Med 1: Heinz needs a WACC! Agent Content hu ofya Mere end Submission 2 3 a 6 w F R T B s D F G . 3 Z z x C V B N M c pal Cages PASE 12 H. J. Heinz Estimating the Cost of Capital in Uncertain Times 1 - rendere As facile Se decor op. More now to WACC or ttai TH H Mate be Helmund the Wood Industry EN 7 B o E R T Y C o D F G H K L V C V B N M 28 100MG by the Heinz and the Food Industry Hy hom 'n rope wings with which in dhe cada uno Malta Naata ts Twith The wint www.bile my do www 10 ondo Anh Total Bohet Word Rrerat l'erformance o 3 a OT 5 co 6 B 9 E R . Y U 1 o D F. G H J K C V B N M Hut x Vie X MBX 5 c Wnxa Wex sx , LD-USbb2RUIMVC86700view The most prominent global food companies based in the United States included Kraft Foods, the largest US- based food and beverage company: Campbell Soup Company, the iconic canned food maker, and Del Monte Foods, one of largest producers and distributers of premium-quality branded food and pet products focused on the US market and a former Heine subsidiary). Heinz also competed with a number of other global players such as Nestl, the world leader in sales and Unilever, the British-Dutch consumer goods conglomerate Recent Performance With the continued uncertainty regarding any economic recovery and deep concerns about job growth over the previous two years, consumers had begun to focus on value in their purchases and to eat more frequently at home. This proved a benefit for those companies providing food products and motivated many top food producers and distributors to focus on core brands. As a result, Heinz had done well in both 2009 and 2010, with positive sales growth and profits above the 2008 level both years, although 2010 profits were lower than those in Page 191 2009. These results were particularly striking since a surge in the price of corn syrup and an increase in the cost of packaging had necessitated price increases for most of its products. Overseas sales growth, particularly in Asia, had also positively affected the company's operations. Exhibit 12.1 and Exhibit.12.2 present financial results for the years 2008, 2009, and 2010. EXHIBIT 12.1 Income Statement (numbers in thousands except pershare amounts: fiscal year ends in 2009 2010 10.011221 075 10.49603 6700877 Good DOM SA 2008 B. en 400 120 2011 1570775 29 2275.670 200410 150246 27545 02.02 D 375.400 DO 20 022002 2 250574 200 2054 2514 25 372 507 co 18 1112 BS stad 265 April Date Hits 2004-10 16 2 2011 EXHIBIT 12.2 Balance Sheer (umbers in thousands except per-sharemonts: fincanlar and in its Viex E CA Syx Ex UpLD-uSbb2RUIMVC26700/view 2010 2009 372,145 1,171797 1.237.613 162466 2.945.021 1.978302 4740.361 9.664.184 1,112 307 2008 Cash 617687 Notre 1516141 1,378.216 Other current 168,182 Toulon 2.326.566 Nettdat 2.10071 Other noncurrent 5.134764 Tous 10 565,043 Accounts payable 1.247.479 Shortom debe 124.290 Cumartortion of long tumat 220418 Other Gartentis 969.872 Test 2.570,060 Long lambe 4730946 Othern 1276,217 6.007.100 1387820 Today 10.565043 Sound I 31145 nom od DSC SET 2010 4341 183.901 2.052.046 5.07.10 1.246047 6322233 1270 105 9.64.15 3146 1045338 1.249.127 273,407 2.051.125 209179 4932.790 10076711 1120514 43853 15.16 SAS 2175359 4152 292,704 55L 1940 30076711 317.69 The relation between food company stock prices and the economy was complicated. In general, the performance of a food products company was not extremely sensitive to market conditions and traght even benefit from market uncertainty. This was clear to Heinz CFO Art Winkelblack, who in early 2009 had remarked. "I'm sure glad we're selling food and not washing machines or cars. People are coming home to Heinz Still an exceptionally prolonged struggle or another extreme market decline could drive more consumers to the private-label brands that represented a step down from the Heirs brands. While a double dip recession seemned less likely in mid-2010, it was clear the economy continued to struggle, and this put pressure on margines, While the stock price for Heinz had been initially unaffected by adverse changes in the coonomy and did not decline with the market, starting in the third quarter of 2008, Heinz's stock price began tracking the market's movement quite closely. Figure 12.1 plots the Heir stock price against the S&P