Golden Gate Case Solution & Answer

Golden Gate Case Solution  


A private equity firm based in Vietnam – Mekong-capital is concerned about existing stakes in Golden Gate, a restaurant chain operator. The private equity firm holds 15 percent growth equity stake in Golden Gate for the past 5 years, during which the group successfully and profitably expanded from one restaurant group and five locations to 10 concepts and 58 locations. The continued growth of Mekong Capital is based on the customer value enhancement, effective merchandising and marketing strategy, robust business strategy and sales force’s effectiveness.

Initial investment of Mekong Capital, Golden Gate is generating 6.3 million dollars in EBITDA, which represents 33 percent annualized increase in EBITDA & 34 percent annualized increase in traffic. Despite of continuous growth and robust success; the profitability of Golden Gate has started lagging, due to which Mekong Capital has an obligation to decide exist strategy and to find out whether operational requirements are needed in order to attract the buyers or to create foundation for the successful Initial Public Offerings (IPO).

Which exit option should be pursued? And what are the differences in operating strategies in the two exit paths?

Based on the company’s lagging performance in the market, Golden Gate is subjected to the usual emerging market investment challenges, such as: rarer exists, elusive profits and addiction to growth.The company was disappointed in terms of similar store sales and profitability at its various locations. To address the issue of reduced profitability and for shareholder’s value creation; the company is presented with two alternative choices, which are business expansion and focus on growth moratorium. Both of these alternatives must be weighed, based on their effectiveness and their overall contribution to the firm’s profitability.

Option 01: business expansion outside Vietnam

One of the ways of reinvigorating the revenue growth is by expanding beyond two largest metropolis of Vietnam, including: Ho Chi Minh City and Hanol. The home city of Hanoi has per capita income of 2985 US dollars and 6.9 million residents and the strong buying power of Vietnamese residents in these tier two cities, which makes them lucrative, but at the same time the robust economies of the tier two cities create competition for people, making the location robust and fierce. The business owners are advised to retain their stakes in the company for the period of five years and then exiting in the sale to trade buyer or another private equity firm. By retaining the ownership, the company can be sold to the strategic acquirer in the near future.The worth of the company is expected to be 300 million dollars with the revenue of 350 million dollars and EBITDA of 30 million dollars, thus representing its growth potential. The decision of retaining the stakes in the company for the period of 5 years, is backed by the robust business performance and cash flows of the company since its inception.

In addition to this, the expansion of the business operation in the emerging markets would lead the company toward-shaving various benefits, such as: strong market position, access to wider customer base, customer loyalty, high market share and strong financial outcomes. The attractiveness of the emerging markets could be measured through market liberalization, political stabilization, and emergence of middle class and high growth of GDP. Additionally, the decision of the business expansion would create value for the shareholders.

Despite a number of benefits in business expansion;the company is concerned about exiting such investment, as it could be challenging due to the reason that the markets tend to be less developed and less liquidated, making the public offerings very challenging and the number of trade buyer with the capability of executing third-party sale are few.Not only this, the family is reluctant to sell the business to the third party, due to the family legacy embedded in the business…………………

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