Indofoods salty snacks. A potential acquisition
of NCI would enrich PepsiCos product portfolio by sweet snacks. PepsiCos experience in the Indonesian
market increases NIC attractiveness as potential acquisition target. But more importantly, there is some
space for operational synergies through conjoint purchasing or centralizing administrations or
production.

Financial synergies
In this area, mainly cash synergies are important. NIC currently has large cash outflows as they require
high capital expenditures in order to sustain their enormous growth of 33% (CAGR last 5 years). Their
current cash position is low which is why they are in need for external funds to finance especially
expenditures in fixed assets. PepsiCo on the other hand has large net inflows of cash due to the maturity
and stability of their business. Therefore, cash can easily be transferred to NIC to maintain or even
increase future growth.

Ownership structure
The current ownership structure seems favorable for PepsiCo. The two major shareholders, which are
both investment funds from the British Virgin Islands, Bonlight Investments Limited and Treasure East
Investments Limited, just released 25.21 million shares. Thus, their ownership declined to 31.5% from
previously 34%. Their investment seems to be only profit oriented and not driven by strategic interests.
Therefore, buying the shares from these firms should be feasible if the price is attractive for them.

Financial Analysis
We analyzed key ratios and compared NIC, its industry, and put them in perspective with regard to
PepsiCo. The study covers the main aspects of the financial situation of the respective companies:
growth, liquidity, profitability, efficiency and management effectiveness.
Area
Growth rate
Financial Strength

Profitability

Efficiency

Management
effectiveness

KPI
Sales growth 1 y
Current Ratio
LT Debt to Equity
Gross Margin
Operating Margin
Net profit margin
Effective tax rate
Receivable turnover
Inventory turnover
Asset turnover
ROA
ROI
ROE

NIC
47,12
1,19
20,93
46,45
16,71
13,42
25,4
9,46
30,16
1,35
18,15
21,73
25,48

Industry
9,12
1,37
29
38,54
8,5
5,92
31,85
16,83
5,79
1,09
8,03
11,24
18,86

PepsiCo
6,72
0,99
104,09
51,99
13,89
9,08
28,11
8,33
7,26
0,9
8,17
10,88
26,98

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Growth rate
The year to year sales growth of Nippon Indosari Corpindo is very impressive. Far above the industry and
PepsiCo figures, this trend is positive for the acquirer to continue to boost sales.
Financial Strength
Nippon Indosari Corpindo has a strong financial position and a low leverage ratio compared to the
industry. Needless to compare the debt position with PepsiCo as the size and track record of the
companies are not comparable. The company's ability to pay short-term obligations proves to be a bit
lower than the industry, but still good, with a current ratio higher than 1.
Profitability
The gross margin is an important indicator for profitability as it shows the capability of a company to
demand a premium over its direct costs. The gross margin for NIC is 46% is about 8% higher than the
industry average. It is however slightly lower than PepsiCo's, but probably due to the fact that PepsiCos
brand image is very strong.
The operating margin is very useful to compare the profitability of the operating activities of a company.
It is not influenced by different financing decisions or tax regimes. NIC has an excellent operating margin
of more than 16%, almost double of the industry average and almost 3% higher than PepsiCo's.
The net profit margin shows how the company is performing after tax and interest. Nippon's net profit
margin of more than 13% is also excellent, clearly beating the industry and PepsiCo.
With about 25%, NIC enjoys lower effective tax rates than an average competitor with 31% and PepsiCo
with 28%. This number also helps to explain the high net profit margin NIC. All in all the figures indicate
very high profitability.
Efficiency
Nippon Indosari Corpindo collects receivables and extends its suppliers' credit in an efficient way to
provide better liquidity. Similar to PepsiCo's level, NIC is still far below the industry, which leaves room
for further improvements in cash collection effectiveness.
The asset turnover of 1.35 indicates high efficiency in the use of fixed assets. The industry average is
slightly above 1 while PepsiCo's is slightly below.
Management effectiveness
ROI measures profitability in terms of investment. With more than 21% Nippon outperforms the
industry and PepsiCo by nearly 10% indicating that they have great investment opportunities.
Nippon Indosari Corpindo yields an interesting Return on Equity, higher than industry average, and in
similar range of current PepsiCo figures. The target looks then attractive from a potential shareholder's
perspective.
Cash Flow Analysis
Cash flows from operating activities have been positive (at least since 2007) and growing at a steady
pace since 2009. The company is following a positive trend in operation performances.
Investing activities have been highly cash consuming in the last 2 years, mainly due to heavy
investments in capital expenditures.