Index (normalized so much Heine's stock price at the start of the 2005 fiscal year). The low stock price at the start of 2009 baad been characterized by some as an over-reaction and even with the subsequent recovery. it was considered undervalued by some Page 192 PAGUAR 131 Mini stock price and would stonden 3CX 2 Chin Solved Pro...ods Blux C W X w M D-usb2RUMVC26700/view FECORE 121 tek pride and see 220 Cost of Capital Considerations Recessions certainly could wreak luvoc on financial markets. Geen that the recent down and been largely precipitated by turmoil in the capital markets, it was not surpeising that the interest rate picture at the time was ulExhibit 123 present information on create yedi. As of April 2010, horem gerere und even comercial paper for these companies that could see it were at strikingly low level Even long-term mies, which were typically less volatile, were low by historic standards. Crodit spreads, which had dritted wwwards during 2008 and jumped perards during 2009. odsouled down but were still somewhat high by historic standards. Interestingly, the low level of long term rates and more than ofset the time in credit sovende and borrowers with access to dobe markets had low borrowing cos 300 2010 SO yu 10 2007 COM DO 2010 Page Ch11 Solved Pro...ods HL Wi w Vie Ex MO DASbb2RUIMVC05700/view De Valetta The bar 2003- Sheppard gathered some market data related to Heine (also shown in Elubit 123). He easily obtained historic stock price data. Most sources he accessed estimated the company's beta using the previous five years of date about: 065 Sheppard obtained prices for two bonds de comidered representative of the company's outstanding borrowings a note due in 2032 and a meste due in 2012. Heins. Ind regularly accessed the commercial paper carket in the past, but that market had recently dried up. Fortunately, the company had other sources for short-term borrowing and Sheppard estimated these funds cost about 1.20 What most surprised Sheppard was the diversity of opinions he obtained regarding the market risk premium Inegal to calculating the required return on a company's equity using the capital aset pricing model, this rate reflected the incremental return an investor required for investing in a broad market index of stocks rather than a riskless bond. When measured over long periods of time, the average premium had been about 75% Bat when measured over shorter time periods, the premium yaried greatly, recently the premium had been closer to 6.0 und by some measures even lower. Most striking were the results of a survey of CFOs indicating at expectations were for an even lower premium in the near future close to 5.0% On the other hand, come asserted that motit conditions in 2010 only made wone if a much higher premium-something close to 8 wete assumed As Sheppard prepared for his cost of capital analysis and reconcidation, Hochtainod rogent reflective date for Heine's three major US competitors (Exhibit12.4) This information would allow Shepparel pence of capital estimates for these competitors As well as for Heine Auflet codicis for Heuwere sul at the time, the results for competitors could be more representave other companies in the industry. All the very feat Sheppard know be would reconfortable with his recommendation it were slipped with what he believed was appropriate for the company's nuor competitors C D 271 Page + Wis 2 Ch Solved Proods CW We X Vex MEXP PLD-uSbb2RUIMVC26700/view SUSITISCHES ZUSUNSCRE were assumed As Sheppard prepared for his cost of capital analysis and recommendation, he obtained recent representative dots for Heine's three major U.S. competitors (Exhibit 12.4). This information would allow Sheppard to generale cost-of-capital estimates for these competitors as well as for Heinu. Argubly, if market conditions for Heit were unusual at the time, the results for competitors could be more representative for other companies in the industry. At the very least, Sheppard knew he would be more comfortable with his recommendation if it were aligned with what he believed was appropriate for the company's major competitors. 126 Commable Fire Data Dw 7 26372 720 2014 20 Mats but 065 070 Sweet 135 12 Shwe 2010 Thording donorge 510 Det var ett CH1 Solved Pro...ods Med 1: Heinz needs a WACC! Agent Content hu ofya Mere end Submission 2 3 a 6 w F R T B s D F G . 