Centerbridge Partners and Great Wolf Resorts: Buying from a Highly Regarded Competitor Case Study Solution

WACC = % of equity * cost of equity + % of debt * cost of debt after tax

Combining all these elements, results in the weighted average cost of capital of 5.2 percent.

Net present value

Using the information provided in Exhibit 13a of the case, the free cash flows of the project are calculated by adding the depreciation back in net income and deducting the changes in capital expenditure and working capital. Discounting back the free cash flows at the end of year 2019 with WACC, the terminal value is amounted $3385.145 million which is calculated by using the formula (FCF at the end of n year*(1+growth rate))/(WACC –growth rate).By taking the rate of inflation of 2.5% and weighted average cost of capital of 5.2 percent; the net present value of the base case scenario is $3340.136 million of the Great Wolf project, ignoring the effect and extent of risk. The net present value of the project is the sum of the discounted free cash flows and discounted terminal value.The positive or greater than zero net present value (NPV) of the project shows that it would yield higher returns. The NPV is positive in all the scenarios, which means that the acquisition of Great Wolf should be accepted because of the reason that the purchase would addvalue to the company as a whole.(Pindyck, 2019).

Sensitivity analysis

The sensitivity analysis is performed to assess the impact of weighted average cost of capital on the net present value of project. Using the estimations done by Centerbridge in Exhibit 13a; the discounted free cash flows are calculated with 3.15 percent and 7.15 percent for upside and downside scenarios, respectively. It is because of an inverse relationship between net present value and cost of capital. The net present value of the project is the sum of the discounted free cash flows and discounted terminal value. The net present value for downside and upside scenarios amounted -$32.114 million and -$43.47 million, respectively.

Determine the relevant criteria.

The criteriathat could be used to assess the feasibility and viability of the project includes several factors are as follows:

  • A defensible market position.
  • Healthy profit margins.
  • Pipeline of specific value creation initiatives & a growth opportunities.

Thesecriteria would help in evaluating whether the acquisition adds value to the overall growth and success of the company in the near future or not.

Analyse alternatives in relation with the criteria.

Alternative 01: Acquire Great Wolf

There are bright chances of growth in the forthcoming years as a market leading company.The acquisition most probably doubles the company’s profitability in the future ahead, through advertising, and the company would flourish and grow at a rapid scale. The acquisition would result in leveraging the benefits and the company would take better advantage of this opportunity.Unlike growth through an increased sales and market share; acquisition would offer a host of other benefits to the company, including: immediate savings due to the economies of scale and easier financing for future undertakings. Acquisition means the diversification of portfolio, value creation, better access to larger markets and accessing wider customer base. The acquisition of Great Wolf would allow the company to attain a defensible market position, gain healthy profit margins, synergies and invest in value creation initiatives & a growth opportunities.

On the other hand, the company might get confronted with the cultural clashes, conflicting objectives and redundancy and market saturation issues. The company might get concerned with the lack of transparency and an inefficient communication, hence hindering the company’s growth………………………………..

 

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