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As a result, free cash flows have been slightly negative in 2010 and 2011, reaching equilibrium in 2008
and 2009. No cash flows are then available to shareholders or debtholders. However, the situation
should change in the coming years as the investment in capital expenditures will bring some returns and
additional cash flows in the operations.
Regarding the financing side, a $ 10 million long term reimbursement combined with an increase of $ 20
million in equity in 2010 resulted in a positive financing cash flow of roughly $ 10 million during that
year. Except from that, financing cash flows remain stable and close to a $ 0 level for the whole period
between 2007 and 2011. In conclusion, net change in cash has been positive in 2010 thanks to the
financing share. In 2011, NIC suffered an $ 8 million outflow of cash.

Market price
As concluded above, the financials of NIC in comparison to the industry in which they operate as well as
to PepsiCo look very promising. However, their good performance and their growth opportunities seem
to be valued by the market already. An indicator for this is the price-to-sales multiple of more than 6 (for
comparison, PepsiCo has a multiple of only 1.64).

Key Value Drivers

Our team will use the DCF model for the company valuation, which requires some assumptions.
Multiples are less reliable as we could see that NIC performs stronger and has higher growth than the
typical company in their industry. The Shareholder Value-Driver Tree helps to identify value drivers,
which will be discussed in more detail below.
Value growth duration
Value growth duration is a key value driver for the company value and a key input in our DCF. Currently,
the NIC is growing in a very profitable way and much faster than the industry and the overall market. It
will be important to determine for how long the company can outperform the competition in its market.

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As the bakery market is very fragmented is it possible that NIC can maintain strong growth for a
relatively long period.
Sales Growth
The sales growth will be driven by the Indonesian GDP, consumer expenditure and growth of middleclass households. With a expected GDP of 6,1% in 2012 and a constant forecast, Indonesias economy is
one of the most growing in Asia and above some other emerging market economies such as Vietnam
(5.6%), Russia (2.8%) and Brazil (2.7%). This is also reflected in the consumer expenditure per household
which will increase by 39.2% from 2012 to 2020 and a growing number of middle-class households from
13.7 million in 2011 to 31.1 million in 2020.
Operating Profit Margin
NCI operating Margin is 16.72% (2012). A merger with PepsiCo would have positive effects on the
drivers of the operation margin. Potential centralization of administration, purchasing, marketing, etc.
saves expenditures, which has a positive effect on the operating margin. A further driver on the
operating margin is the inflation (8.3% in 2012), because raw materials, salaries, etc. become more
expensive, but this cost increase cannot always be transferred to the customer via a price increase. Thus
the high inflation is another driver on NCIs operating margin.
Capital Expenditures
Capital expenditures may be influenced by the age of their equipment since they would have to reinvest
to keep supplying the demand. Also, recently opened factories might increase the depreciation: 3 out of
the 6 current factories of the company opened in 2011 and should be emphasized by the construction of
new plants two new ones are expected for 2012 for about $21 million.
Debt Structure & Interest Rates
The interest rate for debt could be improved by quantitative and qualitative factors. Due to the strong
cash figures by PEPSICO, Nippons liquidity could be improved and debt could be paid back to improve
the equity/debt ratio. Moreover innovation can be boosted, technologies transferred and management
know how shared. The interest rate for debt could be improved by quantitative and qualitative factors.
Due to the strong cash figures by PEPSICO, NICs liquidity could be improved and debt could be taken on
to gain additional tax shields.
Additional consideration: Exchange rate
For PepsiCo as a US-based company, the development of the exchange rate is a major value driver. The
acquisition price will be paid in dollars while the cash flows PepsiCo will receive in the future will be in
local currency. Fluctuations in the exchange rate can therefore have a large impact on the profitability of
the acquisition.

