Peanuts Manufacturer

C: So, I have a few questions about our client first. I’d like to understand, where exactly is our client located, how does our value chain look like, who are our customers, how many product SKUs do we have, what market share do we hold and finally why do we wish to acquire this almond manufacturer?

I: Our client is present in Seattle, US. We manufacture only one type of salted peanuts which are then packed and sold through third-party distributors. We sell the peanuts at $2 per packet and our customers are spread across the entire eastern US market from all income segments, given our products aren’t that expensive. Additionally, we are amongst the top 4 players in the market. Profit maximization is our aim with this acquisition.

C: Okay, I feel I have enough knowledge about the company. Now I would want some information about the Almond manufacturer. How exactly does their value chain look like, where are they located, who are their customers, how many product SKUs do they have and how much share do they hold in their category?

I: They are located in New York, USA. Having only 1 SKU, they cater to people across all income segments throughout US. They manufacture themselves and then sell through their own outlets. They are amongst the top 5 players in the segment.

C: Understood. Next, I would like to understand something about the dry fruit snacks industry and the almond industry in particular. Is it a lucrative industry and at what rate does it grow?

I: Good. So the dry fruit industry is growing @GDP + 1% while the almond industry is highly lucrative, growing @GDP + 4%.

C: Noted. Now that I have decent knowledge about the company and the Industry, I want to understand the valuations at which we plan to acquire the company. Is there any data that you have available that would help me in calculating the acquisition price?

I: Yes, good question. We shall be using profits as a metric and we wish to get a payback in a period of 4 years. You can ignore the time value of money. Now I want you to calculate the profits, given the variable cost of producing almonds is $1, the selling price is $3 and fixed costs are $100,000.

C: Okay so now I would have to find out the market size for the almond-eating population in the US. For this, I’ll take the population of the US, divide it into households since almonds are purchased majorly by houses, take a certain proportion of houses that consume almonds, divide it into income levels and finally take a certain number of packets they will consume per month and hence per year.

I: Good approach. Assume that the number comes out to be around 200,000 people that we can target and capture. 

C: Okay so this gives us $300,000 in the first year of operations. Taking a GDP growth rate of 5%, so almond industry @9% implies 327,000 in 2nd year, 356,430 in 3rd year and lastly 388,508 in 4th year. Ignoring TVM, we get $1,371,938 as the acquisition price that we can actually pay. Next, we can look into budgetary constraints, if any.

I: Makes sense. Ignore the budgetary constraints for now. What other things would you like to look into.

C: Yes. Synergies in terms of operations i.e., in terms of Production, Distribution and Customer Pull. We’ll have savings throughout the value chain, from production to storage as well as packaging. We can get newer Channels of distribution since the almond manufacturer has its own stores. When we talk of creating demand, we can have a merged brand, better product categories, a better marketing team and so on. We can even cut down on admin-related costs by downsizing the departments that we have.

I: Good pointers. Any last few things that you would like to look into before we close the case?

C: Yes, every M&A transaction involves a lot of risks. I’ll break risks into internal and external. Internal risks would involve risks relating to any cultural fit issues, organisational structural fit issues etc. External risks would include risks of Government Regulations like those of CCI in India, then risks of suppliers, threats of competition and new entrants etc.

I: Nice. That’s all that I wanted. We can close the case now.