Financial Mnangement (Lindt and Sprungli. Zetar plc companies) - Term Paper Example

? FINANCIAL MANAGEMENT Table of Contents Executive Summary 3 Company Background and Overview 4 Quantitative and Financial Comparison 5 FINANCIAL COMPARISON 6 Revenue and Profits– Lindt & Sprungli 6 Revenue and Profits– Zetar plc 6 Profitability Ratios 7 Liquidity Ratios 8 Efficiency Ratios 8 Gearing Ratio 9 Estimating the Value of Zetar plc 9 Pros and Cons of a Combination of Lindt and Zetar 11 Pros of the combination 12 Cons of the combination 12 Conclusion 13 14 Bibliography 14 Executive Summary The paper gives an idea about the two different confectionary companies operating in different parts of the world. Lindt and Sprungli are being stationed in Switzerland, Zetar plc in the UK. The paper analyses the company’s background to give an understanding of the operation of both the companies involved, the overview gives an idea of the strategies that the company follows along with the major markets in which it operates. The overview is followed by a comparison of the financial performance of both the company. The financial performance of the company is analyzed by using different measures such as the ratio analysis technique and the comparison of the revenues and the profits of both the organizations. The value of Zetar plc is calculated so as to assess whether Zetar plc can be considered for acquisition purposes by Lindt and Sprungli. This valuation is performed using different methods such as the P/E ratio and the market capitalization concept. Finally, the valuation is used along with other arguments to suggest that the company is worth acquiring. This is further displayed by indicating the different advantages and the disadvantages that the merger/acquisition can bring. Both the advantages and the disadvantages are weighed before the final decision is given. Company Background and Overview Lindt and Sprungli is a group of confectionary company which is globally known for its high quality chocolate production. The company’s head quarter is based in Kilchberg, Switzerland. Lindt and Sprungli, more commonly known as Lindt is considered to be a global market leader with respect to the production of chocolates, its products are highly appreciated by people around the globe. The main markets that Lindt focuses on are highlighted below with respect to their Sales North America (28.3%) Germany (17.5%) Switzerland (12.7%) France (12.5%) Italy (11.5%) Great Britain (5%) Lindt’s success has been attributed to its long term strategy. The company’s focus and its main strategy revolves around its seven pillars; brand management, premium positioning, better bondage with customers, Innovation, marketing expertise, understandability of products and the company’s hunger for expansion. All these seven pillars are deemed to be the Critical Success Factors for the company and it is because of these long term strategies that the company gave an outstanding performance during an era of economic downturn (Lindt and Sprungli, 2010). “Zetar is a leading manufacturer of confectionery and natural snacks with a reputation for quality and product innovation” (Zetar Plc, 2011). Zetar plc is known for its good quality chocolate within the United Kingdom. The company’s main target markets are the children and for that reason they produce chocolates which appeal to children mostly. The company was incorporated on 8 December 2004 but its main business started in the year 2005. Zetar plc comprises of two groups, Confectionary Division and the Natural snack division. The confectionary division covers the production of chocolate which is later sold within the UK and other export markets such as Australia, China and Ireland. The natural snack division, on the other hand, manufactures and processes a wide range of nuts and dried fruits which are later sold within the UK market only. The natural snack division’s only market is deemed to be the UK market only. Zetar plc has developed a strong relationship with all the UK food retailers and it can be said that the company is fond of Organic growth, which is highly supported by the company’s persistent habit to innovate (Zetar Plc, 2010). Quantitative and Financial Comparison Ratios & Other Financials Lindt & Sprungli Zetar plc 2010 (CHF Million) 2009(CHF Million) 2010 (? Million) 2009 (? Million) Revenue 2579.3 2524.8 131.922 118.602 