Grand Metropolitan PLC-Case Solution Sample

QUESTION

 

Grand Metropolitan Part I Memo

Each student is responsible for preparing a one-page memo and supporting worksheet evaluating the key issues in the case.

You should calculate the WACC in both USD and GBP for the company as a whole, but not for its three main divisions (We will cover that during our next class).

Your memo should discuss (in bullet points) the key issues that you had to deal with in making these calculations, such as your choice for the risk-free rate, market risk premium, etc.

Be sure to program all calculations into the supporting worksheet, i.e., do not simply copy weighted averages from the PDF tables.

These electronic documents should be submitted via Canvas prior to class. Also, please bring a paper copy of your memo and spreadsheet to class to hand in.

In addition, each student should post a news story to the discussion board for this week.

Grand metropolitan Part II memo

Each student is responsible for preparing a one-page memo and supporting worksheet evaluating the key issues in the case.

You should calculate the WACC in both USD and GBP for each of GM’s three main divisions.

Your memo should discuss (in bullet points) the key issues that you had to deal with in making these calculations.

Be sure to program all calculations into the supporting worksheet.

These electronic documents should be submitted via Canvas prior to class. Also, please bring a paper copy of your memo and spreadsheet to class to hand in.

Student Workbook

Model Fact

GRNDMETN.XLS
     
  This Spreadsheet supports STUDENT analysis of the case, “Grand Metropolitan PLC” (UVA -F-1019).  
     
  Please note:  
     
  1) This is a working model. Assumptions / Inputs presented can be changed to vary the results.  
     
  2) As long as default spreadsheet calculation is “automatic” the impact of changing assumptions will be computed in real time. If calculation is set as “manual” you should press the F9 function key to  
  recalculate results. To set numerical calculation settings to automatic look under tools, options, calculations menu.  
     
Revised: 5-Jun-98
Copyright (C) 1998 Trustees of the University of Virginia Darden School Foundation.:  

 

Exhibit-2

EXHIBIT 2
GRAND METROPOLITAN
Distribution of Turnover, Profits,
and Assets by Segment and Region
(in millions STG)
Absolute Performance As a Percentage of Totals Return on Net Assets = EBIAT/Net Assets
1991 1990 1989 1988 1987 1991 1990 1989 1988 1987
DRINKS 1991 1990 1989
TURNOVER 2,425 3,000 2,784 2,581 2,178 32% 33% 36% 47% 46%
OPERATING PROFIT 454 473 389 316 257 46% 45% 45% 55% 53% Drinks 19.2% 18.9% 15.6%
NET ASSETS 1,536 1,623 1,626 1,479 1,504 26% 26% 26% 40% 49% Food 9.8% 11.4% 6.5%
OPERATING MARGIN 18.7% 15.8% 14.0% 12.2% 11.8% Retailing 6.6% 6.5% 6.6%
RONAu1 19.2% 18.9% 15.6% 13.9% 11.1%
U.K. 13.8% 11.7% 10.5%
FOOD Europe 12.1% 12.3% 13.0%
TURNOVER 3,026 3,506 2,872 1,253 1,047 40% 39% 37% 23% 22% U.S. 9.7% 9.8% 7.7%
OPERATING PROFIT 300 309 245 84 69 30% 29% 28% 15% 14% America 10.2% 9.2% 9.0%
NET ASSETS 1,997 1,763 2,468 310 260 34% 29% 39% 8% 9% Other 34.0% 38.6% 59.3%
OPERATING MARGIN 9.9% 8.8% 8.5% 6.7% 6.6%
RONAu1 9.8% 11.4% 6.5% 17.6% 17.3%
RETAILING
TURNOVER 2,051 2,531 2,040 1,671 1,467 27% 28% 27% 30% 31%
OPERATING PROFIT 236 278 230 179 160 24% 26% 27% 31% 33%
NET ASSETS 2,332 2,785 2,266 1,898 1,290 40% 45% 36% 51% 42%
OPERATING MARGIN 11.5% 11.0% 11.3% 10.7% 10.9%
RONAu1 6.6% 6.5% 6.6% 6.1% 8.1%
U.K. and Ireland
TURNOVER 2,940 3,685 4,688 3,836 3,559 34% 39% 50% 64% 62%
TRADING PROFIT 385 451 424 364 331 36% 42% 44% 56% 58%
NET ASSETS 1,816 2,500 2,626 2,700 1,945 30% 40% 41% 64% 62%
Continental Europe
TURNOVER 862 661 471 221 214 10% 7% 5% 4% 4%
TRADING PROFIT 104 81 66 46 36 10% 7% 7% 7% 6%
NET ASSETS 557 427 330 384 335 9% 7% 5% 9% 11%
USA
TURNOVER 4,433 4,537 3,720 1,758 1,720 51% 48% 40% 29% 30%
TRADING PROFIT 517 475 395 218 185 48% 44% 41% 33% 32%
NET ASSETS 3,466 3,149 3,314 1,034 759 57% 50% 51% 25% 24%
Rest of America
TURNOVER 216 216 174 54 58 2% 2% 2% 1% 1%
TRADING PROFIT 20 21 20 14 13 2% 2% 2% 2% 2%
NET ASSETS 128 148 145 50 61 2% 2% 2% 1% 2%
Rest of world
TURNOVER 297 295 265 160 155 3% 3% 3% 3% 3%
TRADING PROFIT 45 54 62 12 6 4% 5% 6% 2% 1% 1991 1990 1989 1988 1987
NET ASSETS 86 91 68 22 24 1% 1% 1% 1% 1%
8748 9394 9318 6029 5706
u1FReturn on net assets is computed as EBIAT divided by net assets (total assets less current liabilities). 1071 1082 967 654 572
Source: Annual Reports “Grand Metropolitan” NET ASSETS 6053 6315 6483 4189 3124

