Grand Metropolitan Plc
26 Pages Posted: 21 Oct 2008
Abstract
In April 1992, this multinational consumer foods and beverages company is the focus of takeover rumors, which have prompted an assessment of the firm's returns. The student must choose among the principal methods of estimating the weighted-average cost of capital (WACC) for GrandMet and its three main business segments, and must then produce WACC estimates in order to evaluate the firm's performance.
Excerpt
UVA-F-1019
GRAND METROPOLITAN PLC
Grand Metropolitan PLC is the world's largest wine and spirits seller, and the only one that analysts expect will show volume gains this year. Its Burger King hamburger chain, the world's second biggest, has just completed a turnaround. So why is the price of GrandMet shares in New York, compared with its earnings, 10% below the average price/earnings ratio of the companies in the Standard & Poors' 500 index? And more important, why have rumors surfaced that GrandMet, valued at more than $ 14 billion in the stock market, may be a takeover target?
It is our goal to build on GrandMet's strengths and to continue to create sustainable competitive advantage in our businesses, which is the bedrock of shareholder value and wealth.
By April 1992, senior managers of Grand Metropolitan PLC could look back on a flurry of financial activity. GrandMet had just acquired Cinzano, the Italian vermouth and wines company, for (British pounds) GBP100 million. In the United States, GrandMet was negotiating a joint venture in which it would receive GBP39.5 million in exchange for the U.S. flour-milling business that it acquired when it bought Pillsbury in 1989. In 1991, the group sold off about GBP800 million in businesses in its effort to focus on core activities: food, drink, and retailing.
In spite of the world recession, Grand Metropolitan beat market forecasts in 1991 with a 4.8% increase in pretax profits, which brought the group to a record GBP963 million. This success was accomplished in what Chair Sir Allen Sheppard believed was “one of the toughest years in Grand Metropolitan's history.” Sheppard emphasized that the positive results demonstrated the validity of GrandMet's strategic intent to focus on its core businesses. While conceding that “1992 will be another tough year,” he reiterated the company's goal “to constantly improve on rather than match previous achievements.” The 1991 Annual Report carried the slogan “…adding value” imprinted under the company name. Achieving the goal, however, might mean selling off some of the group's poorly performing businesses, such as Pearle Vision. Furthermore, in the previous year, rumors had circulated that GrandMet might be a takeover target.
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Keywords: capital asset pricing model, cost of capital, dividend-growth model, divisional performance, multinationals, profitability analysis, international case, diversity case, diversity, international
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