Question

Acquisition Valuation Exercise: Nestle Candy Divestiture

Situation: Nestle has decided to sell its Chocolate Division (Butterfinger, Baby Ruth and Nestle Crunch) to Ferrero, the Italia maker of Nutella. You are the Director of Corporate Development and have been asked to help set the price for the business.

The division has provided you with a projection of their Base Case EBITDA forecast:

     2019: $30M                        2021: $38M         2023: $41M

     2020: $35M                       2022: $40M

You estimate that the synergies to Ferrero, which has candy outside the US, could be as much as $5M per year in revenue synergies and $6M of cost synergies. You also learn from an industry source that Ferrero’s internal cost of capital (discount rate) is 8%

Question: Using the Discounted Cash Flow model, what price would you suggest Nestle sell at, assuming that Ferrero wants to make 10% ROI on the deal? Is that a deal that then creates value for Nestle?

Show your math below. Ignore perpetuity value (value after year 5)

Base Case Value of Nestle Chocolate:

Value of Synergies to Ferrero:

Recommended price of Nestle Chocolate to Ferrero:

ROI to Nestle of Selling Chocolate Division:

Answer 1

Basecase value of Nestle Choclate @ 8 % IRR
			($ in Millions)
Year	Cash Inflow	PVF at 8 %	Discounted Cashflow
(a)	(b)	(c )	(d = b x c)
2019	30	0.926	28
2020	35	0.857	30
2021	38	0.794	30
2022	40	0.735	29
2023	41	0.681	28
Basecase value (as NPV)	145
Value of synergy to Ferrero @ 10 % IRR
			($ in Millions)
Year	Synergy	PVF at 10 %	Discounted Cashflow
(a)	(b)	(c )	(d = b x c)
2019	11	0.909	10
2020	11	0.826	9
2021	11	0.751	8
2022	11	0.683	8
2023	11	0.621	7
Basecase value (as NPV)	42
Annual Synergy ($ 5M + $ 6 M) = $ 11 Millions
So,recommended price to Ferrero for Nestle will be
$ 145 to $ 187 Millions. So average of it is suggested
as $ 166 Millions.
ROI to Nestle will be percentage of surplus of consideration received
from Ferrero over book value of assets transferred to Ferrero on book
value of assets .