 

Exhibit-5

EXHIBIT 5
GRAND METROPOLITAN
Capital and Debt Structure
1991 1990 1989 1988 1987
Debt Maturity
CURRENT 5% 7% 9% 21% 22%
1 TO 2 YEARS 2% 58% 11% 19% 25%
2 TO 5 YEARS 77% 30% 69% 14% 28%
OVER 5 YEARS 16% 5% 11% 46% 25%
Debt Currency
U.S DOLLAR 77% 79% 11% 8% 11%
POUND STERLING 18% 15% 9% 47% 33%
DEUTSCHE MARK 2% 1% 1% 0% 0%
MULTI-CURRENCY 0% 0% 77% 34% 47%
VARIOUS 3% 5% 3% 10% 8%
Market Value of Equity (as of April 15, 1992)
Common share prices (in Br. Pounds) £9.48
Shares outstanding 1,005,896,041
Market value of equity 9,535,894,469

 

Exhibit -6

EXHIBIT 6
GRAND METROPOLITAN
Summary of Percentage Weights
of the Various Classes of Capital
Outstandings Outstandings
Pounds Dollars
  Book Market Book Market
Debt £1,777.4 £1,794.8 $3,107 $3,137
Debt – Miscellaneous £87.0 £87.0 $152 $152
Convertible Debt £52.0 £63.0 $91 $110
Preferred Stock £12.2 £6.3 $21 $11
Common Stock £3,454.0 £9,535.9 $6,038 $16,669
Total Capital £5,382.6 £11,487.1 $9,409 $20,079

 

Exhibit- 7

EXHIBIT 7
GRAND METROPOLITAN
Estimation of Average Costs of Debt and Preferred Stock
Yield Yield Yields On Pounds Yields on Dollars
On Book On Market Book Market Book Market
  Currency Value Value Value Value Value Value
Bank loans & overdrafts STG 9.54% 9.54% 9.54% 9.54% 7.86% 7.86%
Commercial paper USD 5.93% 5.93% 7.58% 7.58% 5.93% 5.93%
Guaranteed Notes 1996 USD 8.13% 7.97% 9.81% 9.65% 8.13% 7.97%
Guaranteed Notes 2001 USD 8.63% 7.87% 10.32% 9.55% 8.63% 7.87%
Guaranteed debentures 2011 USD 9.00% 8.02% 10.70% 9.70% 9.00% 8.02%
Commercial paper STG 10.80% 10.80% 10.80% 10.80% 9.10% 9.10%
Debenture stock 2008 STG 12.13% 11.15% 12.13% 11.15% 10.40% 9.44%
Bonds 1992 DEM 6.63% 8.57% 6.93% 8.88% 5.29% 7.21%
Subord. convert. bonds 2002 STG 6.25% 9.75% 6.25% 9.75% 4.62% 8.07%
Preferred Stock Issues
4.75% STG 4.75% 10.05% 4.75% 10.05% 3.14% 8.36%
6.25% STG 6.25% 10.15% 6.25% 10.15% 4.62% 8.46%
5.00% STG 5.00% 10.35% 5.00% 10.35% 3.39% 8.66%
Book Market
Common Equity 3,454 9,536
Dollars/Pound 1.748
DM/Pound 2.917
DM/Dollar 1.669
US Inflation 0.027
UK Inflation 0.043
GER Infla 0.04
Book Value     Market Value
Amount Amount Amount in Amount Amount
  Currency Securities in in Stated in in
Outstanding Pounds Dollars     Currency Pounds Dollars
Bank loans & overdrafts STG 280 280 489 280 280 489
Commercial paper USD 1,696 970 1,696 1696 970 1,696
Guaranteed Notes 1996 USD 170 97 170 171 98 171
Guaranteed Notes 2001 USD 170 97 170 178 102 178
Guaranteed debentures 2011 USD 169 97 169 185 106 185
Commercial paper STG 139 139 243 139 139 243
Debenture stock 2008 STG 50 50 87 54 54 94
Bonds 1992 DEM 137 47 82 134 46 80
Total specified debts 1,777 3,107 1,795 3,137
Various unspecified debts STG 87 87 152
Subord. convert. bonds 2002 STG 52 52 91 63 63 110
Preferred Stock Issues
4.75% STG 1.2 1.2 2.1 0.57 0.57 1.0
6.25% STG 3.3 3.3 5.8 2.03 2.03 3.5
5.00% STG 7.7 7.7 13.5 3.72 3.72 6.5
Total preferred stock 12.2 12.2 21.3 6.32 6.32 11.0

