Pepsi Quaker M&a

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Problem Pepsi has been targeting Quaker as a potential acquisition target because of its ownership of Gatorade (a brand Pepsi actively wants to include in its portfolio) and several synergy opportunities in distribution expertise. Pepsi needs to determine a fair price to offer for a stock-for-stock exchange that accounts for Quaker and Pepsi’s current values, synergy opportunities, and other offers on the table. Facts and Assumptions * Quaker’s portfolio and especially Gatorade is attractive to multiple large food/beverage conglomerates. Due to scale, many of these potential acquirers have synergy opportunities with Quaker. * Quaker portfolio can be seen as two distinct product groupings with differing growth rates – foods (including Oatmeal, Golden Grain, Granola Bars, and Aunt Jemima) and beverages (including Gatorade). * Assumptions used in valuations outlined in exhibits (Exhibits 1-4) * In practice, we might want to use a different discount rate for Quaker’s beverage and food divisions. But no data is given regarding the makeup (in equity and debt) of the different divisions, so while cash flows are calculated separately, NPV is calculated at an aggregate level. Analysis – Quaker Valuation In preparation for presenting an offer, Pepsi needs to value Quaker both excluding and accounting for synergies. Results are wide - ranging from $6.6 Billion (Exhibit 4) to $16.41 Billion (Exhibit 3) using multiples. The multiples methods suggest relatively higher valuations, but NPV calculations do not result in valuations equal to Quaker’s market price - $11.1B. The two critical assumptions in NPV estimates are: * Beta: Historically, Quaker has had a Beta of 0.4, although Value Line projects a Beta of .65 going forward. This is likely due to the increased share Gatorade (a riskier product group) will make of the total portfolio. A beta of .4 vs .65

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