Operating Profit 325.3 264.8 7.312 6.051 Net Profit (Continuing Operation) 241.9 193.1 4.633 3.301 Operating Profit ratio 12.6% 10.5% 5.5% 5.1% Net Profit ratio 9.4% 7.7% 3.5% 2.8% Current Ratio 2.6 : 1 2.4 : 1 1.01 : 1 0.95 : 1 Acid Test Ratio 1.99 : 1 1.74 : 1 0.59 : 1 0.6 : 1 Inventory Turnover Ratio 6.6 days 5.9 days 8.2 days 8.28 days Receivables Turnover Ratio 92 days 95 days 53 days 59 days Gearing (Debt/Total Assets) 8.3% 8.9% 26% 40% (Lindt and Sprungli, 2010; Zetar Plc, 2010) FINANCIAL COMPARISON Revenue and Profits– Lindt & Sprungli The revenue for Lindt has increased from being CHF2524.8 million in the year 2009 to CHF2579.3 million in the year 2010; this shows an increase of approximately 2%. This increase can be considered useful with respect to the competitive environment in which the company operates. The increase in the company’s revenue is admirable because of the fact that the company has to face different competitors in the markets in which they operate (e.g. Kraft, Nestle, etc). The profits for Lindt have also increased during the year 2010. The operating profit for the company increased by CHF 60.5 million (an increase of 22.8%). The Net profit for the year on the hand increased by CHF48.8 million (an increase of 25.3% compared to previous year). Both these increase are drastic changes in a time period where firms and organizations were financially stressed because of the economic downturn. This increase in the profits is also because of some strict measures taken by the firm to reduce their costs. The company was also able to reduce their costs in the year 2010 (Expenses in 2010 CHF2266.6 million; Expenses in 2009 CHF2273.9 million) (Lindt and Sprungli, 2010). Revenue and Profits– Zetar plc The revenue for Zetar plc has increased by ?12.72 million; this shows an approximate increase of 11% in the revenue of Zetar plc. This can be considered a big achievement for Zetar plc as it is small company as compared to Lindt but still it managed to increase its revenue by 11 %. This increase in revenue is primarily because of the enhanced goodwill of the company and its desire to continually improve its product via proper innovation at the right time. The operating profits for the company have increased from being ?6.051 million in 2009 to ?7.312 in 2010; net profits have increased form being ?3.031 million in 2009 to ?4.633 in 2010. This shows that there is an increase of 21% in the operating profit and an increase of 40.4% in the net profits of the company (Zetar Plc, 2010). Profitability Ratios The profitability of both the companies can be viewed and assessed by analyzing the profitability ratios. Profitability ratios are used to assess a company’s performance by analyzing the company’s revenue with the relevant expenditures and costs that are incurred during that time period. Profitability ratios are a way to judge the ability of a company to generate profit in the long run. The profitability can be analyzed by interpreting the Operating Profit ratio and the Net Profit ratio of the respective companies (Gill, 1999). The operating profit ratio for Lindt has increased by 2.1% (12.6% in 2010, 10.5% in 2009). Operating profit ratio indicates the company’s ability to reduce its expenses and increase its sales both at the same time. The net profit ratio also indicates the control of company over its expenses such as it finance costs, taxation, etc. The net profit ratio has also increased for Lindt and Sprungli by 1.7% (9.4% in 2010, 7.7% in 2009) (Lindt and Sprungli, 2010). The operating profit for Zetar plc on the other hand has increased by 0.4% (5.5% in 2010, 5.1% in 2009). This shows that the company has increased its sales more in percentage to its cost of sales and other expenses. The net profit ratio for Zetar plc has also increased by 0.7% (3.5% in 2010, 2.8% in 2009). This shows that the company has kept a proper check and balance over its finance costs and this increase can be illustrated because of the decrease in the gearing of the company (Zetar Plc, 2010). Liquidity Ratios These ratios indicate the ability of an organization to meet its short term obligations for the repayment of debt without difficulty. The main idea is to repay the short term obligation with the liquid assets that the organization has (Jagels et al, 2007, pp144). The liquidity ratios for Lindt suggest that the company has the necessary