 

Exhibit -8

Exhibit 8      Information on Comparable Companies
                             
                             
          Senior Debt-to-Cap. Debt-to-Equity Avg.   Expected Growth  
  Sales Dividend P/E Interest Debt (Book (Market (Book (Market Tax   Rate In:  
  (in US$ mn) Yield Ratio Coverage Rating Value) Value) Value) Value) Rate Beta Sales Dividends  
                             
GRAND METROPOLITAN $15,222 3.4% 13.3 6.6 NR 43% 21% 75% 27% 31% UK: 1.14 6.5% 12.0%  
                      US:0.80      
RESTAURANT-RETAILING                            
FORTE (U.K.) $4,600 5.7% 14.1 2.4 NR 27% 30% 36% 42% 16% 1.18 12.3% 10.6%  
MCDONALD’S $6,695 0.8% 17.3 4.0 AA 42% 2% 72% 2% 34% 0.95 12.0% 13.5%  
LUBY’S $328 3.5% 14.2 nil NR 1% 0% 1% 0% 34% 0.90 10.0% 9.0%  
NATIONAL PIZZA $305 0.0% 16.9 3.3 NR 49% 37% 96% 58% 36% 1.00 15.5% 0.0%  
TCBY ENTERPRISES $129 3.9% 26.8 7.8 NR 14% 3% 16% 3% 35% 1.25 9.0% 23.0%  
WENDY’S INT’L $1,060 2.0% 20.7 5.9 BBB 33% 23% 49% 30% 34% 1.15 6.0% 0.0%  
AVERAGE $2,186 2.7% 18.3 3.9   28% 16% 45% 23% 31% 1.07 10.8% 9.4%  
                             
FOOD PROCESSING                            
ARGYLL GROUP (U.K.) $7,830 4.3% 13.5 12.9 NR 32% 14% 47% 16% 28% 0.72 19.8% 18.3%  
ASSOC. BRIT. FOODS (UK) $6,110 3.2% 9.6 8.3 NR 19% 19% 23% 23% 32% 0.47 2.3% 14.9%  
BORDEN $7,235 3.6% 14.1 3.9 A+ 43% 20% 75% 25% 36% 1.15 5.5% 9.5%  
CADBURY-SCHWEPPES (UK) $5,475 3.6% 17.4 3.8 NR 38% 17% 62% 21% 28% 0.83 10.9% 14.3%  
CAMPBELL SOUP $6,204 1.8% 21.1 5.9 AA 30% 8% 43% 9% 40% 1.00 7.5% 15.5%  
CPC INTERNATIONAL $6,189 2.7% 15.3 6.5 A 38% 12% 61% 14% 40% 1.10 8.5% 12.5%  
DEAN FOODS $2,158 1.9% 16.1 9.5 NR 26% 10% 35% 12% 42% 0.90 8.0% 7.0%  
DREYER’S GRD ICE CREAM $355 0.7% 31.6 4.2 NR 31% 22% 45% 28% 40% 1.05 16.5% 0.0%  
FLOWERS INDUSTRIES $825 4.1% 20.0 5.2 NR 35% 14% 54% 16% 40% 0.85 5.5% 6.5%  
GENERAL MILLS $7,153 2.3% 23.3 8.6 A+ 39% 6% 64% 6% 39% 1.00 11.0% 15.0%  
HEINZ $6,800 2.8% 19.4 7.6 AA- 10% 2% 11% 2% 38% 1.00 8.5% 11.0%  
MICHAEL FOODS $455 1.3% 14.7 4.1 NR 35% 26% 54% 36% 36% 1.15 9.5% 19.0%  
QUAKER OATS $5,491 2.8% 17.8 5.6 A+ 40% 13% 67% 15% 43% 0.90 9.0% 11.5%  
RALSTON PURINA $7,375 2.2% 15.8 4.1 A- 70% 18% 233% 23% 40% 0.90 9.5% 11.0%  
SARA LEE $12,831 1.9% 22.0 6.6 AA- 29% 6% 41% 7% 36% 1.00 7.0% 13.5%  
TATE & LYLE (U.K.) $5,680 3.7% 10.1 3.1 NR 52% 32% 110% 47% 29% 1.10 14.7% 14.3%  
TESCO (U.K.) $11,050 3.3% 13.2 4.0 NR 19% 10% 23% 11% 32% 0.73 13.6% 22.8%  
UNILEVER (NL & U.K.) $42,250 3.2% 15.1 4.6 NR 22% 31% 28% 44% 35% 0.86 8.5% 9.5%  
UNITED BISCUITS (U.K.) $4,225 5.0% 13.7 8.5 NR 32% 14% 48% 16% 33% 0.88 6.1% 12.2%  
UNIVERSAL FOODS $834 2.6% 14.7 7.2 NR 34% 13% 52% 15% 37% 0.90 9.0% 12.5%  
AVERAGE $7,326 2.9% 16.9 6.2   34% 15% 59% 19% 36% 0.92 9.5% 12.5%  
                             
