Below are historical financial statements and other pertinent data for Supervalue Inc. Please use these data in the following exercises. You may assume for the purposes of your calculations that “today” is February 25, 2012-that is, you do not have to worry about partial year calculations. Round your answers to the nearest 1,000 (consistent with 2012 reporting).
A recent article in the Wall Street Journal reports that Supervalue (owner of grocery stores such as Albertsons and Jewel-Osco) is considering putting itself up for sale. Supervalue’s earnings have taken a hit in the most recent quarter, falling 45%. Its share price has been falling as well, and management seems to be abandoning its previously optimistic outlook. Let’s say you are the CEO of a competing grocery store chain and are considering the acquisition of Supervalue. You are confident that you will be able to achieve synergies, and you plan to operate the target as a subsidiary. You are now ready to calculate the value of Supervalue to determine if these synergies will be enough to make this a deal worth pursuing, and what price you should offer. Use these assumptions and the provided historical financial statements to answer the following questions.
Please consider the following assumptions:
Supervalue expects the expansion will increase revenues and operating expenses by 25% in 2013, 15% in 2014 and 6% in 2015-2017.
Beginning in 2018, Supervalue will settle into a permanent free cash flow growth rate of 3% per year.
The levels of cash and interest-bearing debt are expected to remain constant through 2017, then they will grow at the same rate as free cash flows. Any liabilities labeled as “other” are non-interest-bearing.
Supervalue’s marginal cost of debt is 7.5%, and WACC is 11.5%. The marginal tax rate is 38%.
“Total Other Income/Expenses, Net” is expected to be zero in the future, beginning in 2013.
Make any other assumptions you feel are necessary to perform the following tasks, and explain why you are making them.
In Excel, create a pro forma income statement and balance sheet for Supervalue for 2013 through 2017.
Refer to your pro forma income statement from part (a) and the pro forma balance sheet provided. All numbers are in thousands of dollars. What are Supervalue’s free cash flows for 2012 through 2017? You may provide your answer in Excel.
Based on your previous answers and using a DCF analysis, what is Supervalue’s current (as of February 25, 2012) enterprise value? Equity value? Use the EBITDA multiple method to calculate the terminal value. The appropriate EBITDA multiple is 7x.
Given your calculations in part (c), what is the maximum price (equity value) you would be willing to pay for Supervalue? Briefly explain why you wouldn’t be willing to pay more than this.
An income statement, balance sheet, subsidiary schedules and assumptions page have been provided for you. You will not be able to change the financial statements and schedules directly. They will be locked. You WILL have to modify the assumptions based on your judgment. That will change the income, assets, liabilities, and equity automatically. However,You WILL have to create the valuation sheet. A comment sheet is provided as the last tab to answer the text questions. Do not forget to enter your name in the name field in the assumptions sheet, it is labeled ‘Your name goes here’.
You may be tempted to try to reuse this spreadsheet for other assignments, not a good idea. Certainly you can use it for ideas. Of course, do not share ideas, data, etc. with others while working on this exam.
(a) Pro forma income statement is in the “Income Stmt” Tab
(b) Free Cash Flows from 2012 through 2017 is in the “Valuation” Tab – Row 13
(c ) Current Enterprise value is in the “Valuation” Tab – Cell C21, Equity value in “Valuation” – Cell C23
(d) Give the answer in (c) above, as per the intrinsic valuation, one would not pay more than ~$32,000 million. As per the intrinsic valuation in the valuation tab, the equity value is the value after deducting debt and adding cash. Debt is a liability and required to be paid. As a result, debt is deducted and cash is acquired along with the assets, so added. Any amount paid in excess of the intrinsic valuation, the acquirer will be at a notional loss. In fact, if the amount is less than the intrinsic valuation, the acquirer will be at a notional gain.