Valuation of NIC
Standalone valuation: Three-Stage DCF
Possible valuation techniques are the dividend discount model, comparables (transaction or trading
multiples), DCF with exit multiple and DCF with terminal growth rate. Dividend discount model is not
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applicable because no clear dividend pay-out policy is available. Transaction comparables are not
applicable either as no transactions of comparable companies (industry, size and South-East Asia) are
available. Trading multiples are also not very helpful as most of the companies in this industry are not
listed and none has similar growth rates compared to NIC. This fact also rules out the use of exit
multiples in a DCF analysis. Therefore, by far the best method seems to be the DCF with a terminal
growth rate.
The company is currently growing rapidly (at more than 30% annually) and it has the potential to grow
strongly and constantly increase its market share over a longer period. In a two-stage DCF, we would
have the problem of either using a very high long-term growth rate or modeling an abrupt and very
sharp drop in the companys sales growth. Both assumptions seem to be very unrealistic. Therefore, a
three-stage DCF, using detailed forecasts till 2016, followed by a slow-down in market share growth
from 2016-2021 and a terminal value afterwards, is most appropriate to value the company.
We use a constant WACC to value the company using an Indonesian market risk premium of 7.3%3 and a
risk free rate of 5.75%4. NIC operates in the food industry which is not very sensitive to overall market
developments as the consumption of bread and cakes does not heavily depend on market
developments. A beta for NIC is not directly available, so we used the sector beta of 0.55 and relevered
it. Using these numbers as well as the current capital structure of 99.53% equity, we arrive at a WACC of
9.39%.
In order to forecast the free cash flows to the firm, a set of assumptions are used (Exhibit 2).
Furthermore, we assume that PepsiCo will acquire NIC at the end of 2012. Therefore, the free cash flows
from 2012 do not need to be discounted.
Calculating the free cash flows and discounting them at the WACC, we arrive at a standalone equity
value of Rupiah 7.3 trillion or $ 753mn (Exhibit 3).

Valuation of synergies
Synergies can only be implemented after the acquisition of NIC. Consequently, PepsiCo cannot make use
of any synergies in 2012.
Market share
We believe that PepsiCo, due to its expertise in marketing and distribution can increase NICs market
share. We plan to increase the marketing budget and run additional advertising campaigns for Rupiah
10bn (roughly $ 1mn) each year from 2013-2016 to strengthen the brand and increase revenues.
Furthermore, NICs bargaining power towards customers (especially retailers) is increased by the
acquisition, so that better shelf-positioning and slightly higher prices seem achievable.

Source: http://www.iese.edu/research/pdfs/di-0920-e.pdf
Source: http://www.tradingeconomics.com/indonesia/government-bond-yield
5
Source: http://www.reuters.com/finance/stocks/financialHighlights?symbol=ROTI.JK
4

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Additionally, financial synergies come into play. NIC currently has large cash outflows and requires high
amounts of external funds to invest in fixed assets in order to maintain strong growth. If there are
limitations in procuring these funds, NIC cannot exploit all profitable growth opportunities. When
PepsiCo with its strong cash flows acquires NIC, these limitations will disappear and NIC can grow faster.
We assume that, with the help of PepsiCo, NIC can capture an additional 0.4% of market share each year
from 2013-2016 and that this increase will be permanent as NIC can maintain its strong position against
competitors. As the implementation of these synergies is risky, we increase the discount rate to value
this type of synergies by 1.6%. The expected higher market share will increase NICs value by Rupiah
500bn (Exhibit 4).
Margin improvements
Due to the increased bargaining power towards suppliers we expect slightly lower costs for inputs.
PepsiCo as a very experienced producer has high competencies in optimizing production processes such
as packaging. We expect higher production efficiency due to waste reduction, productivity increases of
the workforce etc. These levers translate into gradual improvements in the COGS (lowering the COGS as
% of sales-ratio till 2016 by 0.3% each year). After 2016 the ratio will be lowered permanently by 1.2%
compared to the base case.
A similar impact can be assumed for SG&A as % of sales-ratio. PepsiCo has excellent skills in logistics and
distribution and there are potential synergies for the sales force as both PepsiCos as well as NICs
products are mostly sold in the same outlets. Furthermore, there is some potential to reduce
administrative costs by transferring best practices in controlling, HR and other support functions from
PepsiCo. Improvements of 0.25% each year till 2016 are feasible, lowering the ratio permanently by 1%
in the years afterwards.
Using the WACC seems adequate to measure these synergies because cost reductions are more easily
implemented than revenue increases. Margin improvements combined will account for the majority of
synergies to PepsiCo and are valued at Rupiah 729bn (Exhibit 4).
Additional tax shield
Currently, NIC has practically no long-term debt which also has to do with the limited access to debt
financing in the Indonesian financial system. After an acquisition by PepsiCo, NIC will have significantly
better access to capital markets. Taking on additional debt worth Rupiah 3 trillion at the beginning of
2014 is feasible leading to high tax shields in the future. The year 2014 is chosen because at that point in
time, the expected cash flows are high enough to support the interest payments. We consider the taxsavings to be very certain. However, the amount and conditions for taking on debt in 2014 are not
perfectly predictable. Therefore, we use the risk-free rate adding 2% to it as the discount rate.
Consequently, the present value of the tax shield is Rupiah 461bn.
All in all potential synergies are valued at Rupiah 1.7 trillion or 23% of the standalone equity value of NIC
(Exhibit 4).