DRINKS                            
ALLIED LYONS (U.K.) $8,940 4.1% 23.4 2.3 NR 43% 30% 75% 44% 29% 0.97 9.2% 14.6%  
ANHEUSER-BUSCH $10,996 2.0% 15.7 8.2 AA- 38% 15% 61% 18% 38% 1.00 7.0% 12.0%  
BASS (U.K.) $7,630 4.8% 10.6 4.3 NR 29% 38% 40% 62% 26% 0.77 10.1% 16.5%  
BROWN-FORMAN $1,250 2.8% 14.7 23.5 A+ 14% 4% 16% 4% 35% 1.20 9.5% 11.5%  
COORS $1,917 2.3% 15.2 10.3 NR 13% 10% 15% 11% 39% 0.85 5.0% 0.0%  
GUINNESS (U.K.) $6,110 2.5% 15.9 4.7 NR 31% 18% 44% 22% 28% 1.01 24.2% 21.1%  
LABATT (CANADA) $4,400 3.0% 14.3 2.9 NR 33% 28% 49% 38% 34% 0.75 2.0% 6.5%  
MOLSON (CANADA) $2,500 2.1% 13.9 3.3 NR 45% 37% 82% 59% 34% 0.75 5.0% 13.0%  
SCOTTISH&NEWCASTLE (UK) $2,398 5.0% 13.5 5.8 NR 23% 20% 31% 25% 33% 0.59 19.3% 16.5%  
SEAGRAM (CANADA) $5,000 1.7% 17.2 3.1 NR 29% 26% 41% 35% 22% 1.10 5.0% 12.0%  
WHITBREAD (U.K.) $3,585 5.2% 10.7 5.6 NR 15% 15% 17% 17% 24% 0.70 6.1% 15.9%  
AVERAGE $4,975 3.2% 15.0 6.7   28% 22% 43% 30% 31% 0.88 9.3% 12.7%  
                             

 

 

ANSWER

 

Memo 1

The calculations of the WACC in both dollar and pound terms is provided in the excel sheet attached in the workbook named Memo 1. Following are the major values finally reached:

Pound

Dollar

Debt

1944.841

3399.463

Equity

9542.212

16679.79

Total Capital

11487.05

20079.25

Tax

35%

34%

Pre-tax Cost of Debt

8.66%

7.00%

Cost of Equity

14.82%

12.51%

WACC

13.27%

11.17%

The following problems were encountered while calculating the WACC:

  • The data for both dollars and pounds has been calculated separately based on the available metrics in each currency. Even the beta and the subsequent market risk premiums for both the markets have been taken separately.
  • The current interest rates for the debt available with the company has been fixed by the use of swaps. There was an option to take the weighted average of the interest rates on swaps to arrive at the pre-tax cost of debt. However, we are not aware of the premiums paid by the company to get the swap interest rates.
  • To avoid the miscalculation due to missing swap premiums the original interest rates on the debt has been used. A weighted average of the interest rates based on the amount of debt has been taken.
  • The interest rate on the miscellaneous debt was not available and it has been assumed that the cost of debt on these is equal to the weighted average cost of debt.
  • The yields on the market value have been used instead of the yields on the book value as the values taken for debt and equity are also the market values.
  • The choice of risk-free rate was a dilemma. Most of the debt has been concentrated for medium to short term whereas the essence of equity is that it stays for a much longer time with the major shareholders when compared to the debt of a firm. Thus, 10-year risk free rate has been used to keep the results valid for a medium term in which the company generally operates its business and future projections.
  • The cost of equity has been calculated using both the dividend growth and the market risk premium method and finally an average has been used.

Memo 2

The actual calculations are available in worksheet named Memo 2 in the attached excel file. The following are the calculations for WACC for the three businesses of the company along with the return on assets that the businesses are generating are as follows:

Retailing

Pound

Dollar

Debt to Capital

30%

13%

Equity to Capital

70%

87%

Tax

16%

34%

Pre-tax Cost of Debt

8.66%

7.00%

Cost of Equity

13.20%

11.14%

WACC

11.44%

10.29%

Food

Pound

Dollar

Debt to Capital

20%

13%

Equity to Capital

80%

87%

Tax

31%

39%

Pre-tax Cost of Debt

8.66%

7.00%

Cost of Equity

14.15%

12.76%

WACC

12.56%

11.64%

Drinks

Pound

Dollar

Debt to Capital

24%

20%

Equity to Capital

76%

80%

Tax

28%

34%

Pre-tax Cost of Debt

8.66%

7.00%

Cost of Equity

14.43%

12.96%

WACC

12.45%

11.30%

Return on Net Assets

Drinks

19.21%

Food

9.76%

Retailing

6.58%

The following problems were encountered while calculating the WACC:

