Financial analysis of Blavod Wines and Spirits as acquisition target

Buyout Strategies

A researcher works within the finance division of a large alcoholic and beverage company which is interested in expanding the company line of business. The company considers the buyout strategy to enhance the competitive market advantages as well as expanding the presence of its product range in the UK wines and spirits market. A Finance Director of the company identifies Blavod Wines and Spirits plc as a potential buyout target. Before implementing the buyout strategy, a Finance Director asks the researcher to provide a report analyzing the financial strength of Blavod Wines and Spirits and recommends whether Blavod Wines and Spirits could be a potential buyout target.

Fundamental objective of this report is to analyze financial strengths of BLAVOD WINES and SPIRITS plc and recommends whether BLAVOD WINES and SPIRITS plc is a potential buyout target for the company.

: Overview of Blavod Wines and Spirits plc

Blavod Wines and Spirits plc is a UK-based company formerly known as Blavod Extreme Spirits plc. The company engages in the selling and marketing of Blackwood's Gin and Blavod Black Vodka globally. The company also market varieties of brands of wines and spirits across the United Kingdom. The company brands include Blackwoods, Blavod Black Vodka, Bruichladdich Whisky, Cockspur Rum, Arran Malt Whisky, Lejay Lagoute, Borghetti, Carpano Punte Mes, and other quality wines and spirits. The company aims to pursue a strategy in enhancing the quality of its brands within the UK and the international market. Typically, the company primary assets are its brand that the company is aggressively expanding locally and internationally. The company subsidiaries include Blavod Properties Limited, Blavod Drinks Limited, Blavod Extreme Spirits USA Inc., the Original Black Vodka Company Limited, Blackwood's Gin globally, and Blavod Black Vodka.

Despite the aggressive method that the company employs to promote its brands locally and internationally, the company has recorded a decline in the financial performances within the last three years. The company total revenue declined from £8.3 Million to £7.2 Million between 2010 and 2011. Over the past two years, Blavod Wines and Spirits plc has incurred loss in the net income within the last two years. The company recorded the loss of £15,000 in the net income at the end of 2010 fiscal years. At the end of the 2011 fiscal year, the net income loss increased to £173,000. Blavod Wines and Spirits recorded a decline in the net income because the company profits were affected by the poor performances of Blavod Black Vodka, which is the company highest margin brand. (Annual Report, 2011). Moreover, the company faces aggressive competitions from other wine and spirit company making Blavod Wines and Spirits to record a loss in the market shares. Based on the net income loss that the company has recorded in the last two years, Blavod Wines and Spirits has taken a steps to improve its financial performances as well as improving the company overall long-term prospects. An extract from broker's report reveals that Blavod Wines and Spirits focus on the key brads to increase sales. The company has implemented new sales order transaction to improved efficiencies. (Joshua, Joshua, 2011, Brealey, 2010).

Typically, the company emphasizes on four new export markets which include America, Europe and Asia. With these strategies, the company expects to increase sales in new and existing European markets. Despite the strategy that the company intends to implement, Blavod Wines and Spirits is still facing financial difficulties because the company financial performances decline within the last few years.

1.2: Analysis of BLAVOD WINES and SPIRITS plc

In the contemporary business environment, organization employs different strategies to achieve competitive market advantages, and one of the strategies that organizations employ to achieve competitive market advantages is the implementation of buyout strategy. The concept buyout is a financial and business strategy that a company employs to acquire substantial shares of the target firms. Incorporating a buyout strategy is one of the common techniques that organizations employ to gain access to the new markets, and it is one of strategy that organizations employ to grow business. Typically, buyout strategy is one of the fast methods that organizations employ to achieve market advantages. Despite the benefits that organizations derive from buyout strategy, an organization needs to implement a strong business plan to identify the target companies. The business plan should include the industry analysis and analysis of the target company. Moreover, the business plan should include the historical financial statement of the target company. The business plan should also include the detailed financial project such as balance sheet, the income statement and the cash flow. (Nisar, 2010). The report provides the financial ratios of Blavod Wines and Spirits to enhance greater understanding of our company whether Blavod Wines and Spirits is a buyout target.

