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Andrew Bubs is the founder and owner/operator of privately held Bubs Candies Company (BCC). BCC produces all of its candy and sells directly to retailers. The candy market is dominated by one large publicly traded firm, Tressell Candies, which controls 30% of the market. Two other publicly traded competitors (Claire’s Confections and Cindy’s Sweets) each control 11% of the market, with the rest of the market evenly divided among eight other firms (BCC being one of these smaller firms).Bubs wants to have an adequate knowledge of BCC’s value and of the value proposition offered by potential acquirers of BCC. In late 2012, he hires James Nelson of Nelson Partners to find a value for BCC and to review other issues related to potential changes in industry structure. First, Nelson calculates the expected free cash flow for each year from the projections in Exhibit 1 and determines the terminal value using the assumptions in Exhibit 2. Using discounted cash flow and other methods, he estimates the value of the firm as at the end of 2012 to be between $6.5 and $8.2 million.  Next, Nelson and Bubs discuss attributes of the publicly traded firms in the industry:• Tressell Candies outsources production of its different candies and focuses most of its energy on its retail operations. In fact, some BCC products are brought to market using Tressell’s retail facilities.• Claire’s Confections is like BCC in that it produces candy but does not have its own retail outlets.• Cindy’s Sweets produces and markets its candy through its own retail stores.Bubs and Nelson consider the implication of BCC being acquired by either Tressell Candies or Claire’s Confections. They classify each potential acquisition as:• a vertical merger with backward integration if acquired by Tressell Candies;• a horizontal merger with potential economies of scale if acquired by Claire’s Confections.After considering further information on the publicly traded companies (see Exhibit 3), Nelson observes that Tressell can potentially increase its earnings per share by acquiring either Claire’s Confections or Cindy’s Sweets in an all-stock acquisition (assuming no changes in the current stock prices). Upon hearing this information from Nelson, Bubs decides to contact Tressell to discuss the potential sale of BCC before Tressell can act on acquiring Claire’s Confections or Cindy’s Sweets. Next, Nelson and Bubs discuss attributes of the publicly traded firms in the industry:• Tressell Candies outsources production of its different candies and focuses most of its energy on its retail operations. In fact, some BCC products are brought to market using Tressell’s retail facilities.• Claire’s Confections is like BCC in that it produces candy but does not have its own retail outlets.• Cindy’s Sweets produces and markets its candy through its own retail stores.Bubs and Nelson consider the implication of BCC being acquired by either Tressell Candies or Claire’s Confections. They classify each potential acquisition as:• a vertical merger with backward integration if acquired by Tressell Candies;• a horizontal merger with potential economies of scale if acquired by Claire’s Confections.After considering further information on the publicly traded companies (see Exhibit 3), Nelson observes that Tressell can potentially increase its earnings per share by acquiring either Claire’s Confections or Cindy’s Sweets in an all-stock acquisition (assuming no changes in the current stock prices). Upon hearing this information from Nelson, Bubs decides to contact Tressell to discuss the potential sale of BCC before Tressell can act on acquiring Claire’s Confections or Cindy’s Sweets.Later,upon further investigation, Bubs and Nelson discover a provision that in the event of a takeover, the bondholders of Cindy's Sweets can immediately sell bonds back to the issuing company at a value of 20% above par, making Cindy's Sweets an inlikely target for Tressell. |
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