Topic 5 Tutorial Questions

1. Why is the distinction made between ‘synergies in place’ and ‘real option synergies’?
2. Identify whether the following synergies are classified as (A) revenue enhancements,
(B) cost reductions, (C) asset sales, (D) financial synergies, or (E) real option synergies:
i. Rationalising existing assets through sell offs.

ii. Improved economy of scale through combination of production facilities to increase
output.
iii. Enhanced access to debt capital markets through increased scale of operations.
iv. Potential to defer new investment for up to two years.
v. Increased sales through expansion of products sold through complementary
logistics networks.
3. In valuing synergies, what is the importance of classifying the type of synergy in

place?
4. How do analysts typically measure the necessary adjustments for control and
liquidity?
5. Ryder System is a full-service truck leasing, maintenance and rental firm with operations
in New Zealand and Australia. The following are selected numbers from the financial
statements for 2012 and 2013 (in millions).
2012 2013
Revenue 5192 5400
Operating Expenses 3678.5 3848
Depreciation 573.5 580
EBIT 940 972
Interest Expenses 170 172
Taxes 652.1 670
Net Income 117.9 130
Working Capital 92 -370
Total Debt 2000 2200
The firm had capital expenditures of $800 in 2012 and $850 million in 2013. The working
capital in 2011 was $34.8 million, and the total debt outstanding in 2011 was $1.75 billion.
There are 77 million shares outstanding, trading at $29 per share.
a. Estimate the cash flows to equity in 2012 and 2013.
b. Estimate the cash flows to the firm in 2012 and 2013.
c. Assuming that revenues and all expenses (including depreciation and capital expenditures)
increase 6%, and that working capital remains unchanged in 2014, estimate the projected
cash flows to equity in 2014. (The firm is assumed to be at its optimal financial leverage)
6. Case Study: Coca-Cola Amatil’s bid for Neverfail
Coca-Cola Amatil (CCA) is a top-50 ASX-listed bottler, producer and distributor of

beverages, packaged fruit and snack products. It is best known as the producer of Coca-Cola
and its associated brands for the Australian market, with U.S.-parent The Coca-Cola
Company owning 29% of the business.
In April 2003, CCA announced a $2.25 per share cash takeover offer for all ordinary shares
(100 million SOI) in Neverfail Springwater. This offer represented a 21.6% premium to
Neverfail’s prior day close price of $1.85. Neverfail’s primary business is the sale and
delivery of bulk bottled water (approximately 70% of revenue) and leasing of water cooler
systems (approximately 25% of revenue) to residential and commercial customers in
Australia. At the time of the acquisition announcement Neverfail held a 65% share in the
market for home and office water delivery. Given the strength of CCA’s existing water
products in the individual retail space, including Mount Franklin, Deep Spring and Pump,
CCA Managing Director Terry Davis identified the opportunities of the Neverfail acquisition
at the Annual General Meeting on 1 May 2003:
With water being one of the largest and fastest growing beverages in Australia, the
acquisition would represent an important step in increasing our non-carbonated business.
Neverfail will complement our existing packaged water business and doubles our annual
water volume in Australia. Additionally, we will look to extent the Neverfail brand to CCA’s
retail customers particularly foodstores, convenience and petroleum outlets.
Neverfail’s management, however, rejected the offer arguing “that the CCA offer is
inconsistent with the premium multiples that comparable bottled water businesses have
achieved globally... [and] offers no value for the substantial synergies available to CCA...”
among other reasons.
Use the synergy information in Table 1 and the comparable transactions summarised in Table
2 to answer the questions below. Assume a risk-free rate of 5%, cost of debt of 7%, cost of
equity of 10.4%, nominal after-tax WACC of 9.6% and a perpetual nominal growth rate of
3.5%. Further assume Neverfail has forecast 2003 revenue of $76.5 million and EBITDA of
$32.4 million.
1. Classify each of the four synergies in this deal and determine an appropriate risk-adjusted
discount rate.
2. Calculate the synergy value from this deal.
3. Estimate an appropriate control premium based on precedent transactions analysis.
4. Based on your answers in (2) and (3), comment on the initial decision by Neverfail’s
management to reject the offer.
5. Also in 2003, CCA acquired small private water bottler Peats Ridge as a bolt-on
acquisition and unsuccessfully launched a bid to acquire Berri Fruit Juice Company.
Identify and discuss the strategy of CCA.
Table 1 Expected synergies in CCA-Neverfail acquisition
Synergy After-tax adjustment to FCF
Elimination of duplicated costs (eg listing fees, Immediate savings of $50,000 p.a. expected in
customer service centres, etc) perpetuity with minimal implementation costs.
Redundancy costs of $400,000 in first year

Reduction of management and administration
expected to deliver perpetual cost savings of
costs
$70,000 p.a. from 2005/6.
Asset sales in 2004/05 returning $300,000 net of

Rationalisation of production facilities
costs.
Initial investment upon successful acquisition of

Enhanced utilisation of CCA /Neverfail $55,000 generating additional revenue of
distribution network to cross-sell products $40,000 in 2004/05, $30,000 in 2005/06 and
$10,000 in 2006/07.
Table 2 Comparable transactions, Jan 2000 to Feb 2003

Consideration EBITDA
Date Target Acquirer Revenue multiple
(millions) multiple
Feb-03 Clear Water Nestle SA US$32.5 2.0x 8.1x
Feb-03 Powwow Ltd Nestle SA E 560 4.7x 60.0x
Sparkling Spring
Dec-02 Groupe Danone E 390 3.9x 13.0x
Water
Oct-02 Chateau d’Eau Groupe Danone E 220 4.4x 24.4x
Dec-01 Aqua Cool Pure Nestle SA US$220 3.1x 13.8x
Oct-00 Salute Neverfail A 11.7 2.9x 6.2x
Feb-00 Piccadilly Neverfail A 15.8 1.7x 5.1x
McKesson Water
Jan-00 Groupe Danone US$870 2.3x 10.4x
Co

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1. Why is the distinction made between ‘synergies in place’ and ‘real option synergies’?

i. Rationalising existing assets through sell offs.

3. In valuing synergies, what is the importance of classifying the type of synergy in

a. Estimate the cash flows to equity in 2012 and 2013.

b. Estimate the cash flows to the firm in 2012 and 2013.

6. Case Study: Coca-Cola Amatil’s bid for Neverfail

Coca-Cola Amatil (CCA) is a top-50 ASX-listed bottler, producer and distributor of

2. Calculate the synergy value from this deal.

3. Estimate an appropriate control premium based on precedent transactions analysis.

Synergy After-tax adjustment to FCF

Redundancy costs of $400,000 in first year

Asset sales in 2004/05 returning $300,000 net of

Initial investment upon successful acquisition of

Table 2 Comparable transactions, Jan 2000 to Feb 2003

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