aig/iba m&a case competition finalist presentation

11/21/2015 KICC Application 1

Goizueta Finance Group

2015 M&A Competition

Benjamin Detemmerman, Benjamin Poon, Jia Tang, Kasper Stockel, Michael Bolliger

Synergy is Still King

NAVIS Global

Company & Industry

Problem

Analysis

Whole Foods should merge with Publix

Merging with Publix allows shareholders’ gain to be maximized

Overview

Problems &

Solution

Financials

Whole Foods should not go private with

Blackstone

Executive Summary

11/21/2015 2GFG M&A Competition 2015

Company and industry overview

11/21/2015 3

MissionTo promote the vitality and well-

being of people by supplying the

highest quality, most wholesome

foods available.

Locations412 9 10

Growth rate• Grocery market 3%

• Natural retail market 9%

Company IndustryCompany Industry

Core

competence

• Premium quality brand

• Superior customer

shopping experience

GFG M&A Competition 2015

Increasing costs & competitions hamper Whole Foods’s growth

11/21/2015 4

Missing Targets by

Sales Growth -0.6%

Sales/Square

Foot

-5%

ROIC -0.6%

Gross Margin is narrowing COGS is growing

Same store sales growth decelerated The only driver of growth is expansion

Costs

Com

petition

20%COGS 2013-15

0%

2%

4%

6%

8%

10%

2011 2012 2013 2014 2015

Same Store Sales Growth

34.8%

35.0%

35.2%

35.4%

35.6%

35.8%

36.0%

2013 2014 2015

Gross Margin

290

315

340

365

390

415

440

2011 2012 2013 2014 2015

Number of Stores

Results:

Falling short of expectations


Key Question:

How to maximize shareholder value in the long run?

Whole Foods’s possible alternatives

11/21/2015 5

Go private and get

acquired by Blackstone

Merge with Publix

Others?


Whole Foods should not be acquired by The Blackstone Group

11/21/2015 6

….while Whole Foods is not the caseCompanies that go private with PE are usually

Whole Foods currently has If Whole Foods goes private with PE

• Mature firms with no growth prospect

• Struggling with a FCF problem

• In need of capital restructuring

• Suffering from agency problem

• The industry is growing, and Whole Foods

ranks first

• FCF/OCF = 25.94%

• High debt capacity

• Committed executives

• Sound long-term plans

• Low market price

• Restructure of management level

• Short-sighted, strategies made to ensure

a profitable exit strategy in 3-5 years

• Disadvantageous to shareholders’ gains



11/21/2015 7

Go private and get


Merge with Publix

Others?


Whole Foods should merge with Publix

11/21/2015 8

Whole Foods Market

• The largest natural and organic foods

supermarket in the U.S.

• 433 stores worldwide, including UK, Canada

and across 42 U.S. states

Publix

• One of the 10 largest-volume supermarket

chains in the U.S., rank 1st in Florida

• 1,109 store locations in 6 Southern states

取長補短,相得益彰 (Compensate our weaknesses while gain through combined strengths)


How are the synergies going to benefit Whole Foods

11/21/2015 9

Cost Synergies

Growth Synergies

• Significant reduction of COGS

• Reduction of overhead costs

• Having access to pharmacy industry and boost

product sales

• Increase in online sales

• Cross-selling opportunities

0%

2%

4%

6%

8%

10%

2011 2012 2013 2014 2015

Same Store Sales Growth

34.8%

35.0%

35.2%

35.4%

35.6%

35.8%

36.0%

2013 2014 2015

Gross Margin


Narrowing Gross Margin

Decelerated Sales Growth

Benefits from SynergiesExisting Problems

Synergy benefits under different scenarios

11/21/2015 10

• Overhead savings 4%

• COGS savings of 3.5%

• EBITDA margin on Pharmacy products

8.5%

• Overhead savings 2%

• COGS savings of 2%


7.1% but sales 20% below expectations

• Ready to eat products 22% below

expectation

18.63%

39.45%

11.86%

30.05%

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

90.00%

100.00%

Worst Case: $4.69bn Cost

Synergies and Merger Gains

Overhead Costs COGS

Pharma Extension Ready to eat extension

20.50%

39.24%

10.89%

29.37%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Best Case: $7.73bn Cost


