Nov 18, 2014
Philip Morris Inc.: Seven Up Acquisition (A)
This case discusses Philip Morris Inc. intentions to acquire the Seven-up Company in an effort to diversify their consumer goods. The decision has already been made, however they must decide on an offer price to buy out the company. This report will discuss PM’s acquisition strategy and its appropriateness, along with whether or not 7up fits the criteria of PM’s strategy. The report will further discuss the methods used to determine the maximum amount that Philip Morris should pay for 7up, while also going into detail about the minimum price 7up should accept as a buyout. Philip Morris Acquisition Strategy
Philip Morris bases its…show more content… Lastly, the interest rate was calculated by dividing interest expense by long-term debt for the company. These numbers, along with equity and debt data given to us in the case, resulted in a WACC of 13.89%.
The next step was to calculate the free cash flows for the eleven-year period. In order to do so, we used to following formula: FCF = EBIT(1-tax) + depreciation - change in NWC – CapEx. From here, we used to WACC of 13.89% previously calculated, in order to find the present value of each FCF.
Next, the terminal value at year ten was calculated. The following formula was used to do so: terminal value at year 10 = (FCF at year 11)/(WACC - g). This time we used the long-term growth rate of 7up, which was given by the case as 1% less than the industry rate. This resulted in a terminal value of $848M with its present value calculation being $231M. In order to calculate the FMV of 7up, we took the sum of FCF present value, which equaled to $248M, and added it to the present terminal value of $231M. This resulted in a fair market value of $479M. This is believed to be the minimum amount that 7up should accept as an offer from PM.
In order to find the maximum price that PM should pay for 7up, we once again calculated the fair market value of 7up, however this time we used PM’s expected growth rate of 14% and applied that to 7ups sales. This rate was used in