  • The data for both dollars and pounds has been calculated separately based on the available metrics in each currency. Even the beta and the subsequent market risk premiums for both the markets have been taken separately.
  • There is a lack of data on the interest rates that the three business segments face and the available indicators cannot be used to reliably calculate the actual cost of debt and actual cost of equity for the company thus, the comparable company method has been used, which essentially is the average of the values for the comparable companies which we will be using for calculating the WACC.
  • Even the comparable company method cannot be used to calculate the cost of debt for the company thus, the cost of debt calculated for the company as a whole has been used as a proxy for the cost of debt of the individual businesses as well.
  • To calculate the tax rate and business beta the average of the companies from UK and USA has ben taken separately. The data of the companies from UK has been used to arrive at the pound values and similarly the data of US based companies are used to arrive at the dollar values.
  • At present only, the drinks segment of the company seems to be generating a return on assets which is higher than the WACC of the business unit. Both the other segments are generating fewer profits than desirable values.

 

Student Workbook

EXHIBIT 2
GRAND METROPOLITAN
Distribution of Turnover, Profits,
and Assets by Segment and Region
(in millions STG)
Absolute Performance As a Percentage of Totals
1991 1990 1989 1988 1987 1991 1990 1989 1988 1987
DRINKS
TURNOVER 2,425 3,000 2,784 2,581 2,178 32% 33% 36% 47% 46%
OPERATING PROFIT 454 473 389 316 257 46% 45% 45% 55% 53%
NET ASSETS 1,536 1,623 1,626 1,479 1,504 26% 26% 26% 40% 49%
OPERATING MARGIN 18.7% 15.8% 14.0% 12.2% 11.8%
RONAu1 19.2% 18.9% 15.6% 13.9% 11.1%
FOOD
TURNOVER 3,026 3,506 2,872 1,253 1,047 40% 39% 37% 23% 22%
OPERATING PROFIT 300 309 245 84 69 30% 29% 28% 15% 14%
NET ASSETS 1,997 1,763 2,468 310 260 34% 29% 39% 8% 9%
OPERATING MARGIN 9.9% 8.8% 8.5% 6.7% 6.6%
RONAu1 9.8% 11.4% 6.5% 17.6% 17.3%
RETAILING
TURNOVER 2,051 2,531 2,040 1,671 1,467 27% 28% 27% 30% 31%
OPERATING PROFIT 236 278 230 179 160 24% 26% 27% 31% 33%
NET ASSETS 2,332 2,785 2,266 1,898 1,290 40% 45% 36% 51% 42%
OPERATING MARGIN 11.5% 11.0% 11.3% 10.7% 10.9%
RONAu1 6.6% 6.5% 6.6% 6.1% 8.1%
U.K. and Ireland
TURNOVER 2,940 3,685 4,688 3,836 3,559 34% 39% 50% 64% 62%
TRADING PROFIT 385 451 424 364 331 36% 42% 44% 56% 58%
NET ASSETS 1,816 2,500 2,626 2,700 1,945 30% 40% 41% 64% 62%
Continental Europe
TURNOVER 862 661 471 221 214 10% 7% 5% 4% 4%
TRADING PROFIT 104 81 66 46 36 10% 7% 7% 7% 6%
NET ASSETS 557 427 330 384 335 9% 7% 5% 9% 11%
USA
TURNOVER 4,433 4,537 3,720 1,758 1,720 51% 48% 40% 29% 30%
TRADING PROFIT 517 475 395 218 185 48% 44% 41% 33% 32%
NET ASSETS 3,466 3,149 3,314 1,034 759 57% 50% 51% 25% 24%
Rest of America
TURNOVER 216 216 174 54 58 2% 2% 2% 1% 1%
TRADING PROFIT 20 21 20 14 13 2% 2% 2% 2% 2%
NET ASSETS 128 148 145 50 61 2% 2% 2% 1% 2%
Rest of world
TURNOVER 297 295 265 160 155 3% 3% 3% 3% 3%
TRADING PROFIT 45 54 62 12 6 4% 5% 6% 2% 1%
NET ASSETS 86 91 68 22 24 1% 1% 1% 1% 1%
u1FReturn on net assets is computed as EBIAT divided by net assets (total assets less current liabilities).
Source: Annual Reports “Grand Metropolitan”
Return on Net Assets = EBIAT/Net Assets
1991 1990 1989 1988
Drinks 19.2% 18.9% 15.6% 13.9%
Food 9.8% 11.4% 6.5% 17.6%
Retailing 6.6% 6.5% 6.6% 6.1%
U.K. 13.8% 11.7% 10.5% 8.8%
Europe 12.1% 12.3% 13.0% 7.8%
U.S. 9.7% 9.8% 7.7% 13.7%
America 10.2% 9.2% 9.0% 18.2%
Other 34.0% 38.6% 59.3% 35.6%

 
1991 1990 1989 1988 1987
8748 9394 9318 6029 5706
1071 1082 967 654 572
NET ASSETS 6053 6315 6483 4189 3124

 