Overhead Costs Cogs

Pharma Extension Ready to Eat Extension

• Overhead savings 2.5%

• COGS savings of 2.5%


7.9%

15.74%

37.23%

13.07%

33.96%

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

70.00%

80.00%

90.00%

100.00%

Base Case: $5.81bn Cost


Overhead Costs Cogs

Pharma Extension Ready to Eat Extension

Best Case Base Case Worst Case


Growth

Synergies

Cost

Synergies

Growth

Synergies

Cost

Synergies

Growth

Synergies

Cost

Synergies

Whole Foods shareholder gains

11/21/2015 11

• Publix pays a 20% premium to acquire all of Whole Foods Shares

• 1 WFM to 1.8 Publix share exchange rate

• WFM Shareholders own 45% of the total shares of the post-merger firm

• Why Shares? So WFM Shareholders maintain an ownership stake

Merger Approach: Exchange of Shares

BEST CASE BASE CASE WORST CASE

Post-merger firm now worth $34.06bn $32.02bn $30.95bn

Total gain to Whole Foods

shareholders

$16.10bn $14.84bn $14.23bn

Buyout may be unfavorable – Whole Foods is currently underpriced

• Growth uncertainty and increasing competition drives down current price

• Whole Foods share is underpriced:• Current share price: $29.93

• Intrinsic value: $34.45


Comparison of Alternatives

• Blackstone pays a premium to take Whole Foods private.

• The worst case merger scenario would generate higher returns than a 30% premium.

• The best case merger scenario would generate higher returns than a 50% premium.


Merging with Publix is always the best option

11/21/2015 14

• Highly unlikely – LBO Industry Premium Avg. of 24.3%

• Best alternative for Whole Foods shareholders is to merge


10.00

11.00

12.00

13.00

14.00

15.00

16.00

17.00

WFM CurrentValue

Historic Avg.Premium

30% PE Case Worst Case 50% PE Case Best Case

Comparison of Alternatives


11/21/2015 15

Go private and get


Merge with Publix

Others?


Why Whole Foods is the best fit for Publix?

16

Financial

• Increasing sales in natural and organic food industry• Unleveraged• Solid cash positions (FCF/OCF=25.94%)

• The largest natural and organic foods supermarket in the U.S.

• Strong brand image

• National presence, covering 42 states• Global presence

Geographical Brand

Cultural

• Great cultural fit

Strategy Compatibility


11/21/2015 KICC 2014 17

Don’t sell the chicken that lays golden eggs.

別殺生金蛋的雞

Index Page

11/21/2015 AIG M&A Case 2015 18

• Cover Page

• Executive Summary

• Company Overview

• Problem Analysis

• Alternatives Tree

• M&A with Blackstone

• Bad Timing - Underpriced

• M&A with Publix

• Synergies

• Scenario Analysis

• Shareholder Gains

• Financial Comparison

• Whole Foods is the best fit for Publix

• Appendix:

• Risk & Mitigation

• Implementation Timeline

• Historical LBO Premiums

• Distribution of Merger Gains

• Alternatives Evaluation

• Position Map

• Synergies with Publix Pharmacy

• Key Assumptions of Synergy Calculation

• Calculation of Total Shareholder Value

Appendix: Risks & Mitigation

11/21/2015 AIG M&A Case 2015 19

Risks

1. Risk of adverse selection

2. Cultural risks: both companies have distinct cultures with could

result in incompatibilities, lower productivity, turnover of key talents

3. Strategic risk leading to costly diversion:

Mitigation

1. Risk of adverse selection: Incentivize actions by performance-

contingent payout structures and other incentive structures

2. Cultural risks: walk the talk and articulate the mission and vision

of the new company on a steady basis.

