Kraft Case Study Essay

Purpose

The purpose of this Case Research Report is to advise Philip Morris for the Acquisition of Kraft Inc.

Overview

Kraft is a food-focused company numerous well known brandnames. In 1987 net revenue were $9. 9 billion dollars which was a growth of 27% over the prior year., and net income elevated by 11% to $435 million. This follows a youthful attempt to shift where in 1980 Kraft merged with Dart Industries and then attaining Hobart Company in 1981. However , right at the end of 1986 Kraft acquired returned into a food-focused approach.

Philip Morris is a company that is certainly dependant on the tobacco sector. Most of Philip Morris' salary is from the Marlboro, Benson & Hedges, and Virginia Slim cigarette brands. Although tobacco product sales have increased by 12-15 percent in 1987, Philip Morris wants to shift out of the smoking cigarettes business, since evidenced by their 1969 acquisition of 53 percent of Burns Brewing Provider's common shares with the remaining shares next in 1970, and the purchase of Seven-Up in 1978 and General Food in 85. These purchases have had blended results, with Philip Morris selling the Seven-Up operations in 1986 and General Food having a declining profit from 1986 to 1987 of $624 million to $605 mil.

Why is Kraft a takeover focus on for Philip Morris

The meals industry is actually a growing one particular. For Kraft, in 1987 net revenue were $9. 9 billion which was a growth of 27% over the previous year., and net income elevated by 11% to $435 million. It truly is expected with an increasing inhabitants that the foodstuff industry will certainly grow.

As Philip Morris is definitely seeking to diversify out of the cigarette business and into the food industry, the acquisition of Energi would reinforce their situation as they would then end up being the largest meals company in the world.

Energi is internationally recognised numerous well known brandnames such as Wonder Whip, Several Seas, as well as its range of Kraft salad dressings.

What has occurred thus far

On the 18th of Oct Philip Morris made a hostile tender offer towards the shareholders of Kraft for $90 per share in cash, which has been a 50 percent premium above the closing price ($60. 125) on the 18th of Oct.

In response to this soft offer, Kraft Management include proposed a significant restructuring prepare as an alternative to the tender offer made by Philip Morris.

What is Kraft worth?

We need to value Kraft at the end of 1987 to ascertain whether the market has quite priced the share prices of Energi. The market principles of Kraft as by 1987 sealed at $48. 25. In valuing the share price of Kraft there are several methods that can be used. These types of methods include the Corporate Valuation Model (CVM), the Tweaked Present Worth Model (APV) and the Equity Residual Version. In our examination we applied both the CVM and APV model to get a valuation of Kraft's shares at the end of 1987. In applying the CVM evaluation, we valued Kraft's reveal price by 1987 in $54. nineteen, while the APV method created a value of $52. 79. Although those two methods provide different share price results, both nonetheless seem to be significantly higher than industry share selling price [please refer to Appendix 1-A on the assumptions and calculations accustomed to derive these types of share selling price values] Clearly, you could argue that the marketplace share selling price of Energi is undervalued. [A comparative model of the share prices according to our own independent valuations as well as the market valuations can be seen in Appendix B-1.

[for an explanation from the calculations used to determine Kraft's share cost please refer to Appendix A-1, for tables and graphs refer to Appendix B-1]

Should Philip Morris obtain Kraft

Philip Morris ought to indeed purchase KRAFT. Various economic rewards and inflow will come up due to this buy. Quoting Hamish Maxwell the CEO of Phillip Morris, that " the purchase of Kraft will mean creating the leading international foodstuff company. ” Main driving forces would be the benefits of synergy and revenue diversification.

Synergy is...

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