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PepsiCo: Final Report M&A Advisory

Sensitivity analysis
To have a more precise idea of a valid range of the valuation, we conducted several sensitivity checks. As
sales growth is the most important driver of our valuation, we developed three scenarios with different
sales growth. In the base case, the sales grow as expected. In the low case, they grow 10% less and in
the high case 10% more than expected.
Furthermore, we decided to do a sensitivity analysis in each case with the two following variables: the
WACC and the Growth rate for the Terminal Value. Both variables have a strong impact on the valuation
and are difficult to forecast precisely.
If we call WACC0 the estimation of the WACC calculated for our assumptions, the sensitivity varies from
WACC0 0.5% to WACC0 + 1%. The expected Growth rate for the Terminal Value (g = 4%) is the basis of
the sales growth for the last year. The sensitivity varies from g 0.5% to g + 1%. The results of our
sensitivity analysis are shown in the table below.

WACC \ g
8.89%
9.39%
9.89%
10.39%

LOW CASE

BASE CASE

HIGH CASE

Total Value (incl. synergies; Rupiah billion)

3%
3.5%
4.0%
4.5%
7,698
8,194
8,791
9,526
7,058
7,462
7,940
8,516
6,514
6,846
7,235
7,696
6,044
6,321
6,642
7,016

Total Value (incl. synergies; Rupiah billion)

3%
3.5%
4.0%
4.5%
8,643
9,209
9,890
10,728
7,915
8,375
8,920
9,578
7,296
7,674
8,118
8,643
6,762
7,077
7,443
7,870

Total Value (incl. synergies; Rupiah billion)

3%
3.5%
4.0%
4.5%
9,706
10,351
11,127
12,081
8,879
9,403
10,024
10,772
8,175
8,606
9,111
9,709
7,568
7,927
8,343
8,830

Total Value ($ million)

WACC \ g
8.89%
9.39%
9.89%
10.39%

3%
798
732
675
627

Total Value ($ million)

3.5%

4.0%

4.5%

850
774
710
656

912
823
750
689

988
883
798
728

3%
896
821
757
701

Total Value ($ million)

3.5%

4.0%

4.5%

955
868
796
734

1,026
925
842
772

1,112
993
896
816

3%
1,007
921
848
785

3.5%

4.0%

4.5%

1,073
975
892
822

1,154
1,039
945
865

1,253
1,117
1,007
916

We consider Rupiah 8.9 trillion ($ 925mn, highlighted in green in the base case) to be the most likely
value, however there is some downside potential even in the base case. If the terminal growth rate is
lower and the WACC slightly higher (WACC + 0.5% and g 0.5%), the company is only worth Rupiah 7.7
trillion ($ 796mn) or 14.5% less than in the most likely case. However even in this scenario, paying a
premium on top of the current market price of NIC is justified.
Even in the low case (low sales growth), a premium of approx. Rupiah 1 trillion ($100 mn) on top of the
market price is a reasonable price for PepsiCo, however PepsiCo could face losses if the WACC and/or
the growth rate turn out to be worse than expected.
In the high case (stronger sales growth), there is significant upside potential: the company could well be
worth more than Rupiah 10 trillion (or $ 1,000mn).
All in all, the sensitivity analysis shows that there is significant uncertainty in the valuation of NIC.
However, there is a slight asymmetry between potential losses and gains that is in PepsiCos favor. In the
high case, the valuation increase is more significant than the valuation decrease in the low case which
makes the deal attractive for PepsiCo.

