Pacific Salmon

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Problem Definition:
Ratish, Rotem, & Retzlaff Partners (RRR) are preparing a $450 Million (M) bid for Pacific Salmon Company (PSC). This analysis looks at how attractive RRR’s $450M bid and 12.5% equity option is to owners Ivanov, Stepanov & Nikonov (ISN). The analysis also investigates RRR’s decision to finance $325M with debt and the foreign currency risk to PSC revenues.

PSC was evaluated using projected unlevered Free Cash Flow (FCF) with a Terminal Growth Rate (TGR) of 2.5% and WACC figures that ranged from 8.5% to 9% based on PSC’s leverage. Beta was calculated using the comparable companies Maruha Corp., Nippon Suisan Kaisha Ltd. (NSK) and Pescanova SA. Maruha Corp. and NSK are integrated fishing, processing and packaging companies similar to PSC. Pescanova was used because like PSC 90% of its revenues are from frozen fish sales. Refer to Appendix A for calculations on PSCs beta and WACC.

Analysis shows that RRR’s $450M bid is light as PSC’s estimated value is $639M and the NPV for the acquisition is $189M. Even with a 0% TGR PSC’s estimated value is $507M and the NPV for the acquisition is $57M. RRR’s 12.5% equity option to ISN does not make up this difference as the value of the option is only $4.6M. This makes RRR’s total offer to ISN $454.6M, which frails in comparison to the $639M based on PSC’s forecast FCF. Moreover, competing bid valuations for PSC were calculated for illustrative purposes from comparable companies the majority of them were higher than $454.6M. Competing valuations ranged from $742M to $599M and from $564M to $482M based on TGRs of 2.5% and 0%, respectively. Refer to Appendix B for PSC’s DCF analysis, Appendix C for (1) PSC’s TGR sensitivity and (2) RRR’s equity option analysis, and Appendix D for competitive valuation details.

Debt financing a large portion of the acquisition comes with provisions on the interest coverage ratio, which is to be above one. 50% of PSC’s revenues are in the Japanese yen and...
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