3 Z z x C V B N M c pal Cages PASE 12 H. J. Heinz Estimating the Cost of Capital in Uncertain Times 1 - rendere As facile Se decor op. More now to WACC or ttai TH H Mate be Helmund the Wood Industry EN 7 B o E R T Y C o D F G H K L V C V B N M 28 100MG by the Heinz and the Food Industry Hy hom 'n rope wings with which in dhe cada uno Malta Naata ts Twith The wint www.bile my do www 10 ondo Anh Total Bohet Word Rrerat l'erformance o 3 a OT 5 co 6 B 9 E R . Y U 1 o D F. G H J K C V B N M Hut x Vie X MBX 5 c Wnxa Wex sx , LD-USbb2RUIMVC86700view The most prominent global food companies based in the United States included Kraft Foods, the largest US- based food and beverage company: Campbell Soup Company, the iconic canned food maker, and Del Monte Foods, one of largest producers and distributers of premium-quality branded food and pet products focused on the US market and a former Heine subsidiary). Heinz also competed with a number of other global players such as Nestl, the world leader in sales and Unilever, the British-Dutch consumer goods conglomerate Recent Performance With the continued uncertainty regarding any economic recovery and deep concerns about job growth over the previous two years, consumers had begun to focus on value in their purchases and to eat more frequently at home. This proved a benefit for those companies providing food products and motivated many top food producers and distributors to focus on core brands. As a result, Heinz had done well in both 2009 and 2010, with positive sales growth and profits above the 2008 level both years, although 2010 profits were lower than those in Page 191 2009. These results were particularly striking since a surge in the price of corn syrup and an increase in the cost of packaging had necessitated price increases for most of its products. Overseas sales growth, particularly in Asia, had also positively affected the company's operations. Exhibit 12.1 and Exhibit.12.2 present financial results for the years 2008, 2009, and 2010. EXHIBIT 12.1 Income Statement (numbers in thousands except pershare amounts: fiscal year ends in 2009 2010 10.011221 075 10.49603 6700877 Good DOM SA 2008 B. en 400 120 2011 1570775 29 2275.670 200410 150246 27545 02.02 D 375.400 DO 20 022002 2 250574 200 2054 2514 25 372 507 co 18 1112 BS stad 265 April Date Hits 2004-10 16 2 2011 EXHIBIT 12.2 Balance Sheer (umbers in thousands except per-sharemonts: fincanlar and in its Viex E CA Syx Ex UpLD-uSbb2RUIMVC26700/view 2010 2009 372,145 1,171797 1.237.613 162466 2.945.021 1.978302 4740.361 9.664.184 1,112 307 2008 Cash 617687 Notre 1516141 1,378.216 Other current 168,182 Toulon 2.326.566 Nettdat 2.10071 Other noncurrent 5.134764 Tous 10 565,043 Accounts payable 1.247.479 Shortom debe 124.290 Cumartortion of long tumat 220418 Other Gartentis 969.872 Test 2.570,060 Long lambe 4730946 Othern 1276,217 6.007.100 1387820 Today 10.565043 Sound I 31145 nom od DSC SET 2010 4341 183.901 2.052.046 5.07.10 1.246047 6322233 1270 105 9.64.15 3146 1045338 1.249.127 273,407 2.051.125 209179 4932.790 10076711 1120514 43853 15.16 SAS 2175359 4152 292,704 55L 1940 30076711 317.69 The relation between food company stock prices and the economy was complicated. In general, the performance of a food products company was not extremely sensitive to market conditions and traght even benefit from market uncertainty. This was clear to Heinz CFO Art Winkelblack, who in early 2009 had remarked. "I'm sure glad we're selling food and not washing machines or cars. People are coming home to Heinz Still an exceptionally prolonged struggle or another extreme market decline could drive more consumers to the private-label brands that represented a step down from the Heirs brands. While a double dip recession seemned less likely in mid-2010, it was clear the economy continued to struggle, and this put pressure on margines, While the stock price for Heinz had been initially unaffected by adverse changes in the coonomy and did not decline with the market, starting in the third quarter of 2008, Heinz's stock price began tracking the market's movement quite closely. Figure 12.1 plots the Heir stock price against the S&P