Exhibit 5

EXHIBIT 5
GRAND METROPOLITAN
Capital and Debt Structure
1991 1990 1989 1988 1987
Debt Maturity
CURRENT 5% 7% 9% 21% 22%
1 TO 2 YEARS 2% 58% 11% 19% 25%
2 TO 5 YEARS 77% 30% 69% 14% 28%
OVER 5 YEARS 16% 5% 11% 46% 25%
Debt Currency
U.S DOLLAR 77% 79% 11% 8% 11%
POUND STERLING 18% 15% 9% 47% 33%
DEUTSCHE MARK 2% 1% 1% 0% 0%
MULTI-CURRENCY 0% 0% 77% 34% 47%
VARIOUS 3% 5% 3% 10% 8%
Market Value of Equity (as of April 15, 1992)
Common share prices (in Br. Pounds) £9.48
Shares outstanding 1,005,896,041
Market value of equity 9,535,894,469

 

Exhibit -7

EXHIBIT 7
GRAND METROPOLITAN
Estimation of Average Costs of Debt and Preferred Stock
Yield Yield Yields On Pounds Yields on Dollars
On Book On Market Book Market Book Market
  Currency Value Value Value Value Value Value
Bank loans & overdrafts STG 9.54% 9.54% 9.54% 9.54% 7.86% 7.86%
Commercial paper USD 5.93% 5.93% 7.58% 7.58% 5.93% 5.93%
Guaranteed Notes 1996 USD 8.13% 7.97% 9.81% 9.65% 8.13% 7.97%
Guaranteed Notes 2001 USD 8.63% 7.87% 10.32% 9.55% 8.63% 7.87%
Guaranteed debentures 2011 USD 9.00% 8.02% 10.70% 9.70% 9.00% 8.02%
Commercial paper STG 10.80% 10.80% 10.80% 10.80% 9.10% 9.10%
Debenture stock 2008 STG 12.13% 11.15% 12.13% 11.15% 10.40% 9.44%
Bonds 1992 DEM 6.63% 8.57% 6.93% 8.88% 5.29% 7.21%
Subord. convert. bonds 2002 STG 6.25% 9.75% 6.25% 9.75% 4.62% 8.07%
Preferred Stock Issues
4.75% STG 4.75% 10.05% 4.75% 10.05% 3.14% 8.36%
6.25% STG 6.25% 10.15% 6.25% 10.15% 4.62% 8.46%
5.00% STG 5.00% 10.35% 5.00% 10.35% 3.39% 8.66%
Book Market
Common Equity 3,454 9,536
Dollars/Pound 1.748
DM/Pound 2.917
DM/Dollar 1.669
US Inflation 0.027
UK Inflation 0.043
GER Infla 0.04
Book Value     Market Value  
Amount Amount Amount in Amount Amount
  Currency Securities in in Stated in in
Outstanding Pounds Dollars     Currency Pounds Dollars  
Bank loans & overdrafts STG 280 280 489 280 280 489
Commercial paper USD 1,696 970 1,696 1696 970 1,696
Guaranteed Notes 1996 USD 170 97 170 171 98 171
Guaranteed Notes 2001 USD 170 97 170 178 102 178
Guaranteed debentures 2011 USD 169 97 169 185 106 185
Commercial paper STG 139 139 243 139 139 243
Debenture stock 2008 STG 50 50 87 54 54 94
Bonds 1992 DEM 137 47 82 134 46 80
Total specified debts 1,777 3,107 1,795 3,137
Various unspecified debts STG 87 87 152
Subord. convert. bonds 2002 STG 52 52 91 63 63 110
Preferred Stock Issues
4.75% STG 1.2 1.2 2.1 0.57 0.57 1.0
6.25% STG 3.3 3.3 5.8 2.03 2.03 3.5
5.00% STG 7.7 7.7 13.5 3.72 3.72 6.5
Total preferred stock 12.2 12.2 21.3 6.32 6.32 11.0

 

Exhibit 6

EXHIBIT 6
GRAND METROPOLITAN
Summary of Percentage Weights
of the Various Classes of Capital
Outstandings Outstandings
Pounds Dollars
  Book Market Book Market
Debt £1,777.4 £1,794.8 $3,107 $3,137
Debt – Miscellaneous £87.0 £87.0 $152 $152
Convertible Debt £52.0 £63.0 $91 $110
Preferred Stock £12.2 £6.3 $21 $11
Common Stock £3,454.0 £9,535.9 $6,038 $16,669
Total Capital £5,382.6 £11,487.1 $9,409 $20,079

 

Exhibit -8

Information on Comparable Companies
            Senior Debt-to-Cap. Debt-to-Equity Avg.   Expected Growth  
    Sales Dividend P/E Interest Debt (Book (Market (Book (Market Tax   Rate In:  
    (in US$ mn) Yield Ratio Coverage Rating Value) Value) Value) Value) Rate Beta Sales Dividends  
                               