3. Strategic risk leading to costly diversion: Clear process

planning and scenario technique to address unexpected outcomes

Index Page

Appendix: Implementation Process

11/21/2015 AIG M&A Case 2015 20

2016 2017 2018

1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q

Overhead Costs

Gradual Implementation

COGS

Cost Savings

Pharmacy

Pre-launch marketing

Post-launch marketing

Ready-to-Eat

WFM Ready-to-Eat in Publix

Evaluation and improvements

1 Year Pilot

covering 10% of

Publix Stores

Planning

Phase of 2

Years Index Page

Appendix: Historical LBO Premiums

11/21/2015 AIG M&A Case 2015 21

Index Page

Appendix: Distribution of Merger Gains

11/21/2015 AIG M&A Case 2015 22

Index Page

• Merged Company Value: $34.06bn

• WFM Shareholders Value $16.1bn


• WFM Shareholders Value $14,84bn


• WFM Shareholders Value $14.23bn

Best Case Base Case Worst Case

68.95%

31.05%

Best Case Distribution of Merger Gains

Whole Foods Shareholders Publix Shareholders

71.00%

29.00%

Base Case Distribution of Merger Gains


76.90%

23.10%

Worst Case Distribution of Merger Gains


Appendix: Alternatives Evaluation

11/21/2015 KICC 2014 23

Customer Base

Expansion4 0 0 5

Cost of

Implementation4 3 4 2

Time Needed 3 3 3 1

Ease of

Implementation3 4 3 1

More DesirableLess Desirable

Merging with Publix Acquired by

Blackstone

International

M&A

Integrate with

suppliers

0 1 2 3 4 5

Index Page

Appendix: Position Map

11/21/2015 AIG M&A Case 24

Fre

sh F

ood

Non

-perishable

Premium Value

Index Page

Appendix: Synergy potential of Pharmacies in Whole Food Stores

11/21/2015 KICC 2014 25

• Publix Pharmacies open new growth driver for

the merged company

• In-store pharmacies to provide health consulting

to advice customers on diets, nutrition, and

weight loss by eating more organic and natural

foods in order to prevent diabetes and high

cholesterol.

• Future Vision: expand health services to Whole

Foods Markets

Index Page

Appendix: Key Assumptions of Synergy calculation

11/21/2015 KICC 2014 26

• Three Cases considered

• Best Case: 4.4Bn

• Base Case: 3.1Bn

• Low Case: 2.7Bn

• 38.5% Tax Rate

• WACC 9.2%

• EBITDA margins of 8.5%

• Ramp up of synergies of 5 years

Key Assumptions of Synergy calculation

Index Page

11/21/2015 KICC 2014 27

Index Page

Appendix: Calculating the Total Shareholder Value

Publix P $20,00 WFM P $29,93

Publix # 777090000 WFM # 357860000

Publix V $15.541.800.000 WFM V $10.710.749.800

Premium 20%

Price Paid $12.852.899.760

Shares Issued by Publix to pay for WFM 642644988

Total Shares post-merger 1419734988

Share Exchange Rate 1,80 Publix Shares for each WFM share

Apparent Cost $2.142.149.960

PVCS $5.818.000.000

Apparent NPV Publix $3.675.850.040

Value of New Company $32.070.549.800

New Stock Price $22,59

True Cost $3.806.028.518

True NPV Publix $2.011.971.482

WFM Shareholders get 3806028518 65,42% of the merger gains

Publix Shareholders get 2011971482 34,58% of the merger gains

WFM Shareholders now have 45,27% of the total shares in the new company

Publix Shareholders now have 54,73% of the total shares in the new company

WFM total shareholder value $14.841.722.170

Publix total shareholder value $17.228.827.630

$32.070.549.800

71.00%

29.00%

Base Case Distribution of Merger Gains


aig/iba m&a case competition finalist presentation

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