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PepsiCo: Final Report M&A Advisory

Deal structure
Payment by cash deal or stock deal
There are two kinds of paying the acquisition price: cash deal or stock deal. The purchase price will be
paid in cash at a cash deal. On the other hand a portion or the entire amount of the acquisition price is
paid in shares of the acquiring company during a stock deal. During the M&A wave from 2003 till 2005
around 50% of deals were paid in cash.
At stock transactions, buyers share the value as well as the risk of the transaction with the shareholders
of the company they acquire. In cash deals, acquiring shareholders take on the entire risk that the
expected synergy value embedded in the acquisition premium will not materialize.
PepsiCo has a lot of cash to finance a cash deal in that case. With net cash provided by operating
activities of US$ 8.9bn and cash/cash equivalents of US$ 4.1bn referring to the balance sheet in 2011,
PepsiCo is well prepared. Moreover PepsiCo would have a certain purchase price and no dilution of
ownership. The certain purchase price guarantees a less risky transaction for both companies because
cash does not fluctuate like stocks. A stock deal could increase the stock price significantly, so the
acquirer would pay much more. Furthermore cash deals prevent the dilution of ownership of your
company. It allows maintaining the current ownership status of your company. Otherwise the target
entitled to a percentage of the acquirer future profits and would have a vote in shareholder decisions.
The disadvantage of spending down the cash reserves could be compensated quite easily by PepsiCo
due to their high liquidity as already mentioned.
Another argument for a cash deal is the sellers preference. PepsiCo has to convince the major investors
of Nippon. These two major investors are Investment funds. They would prefer cash instead of stocks, to
invest in new projects.

Negotiation strategy
Analysis of possible defense tactics by the target company
An analysis of the possible defense tactics is essential to figure out the right negotiation strategy as
defense tactics could delay the outcome or/and increase the uncertainty of the deal taking place.
Several defense tactics by Nippon could confront PepsiCo. But in case of Nippon, the major shareholders
are two investment funds with 63% of the shares, whose behavior is important for PepsiCo:

Bonlight Investments Limited (31.5%)

Treasure East Investments Limited (31.5%)

As an investment fund, the main objective could be to buy shares of a company, increase the value and
sell it. It is less probable that proactive or pre-deal preparations like special charter amendments exist.
The same applies for a possible golden parachute. If these existed the actual major shareholders would
decrease the value for an acquiring company with negative impact on a potential purchase price.
Employee stock ownership plans, other labor agreements and poison puts would be against the
investment strategy of investment funds as well.

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PepsiCo: Final Report M&A Advisory

A usual reactive tactic is litigation. Nippons shareholder could try to increase the uncertainty and
improve their psychological position between buyer and seller. But in the end it should be no problem
for PepsiCo if the shareholders are willing to sell. Since Nippon is an Indonesian company, different
regulations could make the transaction harder. Bapepan-LK the Indonesian capital market regulator
has introduced new takeover rules in June 2008. PepsiCo has to make sure, that minimum 20% of the
shares are free float.
Another defense tactic is the counter-tender, which seems not realistic due to the different sizes of both
companies. Asset restructuring would decrease the attractiveness for PepsiCo, but would not be a
reasonable strategy for an investment fund as major shareholder. Moreover it is less probable that a
white knight or greenmail would save the target company this is not needed for an investment fund. It
is more likely, that another potential buyer could compete against PepsiCo. Due to the low quota of
public shares a leveraged recapitalization makes also no sense. The last defense tactic to be mentioned
is a management buy-out, by the current management of Nippon. In this case a significant use of debt
financing is needed as well as a financial partner. Such a financial partner could be one of the current
investment funds. However, Nippon has currently negative cash inflow. There is a lack of cash that
makes it harder to finance such a management buy-out. Anyway PepsiCo has to make sure, to negotiate
with the two major shareholders in the same way under the same circumstances.
In conclusion, PepsiCo does not have to expect major defense tactics by Nippon. In the end it will be a
negotiation with the major shareholders.
Approach for negotiation
Our approach consists in a first negotiation with the board of directors of NIC to convince them on the
positive aspects of PepsiCos takeover. Due to their important equity stake in the company, we can
assume that representatives of the investments funds will sit on the board, which will be favorable for
the later discussion with the funds themselves.
The purpose is to propose a friendly takeover, in the form of the acquisition of a majority of the shares
of NIC. One of the key elements we will emphasize during the discussions is that we want to keep the
current management in place, as we consider they are doing a great job in managing the company.
If the discussion with the board gives positive results, we will contact the two investment funds. As a
certain part of the equity need to be free floated, according to Indonesian regulation, PepsiCo is only
interested in buying a majority stake of the equity, but not 100%. We want to make a direct cash offer to
the investment funds.
The investment funds are exclusively interested in a financial return on their shares, not in a strategic fit.
As a result, the cash offer with a decent premium should be the perfect solution to convince them to sell
their shares to PepsiCo. Moreover, those funds recently sold 2.5% of their respective stake in NIC. This
indicates that they are satisfied with the current share price and do not consider the stock to be
undervalued. In addition, they are also probably looking for a potential exit strategy and the PepsiCo
offer is the perfect solution to answer that need of the current main shareholders.