  GRAND METROPOLITAN $15,222 3.4% 13.3 6.6 NR 43% 21% 75% 27% 31% UK: 1.14 6.5% 12.0%  
                        US:0.80      
  RESTAURANT-RETAILING                            
  FORTE (U.K.) $4,600 5.7% 14.1 2.4 NR 27% 30% 36% 42% 16% 1.18 12.3% 10.6%  
  MCDONALD’S $6,695 0.8% 17.3 4.0 AA 42% 2% 72% 2% 34% 0.95 12.0% 13.5%  
  LUBY’S $328 3.5% 14.2 nil NR 1% 0% 1% 0% 34% 0.90 10.0% 9.0%  
  NATIONAL PIZZA $305 0.0% 16.9 3.3 NR 49% 37% 96% 58% 36% 1.00 15.5% 0.0%  
  TCBY ENTERPRISES $129 3.9% 26.8 7.8 NR 14% 3% 16% 3% 35% 1.25 9.0% 23.0%  
  WENDY’S INT’L $1,060 2.0% 20.7 5.9 BBB 33% 23% 49% 30% 34% 1.15 6.0% 0.0%  
  AVERAGE $2,186 2.7% 18.3 3.9   28% 16% 45% 23% 31% 1.07 10.8% 9.4%  
                               
  FOOD PROCESSING                            
  ARGYLL GROUP (U.K.) $7,830 4.3% 13.5 12.9 NR 32% 14% 47% 16% 28% 0.72 19.8% 18.3%  
  ASSOC. BRIT. FOODS (UK) $6,110 3.2% 9.6 8.3 NR 19% 19% 23% 23% 32% 0.47 2.3% 14.9%  
  BORDEN $7,235 3.6% 14.1 3.9 A+ 43% 20% 75% 25% 36% 1.15 5.5% 9.5%  
  CADBURY-SCHWEPPES (UK) $5,475 3.6% 17.4 3.8 NR 38% 17% 62% 21% 28% 0.83 10.9% 14.3%  
  CAMPBELL SOUP $6,204 1.8% 21.1 5.9 AA 30% 8% 43% 9% 40% 1.00 7.5% 15.5%  
  CPC INTERNATIONAL $6,189 2.7% 15.3 6.5 A 38% 12% 61% 14% 40% 1.10 8.5% 12.5%  
  DEAN FOODS $2,158 1.9% 16.1 9.5 NR 26% 10% 35% 12% 42% 0.90 8.0% 7.0%  
  DREYER’S GRD ICE CREAM $355 0.7% 31.6 4.2 NR 31% 22% 45% 28% 40% 1.05 16.5% 0.0%  
  FLOWERS INDUSTRIES $825 4.1% 20.0 5.2 NR 35% 14% 54% 16% 40% 0.85 5.5% 6.5%  
  GENERAL MILLS $7,153 2.3% 23.3 8.6 A+ 39% 6% 64% 6% 39% 1.00 11.0% 15.0%  
  HEINZ $6,800 2.8% 19.4 7.6 AA- 10% 2% 11% 2% 38% 1.00 8.5% 11.0%  
  MICHAEL FOODS $455 1.3% 14.7 4.1 NR 35% 26% 54% 36% 36% 1.15 9.5% 19.0%  
  QUAKER OATS $5,491 2.8% 17.8 5.6 A+ 40% 13% 67% 15% 43% 0.90 9.0% 11.5%  
  RALSTON PURINA $7,375 2.2% 15.8 4.1 A- 70% 18% 233% 23% 40% 0.90 9.5% 11.0%  
  SARA LEE $12,831 1.9% 22.0 6.6 AA- 29% 6% 41% 7% 36% 1.00 7.0% 13.5%  
  TATE & LYLE (U.K.) $5,680 3.7% 10.1 3.1 NR 52% 32% 110% 47% 29% 1.10 14.7% 14.3%  
  TESCO (U.K.) $11,050 3.3% 13.2 4.0 NR 19% 10% 23% 11% 32% 0.73 13.6% 22.8%  
  UNILEVER (NL & U.K.) $42,250 3.2% 15.1 4.6 NR 22% 31% 28% 44% 35% 0.86 8.5% 9.5%  
  UNITED BISCUITS (U.K.) $4,225 5.0% 13.7 8.5 NR 32% 14% 48% 16% 33% 0.88 6.1% 12.2%  
  UNIVERSAL FOODS $834 2.6% 14.7 7.2 NR 34% 13% 52% 15% 37% 0.90 9.0% 12.5%  
  AVERAGE $7,326 2.9% 16.9 6.2   34% 15% 59% 19% 36% 0.92 9.5% 12.5%  
                               
