Grand Metropolitan PLC Essay

Company Background and Issues jet Metropolitan PLC was a multinational holdings go with that faced a hostile takeover threat in the late 1980s and early 1990s. The company specialized in wine and spirits. The headquarters for ope ration was in London, England at the time of this case.The major dilemma at hand is avoiding a takeover. The economy was magnanimous at the time, and the companys carnation price was thought to be at a lower place time shelterd, as their rugged P/E ratio of 13.3 indicated. Management needs to note out why their stock price is so chthonicvalued.A wise strategy of talkative Metropolitans was to capitalizing brand value on the balance sheet. Another strategy of trouble was to divest in low issue aras and invest heavier in projects that meet a certain growth criteria. The CEO stated, In addition to brewing, we have continued to exit those businesses whose ill luck potential earnings do not meet our growth criteria exclusively those decisions were driven by a thorough analysis of income growth prospects. old management is committed to reducing debt. In 1991 alone the debt to capital ratio fell by 9%. Management has shown to be committed to these goals into the future. virtuoso of the issues management will have to face is how to tell which business units be outperforming others.Despite the capital performance of jet Metropolitan as a company during the 1980s, the stock was undervalued in the early 1990s. This is the immediate issue management must address to avoid a takeover.Financial Analysis follow of CapitalOur estimate of the pound-based weighted bonnie court of capital for Grand Metropolitan was 16.433862%. We used the weights from exhibit 6. The tax rate was abandoned as 35%. We used the weighted average termss of debt and preferred stock from exhibit 7. We then discounted the flow of future dividends to find the personify of rough-cut equity. We also used the three strategic business units to find the judge weighted average cost of capital for to each one unit. We tack together that WACC for Restaurant-Retailing came to 12.8876%. The WACC for aliment Processing came to 12.12%. And the WACC for Drinks came to 11.5513%. We used exhibit 8 to find the average cost of equity and debt for the comparable to(predicate) companies in each business share and forecasted it on to Grand Metropolitan.We noticed a high cost of equity for Grand Metropolitan. This comes at a time when the company is trying to reduce its debt. The cost of equity was found to be 16% in the U.S. and about 18% in Great Britain.Cost of DebtTo find our cost of debt we took the market value of debt to capital ratios for each segment, found on exhibit 8, for our weights. Our assumptions to find the cost of debt, since it was not explicitly given, were as follows we used the bond ratings given under each segment, we then used the yields by rating category graph on exhibit 9 to find the appropriate rates and found an average of the ratings assigned for each segment. Now having found our weights and rates we are able to with the tax rate found within each segment find our cost of debt.Currency rate riskDue to the novelty of markets that Grand Metropolitan operates within, the company is inherently exposed to currency parley rate risk. The majority of the subsidiaries of Grand Metropolitan operate within the join Kingdom and the United States markets, which utilize the Great Britain Pound and the U.S. Dollar respectively. With Grand Metropolitans headquarters in London, England, they have a giant number, 77%, of their Debt currency in U.S. dollars. We think this is due to their ability to get to a much lower debt rate within the U.S. market, so they lowlife finance their projects with the cheapest debt available.Market AnalysisGrand Metropolitans P/E ratio is noticeably lower when compared to the other companies within its section segments. We found that these low P/E ratios combined with increase d moolah made Grand Metropolitan a potential target for bodily raiders, i.e. takeover risk.RONADuring our analysis of individual segments, exhibit 2, we found that the RONAs for the Retailing and nutriment were lagging behind that of the Drinks segment. Furthermore, the Drinks segment only has 26% of total lettuce assets, yet it provides 46% of operational benefit. Comparing this to the Retailing segment, which utilizes 40% of realise assets while only contributing 24% of the total profits, shows a great disparity. The Food segment represents 34% of net assets and 30% of the total profits.EVAWhen scheming EVA, our early indications that Retailing was a drain on the companys profits and growth were further confirmed. Retail had a negative EVA of -137.70. Drinks were clear the main most efficient segment with an EVA of 135.83, and Food had a -44.04 EVA. We mensurable these EVAs apply our segment WACCs and using Net Assets as a measure of Capital. Tax Rates for each segment w ere given in exhibit 8, which were applied to operating profit for a NOPAT of each segment. These results show how mismanaged and inefficient the Retailing segment, and to a smaller degree the food for thought segment are.Environmental AnalysisStrengthsThe strength of Grand Metropolitan is its salute segment. The operating profit in the United States has been grown from $185 to $517. The UK and Ireland are using only 30% of net assets, but contribute 36% of the operating profit.WeaknessesRetailing appears to be a weakness for Grand Metropolitan. The return on net assets and operating profit has been consistently lower than the other segments. The companys capital structure is set up with a heavier than average amount of debt. Grand Metropolitan carries 43% debt to capital, while the average for comparable companies is between 28-34% depending on the segment.OpportunitiesGrand Metropolitan has an opportunity to increase profits by investing in current successful brands. The brands that fall under drinks have proven to give the highest return on net assets. testimonyFrom our results we can conclude that the Retailing and Food segments are not adding value to the firm and are bringing dismantle the value being added by the Drinks segment. While Foods EVA of -44.04 isnt nearly as bad as Retails -137.70, both are bringing down the companys growth opportunities. These segments are either ripe for a selloff or restructuring. The food segment especially seems like it needs only a management change since its close to being lordly EVA but return on net assets has dipped in the destination few years, leading to the low EVA.