1.3:Financial Ratio Analysis of Blavod Wines and Spirits

Financial ratio analysis is a financial evaluation and the interpretation of the financial data of the company. Ratio analysis along with other pertinent financial information enhances investor's financial decision on a company. Typically, ratio analysis is a critical tool to evaluate the financial strength of a company. The most important pertinent financial tools to evaluate the financial strength of a company are financial ratio analysis. A financial ratio is a useful indicator to calculate the financial performances of a company. This report uses the Profitability ratio such as net profit margin, Return on Equity, Return on Asset, asset turnover ratio, financial leverage ratio and Return on Invested Capita to evaluate the financial performances of Blavod Wines and Spirits. Analysis of the financial ratio of the company will enhance greater understanding of a Finance Director about the investment prospect of Blavod Wines and Spirits. The ratio analysis also assists in making decision on whether Blavod Wines and Spirits should be a buyout target.

Profitability Ratio: Profitability ratio measures the success of a firm to generate profits. The most important tool to determine the profitability ratio is net profit margin.

Net Profit Margin: A net profit margin measures the net profits that a company earns from sales. The company realizes a net profit margin after all the operating expenses, taxes, interests and dividends have been deducted from the company total revenue. A formula to calculate the net profit margin is as follows:

Net Profit Margin= Net Profit/Total Revenue.

Table 1: Financial Ratio of Blavod Wines and Spirits Plc

Profitability ratio

2005

2006

2007

2008

2009

2010

2011

TTM

Net Margin

(125.74)%

(54.85)%

(107.81)%

26.47%

2.18%

(0.18)%

(2.40)%

(9.41)%

Asset Turnover (Average)

0.30

0.67

0.56

1.34

2.02

2.25

1.95

1.58

Return on Assets

(37.65)%

(36.79)%

(60.81)%

35.44%

4.41%

(0.41)%

(4.67)%

-14.89

Financial Leverage (Average)

1.11

1.28

6.68

1.63

2.17

2.41

2.42

3.06

Return on Equity

(41.90)%

(43.81)%

(105.48)%

8.44%

(0.93)%

(11.27)%

(41.47)%

Return on Invested Capital %

-41.85

-43.76

-84.31

8.44

-0.75

-8.95

-31.96

As being revealed in the Table 1 and Fig 1, the net profit margin of Blavod Wines and Spirits is negative since 2005. It was only between 2008 and 2009 that the company recorded gain from the net profit margin. Since 2005, the company recorded a net income loss except 2008 and 2009. Between 2010 and 2011, the company recorded a loss in net income margin. The company net income margin in 2010 was (0.18) % and the net income margin loss increased to (2.40) % in 2011.

Fig 1: Net Profit Margin of Blavod Wines and Spirits

Return on Equity: A return on equity measures the profits that a company earned from each dollar invested in the company stocks. The formula to calculate the return on equity is as follows:

Return on Equity (ROE): Net Income/Shareholder Equity

Since 2005, Blavod Wines and Spirits have not increased the value of the shareholders except 2008 and 2009 where the company recorded 107.12% and 8.44% respectively on ROE. Between 2010 and 2011, the company was not able to increase the value of shareholders. The company recorded (0.93) % and (11.27) % between 2010 and 2011 repectively. (See Fig 2).

Fig 2: Return on Equity of Blavod Wines and Spirits

Return on Asset (ROA): A return on asset reveals the percentage of revenue that the company is able to generate from the assets. ROA measures the ability of a company to generate profits from its assets. The formula used to calculate ROA is as follows:

Return on Asset: Net Income/Total Assets

As being revealed in Table 1 and Fig 3, Blavod Wines and Spirits have not been able to generate revenue from the company total assets in 2005, 2007, 2010 and 2011. It was only between 2008 and2009 that the company was able to generate revenue from the total asset. Typically, the company recorded (0.41) % and (4.67) % on ROA between 2010 and 2011 respectively.

Fig 3: Return on Asset of Blavod Wines and Spirits

Disadvantages

Buyout of Blavod Wines and Spirits involves high level of risks. Since the target company is facing financial difficulties before acquiring the company stocks, our company will need to implement business strategy to remove the target company from its financial difficulties and this may take time. In some cases, a company buying the shares may not be able to derive benefits from the transactions if the target company financial condition does not improve.

Comment

Based on the financial difficulties that Blavod Wines and Spirits is having within the last few years, Blavod Wines and Spirits is not an attractive target for our company. Our company may face financial difficulties by proceeding with the transactions. Apart from the money we will incur by buying out the shares of the target company, realizing benefits from the transactions may take longer time than we expect.

5) Source of Finance for the Buyout strategy.

If our company decides to continue with the buyout strategy, there are many methods that our company could employ to raise fund for the acquisition.