Index (normalized so much Heine's stock price at the start of the 2005 fiscal year). The low stock price at the start of 2009 baad been characterized by some as an over-reaction and even with the subsequent recovery. it was considered undervalued by some Page 192 PAGUAR 131 Mini stock price and would stonden 3CX 2 Chin Solved Pro...ods Blux C W X w M D-usb2RUMVC26700/view FECORE 121 tek pride and see 220 Cost of Capital Considerations Recessions certainly could wreak luvoc on financial markets. Geen that the recent down and been largely precipitated by turmoil in the capital markets, it was not surpeising that the interest rate picture at the time was ulExhibit 123 present information on create yedi. As of April 2010, horem gerere und even comercial paper for these companies that could see it were at strikingly low level Even long-term mies, which were typically less volatile, were low by historic standards. Crodit spreads, which had dritted wwwards during 2008 and jumped perards during 2009. odsouled down but were still somewhat high by historic standards. Interestingly, the low level of long term rates and more than ofset the time in credit sovende and borrowers with access to dobe markets had low borrowing cos 300 2010 SO yu 10 2007 COM DO 2010 Page Ch11 Solved Pro...ods HL Wi w Vie Ex MO DASbb2RUIMVC05700/view De Valetta The bar 2003- Sheppard gathered some market data related to Heine (also shown in Elubit 123). He easily obtained historic stock price data. Most sources he accessed estimated the company's beta using the previous five years of date about: 065 Sheppard obtained prices for two bonds de comidered representative of the company's outstanding borrowings a note due in 2032 and a meste due in 2012. Heins. Ind regularly accessed the commercial paper carket in the past, but that market had recently dried up. Fortunately, the company had other sources for short-term borrowing and Sheppard estimated these funds cost about 1.20 What most surprised Sheppard was the diversity of opinions he obtained regarding the market risk premium Inegal to calculating the required return on a company's equity using the capital aset pricing model, this rate reflected the incremental return an investor required for investing in a broad market index of stocks rather than a riskless bond. When measured over long periods of time, the average premium had been about 75% Bat when measured over shorter time periods, the premium yaried greatly, recently the premium had been closer to 6.0 und by some measures even lower. Most striking were the results of a survey of CFOs indicating at expectations were for an even lower premium in the near future close to 5.0% On the other hand, come asserted that motit conditions in 2010 only made wone if a much higher premium-something close to 8 wete assumed As Sheppard prepared for his cost of capital analysis and reconcidation, Hochtainod rogent reflective date for Heine's three major US competitors (Exhibit12.4) This information would allow Shepparel pence of capital estimates for these competitors As well as for Heine Auflet codicis for Heuwere sul at the time, the results for competitors could be more representave other companies in the industry. All the very feat Sheppard know be would reconfortable with his recommendation it were slipped with what he believed was appropriate for the company's nuor competitors C D 271 Page + Wis 2 Ch Solved Proods CW We X Vex MEXP PLD-uSbb2RUIMVC26700/view SUSITISCHES ZUSUNSCRE were assumed As Sheppard prepared for his cost of capital analysis and recommendation, he obtained recent representative dots for Heine's three major U.S. competitors (Exhibit 12.4). This information would allow Sheppard to generale cost-of-capital estimates for these competitors as well as for Heinu. Argubly, if market conditions for Heit were unusual at the time, the results for competitors could be more representative for other companies in the industry. At the very least, Sheppard knew he would be more comfortable with his recommendation if it were aligned with what he believed was appropriate for the company's major competitors. 126 Commable Fire Data Dw 7 26372 720 2014 20 Mats but 065 070 Sweet 135 12 Shwe 2010 Thording donorge 510 Det var ett CH1 Solved Pro...ods