empire - students F23 (1)

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Jan 9, 2024

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Case 11: Empire Group Limited

Empire Prep Assignment submit single pdf file to Learn by 8a.m. Monday Nov 27th • Assess the situation arising in the case. • Analysis: Estimate the value of Oshawa as a stand-alone company, and the value of the projected synergies with Empire. Recommendation 1: How much (total $) would you offer? Why? Additional information: the offer to Oshawa shareholders will include cash and shares as consideration. The shares will be in Newco's equity; the cash payment will include $200M directly from Empire plus the proceeds from new debt issued by NewCo . • Analysis: Use the TEV/EBITDA method to value Empire's Food Division , assuming 37% of Empire's EBITDA is attributable to the Food Division. • Analysis: Estimate the TEV of NewCo (New Sobey's), a firm that merges Oshawa with the Empire Food division. – Estimate the Equity value of Newco = TEV – Debt value, given that no debt is transferred from Empire to Newco. Recommendation 2: What combination of shares of Newco versus cash would you offer? [Hint: keep in mind the preferences of the main stakeholders: The Wolfe's prefer mostly cash as payment; Empire requires majority ownership of all companies; target leverage is 30% for Newco)].

Case Objectives: • Evaluate an M&A opportunity in the context of the Canadian grocery industry. • Identify strategic issues surrounding the bid. • Value the target (Oshawa) as a standalone firm • Evaluate additional synergies produced in an acquisition. • Incorporate a “pure play” restructuring • Recommend an amount to offer for the acquisition, and how to structure the deal to meet the objectives of the main players.

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Assess the situation 1. Role: Who are we? 2. Issue: Why are we here? 3. Who are the focal stakeholders in the case? 4. Alternatives: What could we possibly do? 5. Criteria: To choose between the alternatives, what matters ?

Qualitative analysis • What are the characteristics of the grocery business in Canada? – What are the key success factors? • What strengths and weaknesses does the Oshawa Group possess? – What are the synergies associated with a potential takeover offer? • What strategic issues are associated with a potential takeover offer ?

Quantitative Analysis: Valuing Oshawa Use the spreadsheet to determine: • The value of Oshawa Group as a stand-alone company, based on estimates obtained using: i. the DCF method (assume terminal growth rate = 5%), and a target Debt/Capital ratio of 30% (as distinct from the current 12.4% in Exh 9). Assume moving to target leverage would decrease their debt rating to “BBB” ii. the TEV/EBITDA multiple method (exh 9) • The value of the synergies (using the DCF method only) • The total value of Oshawa to Empire (i.e., the maximum Empire can pay before the NPV of the acquisition goes negative). • The total value created (total NPV) of the deal. • How much to bid, using information in the case (precedent transactions, assessing the situation, judgement)

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Recommendation 1: how much to bid? How much (total $) would you offer for Oshawa? Why? • What is the implied NPV to Empire? To Oshawa?

Additional information As detailed below, to achieve the objectives of both families the deal will include a restructuring in which Oshawa and Empire’s Food Division are spun off into a new company (New Sobey's, aka Newco). The offer to Oshawa shareholders will include a percentage of Newco's equity plus a cash payment, where the cash payment includes $200M directly from Empire plus the proceeds from new debt issued by NewCo .

Why create Newco? How much cash does Empire have? Without restructuring, what cash-raising alternatives does Empire have? • How attractive would each be to the Sobey family? Without restructuring, what non-cash forms of payment could Empire offer? • How attractive would each be to the Wolfe family? Hmm… Consider a restructuring that creates a new , “pure play” company from the merged Food Divisions…

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Restructuring Empire before divestiture Food Division Empire without Food Division Oshawa Oshawa company

Restructuring Empire w/o Food Division Oshawa 2. Merge New Sobey’s (Old Food Division) 1. Spin Of

Restructuring New Sobey’s (“pure play” trades on mkt) New Empire (trades on mkt)

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Valuing NewCo Follow the spreadsheet: Use the TEV/EBITDA method to value Empire’s Food Division, assuming 37% of Empire’s EBITDA is attributable to the Food Division Estimate the TEV of NewCo (merge your estimate of Oshawa’s value with the estimated value of Empire Food division). Then consider issuing Newco debt and using the proceeds as part of the bid for Oshawa. This will decrease the equity value in Newco, as Equity value = TEV - Debt value • Note: No debt is transferred from Empire when creating Newco (but Newco will have Oshawa's debt).

Determining the stock and cash amounts Now we can offer both cash and stock to Oshawa shareholders as consideration. Given the total amount we wish to bid (recommendation 1), we need to determine: 1. the percentage of Newco’s equity to offer 2. the amount of the cash payment The cash payment itself will come from two sources: i. $200M directly from Empire (an assumption) ii. proceeds from new debt issued by NewCo (amount to be determined) Following the spreadsheet, determine the amount of cash you would recommend (determined by the amount of debt issued by Newco), and the corresponding percentage of Newco equity.

Recommendation 2: the mix of cash and stock as consideration What combination of (i) shares in Newco and (ii) cash would you recommend? Keep in mind the preferences of the main stakeholders: – Empire’s required majority ownership of all companies – A target leverage ratio of 30% for Newco. – The Wolfe’s preference for cash vs. securities (as payment)

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