First, our company could raise money from bank. Benefits that we will derive from the bank loans are that our company will be able to raise money quickly from the bank since we have adequate collateral security for the bank loan. Despite the benefits that bank loan offers, the interest that bank will charge may affect the profitability of the buyout transactions. Our company will need to pay the interests from the gross profits of the target company before we could realize the gains from the transactions.

Another strategy is the use of our company funds to implement the buyout strategy. A benefit that our company will derive from this option is that we will be able to implement the transaction as quickly as possible. However, the option may make our company to be short of liquidity which may affect out company to meet its short-term obligation.

Despite these shortcomings identified, there are several strategies that our company could use to improve business performance of Blavod Wines and Spirits.

First, we will need to restructure the management team of Blavod Wines and Spirits to enhance the market advantages. We will need to employ people with management skills and experience to the company management positions to enhance the company profitability.

Moreover, we will need to strengthen the brand of Blavod Wines and Spirits to enhance competitive market advantages. Within the last three years, the target company has recorded the decline in the net income. There is a need to improve the target company brand to enhance the competitive market advantages.

Implementation of these strategies will make the Blavod Wines and Spirits to achieve following benefits within the next three years:

The target company will increase its overall sales by 90% within the next three years.

The target company will record positive increase in the net income leading to the 80% increase in the net income.

The target company will achieve more than 40% of the market shares within the next three years.

PART B

Note on Leveraged Buyouts

A LBO or leveraged buyout is the acquisition of a division of a company or the acquisition of a company with substantial amount of borrowed fund. Many companies implemented the acquisition strategy in the 1980s to achieve a competitive market advantages. The acquisition fund reached $1.7 billion in 1980 and the acquisition reached its peak in 1988 reaching an aggregate value of $188 billion. Since 1988, the downturns of the business cycle and the collapse of bond market led to the change in the acquisition business making LBO business to rise dramatically. Between 1988 and 2000, the LBO funds increased to over $385 billion. With the attractiveness of LBO, increasing number of firms entered the LBPO leading the LBO firms to acquire target business at attractive prices. Increase in the prices associated with the LBO transaction makes senior lenders to become wary of the LBO transaction. (Tuck School of Business School at Dartmouth, 2003).

Based on the attractiveness of the LBO, the private equity firms have been realizing the beneficial effect from the use of LBO. There are number of positive effects that private equity firms realize from the LBO. First, the LBO has led to the increase in the management effectiveness. Since LBO transaction involves borrowing from banks, the realization of paying the interests and the capital has forced the private equity firms to improve on their management effectiveness. Typically, many LBO firms used several strategies such as downsizing, investing or cutting on technological upgrades as well as investing in technological upgrades to achieve competitive market advantages. Thus, most private equity firms use LBO to enhance efficiency of management behavior.

Other positive effect that private equity firms drive from "the leverage in LBO financing is that, as the debt ratio increases, the equity portion of the acquisition financing shrinks to a level at which a private equity firm can acquire a company by putting up anywhere from 20-40% of the total purchase price. Private equity firms typically invest alongside management, encouraging (if not requiring) top executives to commit a significant portion of their personal net worth to the deal. By requiring the target's management team to invest in the acquisition, the private equity firm guarantees that management's incentives will be aligned with their own. ." (Tuck School of Business School at Dartmouth, 2003 P. 5).

Despite the benefits that the private equity firms derive from the LBO transaction, the most obvious risk that the private equity firms face with the leveraged buyout is the possibility of the financial distress. Within the contemporary business environment, there are unforeseen circumstances that could affect the business performances. There are some unforeseen events such as litigation, recession, natural disaster, and changes in the regulatory environment. These issues sometimes affect the private equity firms. With the event such as recession that affects the business performances, a private equity firms could face litigation in case of loan default and the issue could lead a private equity form to lose its entire investment fund.

Conclusion

The paper provides the financial analysis of the Blavod Wines and Spirits to determine whether the company is a target buyout company. Based on the analysis of the company financial performances, it is revealed that the report is unable to recommend Blavod Wines and Spirits as a potential target buyout company. The target company has been recording the financial loss since 2005. It was only in 2008 and 2009 that the target company recorded a gain in the net income. Recently, the target company recorded a loss of £15,000 in the net income at the end of 2010 fiscal years. At the end of the 2011 fiscal year, the company also recorded a loss of £173,000 in the net income. Based on the weak financial performances of the target company within the last few years, the report could not recommend our company to proceed with the transaction.