EMPRESAS POLAR vs. BAVARIA, S.A.: ACQUISITION OF MINORITY BLOCKS OF BACKUS & JOHNSTON’S VOTING STOCK Case Solution & Answer

EMPRESAS POLAR vs. BAVARIA, S.A.: ACQUISITION OF MINORITY BLOCKS OF BACKUS & JOHNSTON’S VOTING STOCK Case Solution

The total value of the company will be $651 million in the year of the last year and shows that 420 million is invested by Bavaria, which shows that it will hold majority of the shares at the end of the period as well as it will control most of the operations during the projected years.

Discounted Cash flow (alternative results)

The same cash flows will be incurred during the selected years as compared to the previous projected results however,there will be slightly change in the weighted average cost of capital because some of the value will be considered in terms of debt instead of dominated equity shares. The total net present value under the case will be less than the previous one and it would be a threat for Polar to purchase in such highprice.

Therefore, the total net worth of the company in terms of EBITDA will reduce to $582 million as compared to the projected results given in the first case. Hence,it is determined that the less rate of WACC could reduce the overall worth of the company in terms of both net income and EBITDA multiples.

Change in price and income elasticity

The price elasticity shows that how much the price level will differ according to the current market demand of Beer consumption. It has been analyzed that due to less consumption in developing countries, the price will tend to increase according to the historical market data analyzed by the economists.

The current price elasticity in Peru is -1.676, which shows that consumers are not willing to purchase Beers and shows less per capita consumption. However,the economist suggested that Latin America will increase the level of demand by 3.16% in the coming year. Therefore,according to their assumptions, the price elasticity will increase, which is inversely proportional to the level of demand. Thus,this consistent rate indicates that demand will tend to increase and prices will fall in order for more supply in the emerging economies.

However, the level of income elasticity is directly proportional to the demand of Beer consumption. Therefore,the increase in the level of income will also increase the demand in the same proportion. In the case, the level of income elasticity is quite low in Peru as compared to other emerging economies. Nonetheless,the economist said that 3.14% of total growth will incur during the projected years so the same level of rate will impose throughout the selected years and will tend to increase the level of income elasticity due to increase in the level of demand.

Market price of class A shares

The projected results shows that the earning price per share of class A will be 0.70 and indicates that it will likely to increase if the operations would be expanded in the emerging economies. While according to the market analysis, the price could be $10.975 per share as compared to the actual paid by Bavaria that was doubled of the market price. Some analysts were shocked to the paid price and analyze that the Bavaria had paid extra premium amount in order to control the entire operations. The results also shows that the company purchased 19,134 outstanding shares at the price of $21.95 per share value. It has also determined that Bavaria hold 45% of the overall shares in equity, which was threat to Polar. The total net amount including the premium was $420 million at the end of the offer.

The alternate analysis is quite different from the previous result as it shows the expected value of the shares according to the market situation. With 45% of the shares held, it is concluded that the same level of share outstanding will be purchased in $13.74 per share value. This will be the accurate share price for class A because it will be generated through the current market analysis and compared with the other shares value in the stock exchange………………..

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