  DRINKS                            
  ALLIED LYONS (U.K.) $8,940 4.1% 23.4 2.3 NR 43% 30% 75% 44% 29% 0.97 9.2% 14.6%  
  ANHEUSER-BUSCH $10,996 2.0% 15.7 8.2 AA- 38% 15% 61% 18% 38% 1.00 7.0% 12.0%  
  BASS (U.K.) $7,630 4.8% 10.6 4.3 NR 29% 38% 40% 62% 26% 0.77 10.1% 16.5%  
  BROWN-FORMAN $1,250 2.8% 14.7 23.5 A+ 14% 4% 16% 4% 35% 1.20 9.5% 11.5%  
  COORS $1,917 2.3% 15.2 10.3 NR 13% 10% 15% 11% 39% 0.85 5.0% 0.0%  
  GUINNESS (U.K.) $6,110 2.5% 15.9 4.7 NR 31% 18% 44% 22% 28% 1.01 24.2% 21.1%  
  LABATT (CANADA) $4,400 3.0% 14.3 2.9 NR 33% 28% 49% 38% 34% 0.75 2.0% 6.5%  
  MOLSON (CANADA) $2,500 2.1% 13.9 3.3 NR 45% 37% 82% 59% 34% 0.75 5.0% 13.0%  
  SCOTTISH&NEWCASTLE (UK) $2,398 5.0% 13.5 5.8 NR 23% 20% 31% 25% 33% 0.59 19.3% 16.5%  
  SEAGRAM (CANADA) $5,000 1.7% 17.2 3.1 NR 29% 26% 41% 35% 22% 1.10 5.0% 12.0%  
  WHITBREAD (U.K.) $3,585 5.2% 10.7 5.6 NR 15% 15% 17% 17% 24% 0.70 6.1% 15.9%  
  AVERAGE $4,975 3.2% 15.0 6.7   28% 22% 43% 30% 31% 0.88 9.3% 12.7%  
                               
US & Canadian companies: 1991 & expected annual growth rates until 1997                              
UK companies: 1990 & average annual growth rates of the last 5 years                              
                               
Source: Value Line Reports, Risk Measurement Service Jan-Mar 1992 (London Business School) & Compact Disclosure (Digital Library System Inc.)                              
US & Canadian companies: 1991 & expected annual growth rates until 1997                              
UK companies: 1990 & average annual growth rates of the last 5 years                              
                             

 

MEMO 1

Pound Dollar
Debt 1944.84120709382 3399.46314469742
Equity 9542.21246868 16679.7873952526
Total Capital 11487.0536757738 20079.2505399501
Tax 35% 34%
Pretax Cost of Debt 8.66% 7.00%
Cost of Equity 14.82% 12.51%
WACC 13.27% 11.17%
Debt Profile
Pounds Dollars
Value Yield Contribution Value Yield Contribution
Bank loans & overdrafts 280 9.54% 1.44% 489 7.86% 1.18%
Commercial paper 970 7.58% 3.96% 1,696 5.93% 3.10%
Guaranteed Notes 1996 98 9.65% 0.51% 171 7.97% 0.42%
Guaranteed Notes 2001 102 9.55% 0.52% 178 7.87% 0.43%
Guaranteed debentures 2011 106 9.70% 0.55% 185 8.02% 0.46%
Commercial paper 139 10.80% 0.81% 243 9.10% 0.68%
Debenture stock 2008 54 11.15% 0.32% 94 9.44% 0.27%
Bonds 1992 46 8.88% 0.22% 80 7.21% 0.18%
Subord. convert. bonds 2002 63 9.75% 0.33% 110 8.07% 0.27%
Weighted Average Cost of Debt 8.66% 7.00%
Preferred Stocks
Pounds Dollars
Value Yield Contribution Value Yield Contribution
4.75% 0.57 10.05% 0.009035137701804 1.0 8.36% 0.007517407993172
6.25% 2.03 10.15% 0.0326123773346 3.5 8.46% 0.027183167938202
5.00% 3.72 10.35% 0.060940170940171 6.5 8.66% 0.050973013232521
Weighted Average Cost of preferred stocks 10.26% 8.57%
Cost of Equity by discounted flow of future dividnds 15.40%
Cost of Equity by capital asset pricing model
Pounds Dollars
Beta 1.14 0.8
Market risk premium 3.90% 2.70%
Rf 10% 7.45%
Ke 14.25% 9.61%
Average Ke 14.82% 12.51%

 

MEMO 2

Retailing Food Drinks
Pound Dollar Pound Dollar Pound Dollar
Debt to Capital 30% 13% Debt to Capital 20% 13% Debt to Capital 24% 20%
Equity to Capital 70% 87% Equity to Capital 80% 87% Equity to Capital 76% 80%
Tax 16% 34% Tax 31% 39% Tax 28% 34%
Pretax Cost of Debt 8.66% 7.00% Pretax Cost of Debt 8.66% 7.00% Pretax Cost of Debt 8.66% 7.00%
Cost of Equity 13.20% 11.14% Cost of Equity 14.15% 12.76% Cost of Equity 14.43% 12.96%
WACC 11.44% 10.29% WACC 12.56% 11.64% WACC 12.45% 11.30%
Return on Net Assets
Drinks 19.21%
Food 9.76%
Retailing 6.58%

 

Cost of Equity by discounted flow of future dividnds
Retailing 12.00%
Food 15.39%
Drinks 15.92%
Cost of Equity by capital asset pricing model
Pounds Dollars
Market risk premium 3.90% 2.70%
Rf 9.80% 7.45%
Beta Retailing 1.18 105%
Beta Foods 80% 99%
Beta Drinks 81% 94%
Ke Retail 14.402% 10.285%
Ke Foods 12.914% 10.129%
Ke Drinks 12.951% 9.993%

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