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PepsiCo: Final Report M&A Advisory

Our reserve price of Rupiah 5.6 trillion ($ 585mn) or Rupiah 8,848 per share for the 63% of the equity
from the investment funds is based on our valuations and on the value of the potential synergies,
valuing the total company at 9.0 trillion ($ 926mn). Our negotiation strategy recommends starting the
offering at a lower price of Rupiah 7,150 per share, but giving the current shareholders a decent
premium of 10% compared to the current price6 of Rupiah 6,500 per share. If they refuse, we will
progressively increase our offer. We are optimistic to settle the deal below Rupiah 8,000 per share, well
below our reserve price of Rupiah 8,848 per share.

Share price on Oct. 29, 2012

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PepsiCo: Final Report M&A Advisory

Appendix
Exhibit 1: Bloomberg output

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PepsiCo: Final Report M&A Advisory

Exhibit 2: DCF assumptions
Sales growth: Overall market grows at the same rate as the Indonesian GDP. NICs market share
increases by 1.7% each year till 2015 and afterwards market share growth linearly decreases.
SG&A: Due to economies of scale, SG&A as a percentage of sales linearly decrease from 24% to 22.5% in
2015 and remain constant afterwards.
PP&E: Due to economies of scale, the fixed capital requirements (PP&E as % of next years sales)
decrease from 48.9% in 2012 to 42.9% in 2016.
Depreciation: Depreciation as % of last years PP&E remain constant at 6.9%.
Capital expenditures: Capital expenditures are calculated as sum of the increase between this years and
last years PP&E and the incurred depreciation for this year.
Change in net working capital: Historical averages of several ratios (inventory turnover ratio, accounts
payable turnover ratio etc.) are used to forecast this item.
Stand-alone equity value: This number is calculated by reducing the firm value from the DCF by the
market value of debt. We hereby assume that market value of debt is equal to book value of debt.

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Stand alone Equity Value

7,266,118,243

7,299,189,764
-33,071,521

203,869,180
30,615,461
30,615,461

Capital expenditure (Capex)

FCFF
Present value of FCFF

Firm value
-Market value of debt

264,051,719
198,038,789
38,452,921
2,007,068

2012

EBIT
EBIT*(1-t)
Depreciation and amortisation
Change in Net Working Capital

YEAR

(000 Rupiah)

178,958,825
123,099,864
112,534,201

335,374,142
251,530,606
49,885,611
-642,472

2013

191,281,570
183,471,279
153,328,189

420,506,204
315,379,653
58,806,463
-566,733

2014

183,420,219
272,721,157
208,352,976

516,954,723
387,716,042
67,962,436
-462,898

2015

171,766,387
354,925,168
247,881,796

599,749,130
449,811,848
75,942,263
-937,444

2016

202,490,641
389,266,084
248,531,455

677,756,818
508,317,613
82,565,115
-873,997

Forecast
2017

194,298,732
456,690,259
266,552,956

745,796,013
559,347,010
90,853,728
-788,253

2018

181,559,693
520,487,326
277,714,703

804,485,060
603,363,795
98,003,295
-679,929

2019

164,140,076
579,105,194
282,470,523

851,890,397
638,917,798
103,778,268
-549,204

2020

170,738,507
602,210,690
268,528,937

886,136,391
664,602,293
107,950,155
-396,749

2021

626,419,560
5,202,678,567

TV

PepsiCo: Final Report M&A Advisory

Exhibit 3: DCF-valuation

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Higher Market share

8,957,046,878

Total value for Pepsico

2013
33,071,521
33,071,521
461,669,048

2013
-0.30%
3,323,139
-0.25%
2,769,283
6,092,422
729,117,215

7,266,118,243
1,690,928,634

2013
0.40%
10,000,000 1,369,405
502,643
500,142,371

Stand alone equity value

Total value of synergies

PV of additional tax shield (at risk free rate + 2%)

New total long-term debt

Old total long-term debt
Difference
Additional tax shield

Additional tax shield

PV of margin improvements (at WACC)

Lower COGS as % of sales

Effect on FCFF
Lower SG&A as % of sales
Effect on FCFF
Total effect on FCFF

Margin improvements

PV of additional market share (at WACC + 2%)

Additional market share to base case

Cost of additional advertising
Effect on EBIT
Effect on FCFF

2014
3,000,000,000
33,071,521
2,966,928,479
42,649,597

2014
-0.60%
8,082,903
-0.50%
6,735,753
14,818,656

2014
0.80%
9,643,200 15,277,200
6,665,603

2015
3,000,000,000
33,071,521
2,966,928,479
42,649,597

2015
-0.90%
14,470,291
-0.75%
12,058,576
26,528,867

2015
1.20%
9,643,200 31,171,217
16,444,477

2016
3,000,000,000
33,071,521
2,966,928,479
42,649,597

2016
-1.20%
22,287,945
-1.00%
18,573,288
40,861,233

2016
1.60%
9,643,200
48,108,814
28,470,285

2017
3,000,000,000
33,071,521
2,966,928,479
42,649,597

2017
-1.20%
25,079,517
-1.00%
20,899,597
45,979,114

2017
1.60%
61,096,395
35,090,395

2018
3,000,000,000
33,071,521
2,966,928,479
42,649,597

2018
-1.20%
27,597,220
-1.00%
22,997,683
50,594,903

2018
1.60%
64,157,324
39,286,916

2019
3,000,000,000
33,071,521
2,966,928,479
42,649,597

2019
-1.20%
29,768,932
-1.00%
24,807,443
54,576,376

2019
1.60%
67,159,887
43,451,236

2020
3,000,000,000
33,071,521
2,966,928,479
42,649,597

2020
-1.20%
31,523,106
-1.00%
26,269,255
57,792,360

2020
1.60%
70,081,342
47,640,482

2021
3,000,000,000
33,071,521
2,966,928,479
42,649,597

2021
-1.20%
32,790,334
-1.00%
27,325,279
60,115,613

2021
1.60%
72,898,612
49,541,271

TV
3,000,000,000
33,071,521
2,966,928,479
454,258,136

TV
-1.20%
635,304,230
-1.00%
529,420,192
1,164,724,421

TV
1.60%
1,412,391,712
959,849,292

PepsiCo: Final Report M&A Advisory

Exhibit 4: Valuation of synergies & total value

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PepsiCo: Final Report M&A Advisory

References
PepsiCo Homepage:
www.PepsiCo.com
PepsiCo Annual Report:
http://www.PepsiCo.com/annual11/downloads/pep_ar11_2011_annual_report.pd
Interview with Mrs Belissa October 26th, 2011
http://www.thedeal.com/content/consumer-retail/unilever-pepsi-scour-globe-for-deals.php
Consumer Analyst Group of New York Conference Presentation, 02/23/2012
http://www.PepsiCo.com/Investors.html
Bloomberg:
http://www.bloomberg.com/quote/PEP:US
Reuters:
www.reuters.com
NIPPON INDOSARI CORPINDO:
http://sariroti.com/
NIC Annual Report:
http://www.sariroti.com/0_repository/Annual-Report%20Sari-Roti%202010-Final.pdf
Euromonitor:
http://www.euromonitor.com/
Datamonitor:
http://www.datamonitor.com/
WACC Sources:
http://www.iese.edu/research/pdfs/di-0920-e.pdf
http://www.tradingeconomics.com/indonesia/government-bond-yield
http://www.reuters.com/finance/stocks/financialHighlights?symbol=ROTI.JK
http://www.pwc.com/id/en/indonesian-pocket-tax-book/assets/Indonesian-pocket-tax-book_2012-update.pdf

Takeover Defenses:

Mergers, Acquisitions and Corporate Restructuring, by Patrick Gaughan, Wiley International,

2003 (Third Edition)

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