assets to tackle or to pay off its obligations/liabilities as soon as they arrive. The current ratio for Lindt clearly suggests that the company has a high level of current assets that can be used to pay off the current liabilities of the company. An average ratio of 2:1 is highly appreciated in this regard and Lindt is showing a current ratio which is way better than this average ratio. The acid test ratio further illustrates the situation, an average ratio of 1:1 is highly acceptable and Lindt shows a way better ratio than the average ratio i.e. 1.99:1. The liquidity ratios for Zetar plc on the other hand shows that the financial position of the company is not as strong as that of Lindt but still the company is performing well. The reduced liquidity ratio i.e. both the current and the acid test ratios are way below the average and it can be assumed that Zetar plc might run into financial difficulties if these problems are not solved quickly (Lindt and Sprungli, 2010; Zetar Plc, 2010). Efficiency Ratios “Efficiency ratios measure how well you are conducting your business. These ratios provide an indication of how fast you are collecting your money for credit sales and how many times you are turning over your inventory in a given period of time. They measure the amount of sales generated by your assets and the return you are earning on your assets”. Besides the sales it also gives an analysis of the inventory management technique of the company i.e. how well the inventory is managed (Gill, 1999, pp 45-46). The inventory turnover suggests the time of selling the existing stock and replacing it with other necessary stock. The inventory turnover for Lindt and Sprungli is better than that of Zetar plc. This shows that Lindt has the ability to convert its stock into sales more quickly than Zetar plc. The receivables ratio on the other hand gives an explanation of how many times, on average, the receivables are collected in a given period of time. The receivable turnover ratio for Zetar plc (53 days) is better than that of Lindt and Sprungli (92 days) (Lindt and Sprungli, 2010; Zetar Plc, 2010). Gearing Ratio “This ratio indicates the proportion of debt finance to the total assets of a firm. It may be expressed in a variety of forms depending on how the terms “debt” and “assets” are defined for computing the ratio”(Barthwal, 1984, pp338-339). The gearing ratio for Lindt and Sprungli suggests that the company is highly financed through equity and debt is very rarely considered as an option of finance within the firm. This is further illustrated as the company has reduced its gearing ratio from 8.9% to 8.3%. Zetar plc on the other hand is geared much higher as compared to Lindt and Sprungli though Zetar plc has also reduced its dependence on debt finance by paying off its long term obligation and reducing its gearing ratio from being 40% to 265 in 2010(Lindt and Sprungli, 2010; Zetar Plc, 2010). Estimating the Value of Zetar plc Market capitalization = Issued share capital * Market price/share Market capitalization = 13,238,695 * ?2.05 Market capitalization = ?27,139,324.75 approximately ?27 million P/E ratio = Market value of share/Earnings per share Market Capitalization for Lindt and Sprungli = Market value/ share * No. of ordinary shares. Market value/share = 6762.5 million/228.071 million = CHF2,965/share P/E ratio – Lindt and Sprungli = 2,965/1060.6 = 2.80 The P/E ratio is taken as the industry average to evaluate the value of equity of Zetar plc. Value of equity = Profit after tax * Suitable industry PE ratio. Value of equity for Zetar plc = ?4.633 million * 2.80 Value of equity for Zetar plc = ?12.972 million To value the equity of Zetar plc, the P/E ratio method is adopted. This method uses the assumption that a suitable industry average of should be taken and that particular industry average P/E ratio should be multiplied with the profit of Zetar plc to calculate the value of equity of Zetar plc. The P/E ratio used is based on the assumption that it should pertain to any firm in the same industry i.e. the business risk of the other firm should be the same as that of the company whose value of equity is calculated. Besides the business risk, the financial risk should be approximately the same i.e. the gearing level should be the same of the both the companies. Although the gearing level of both the companies in question is not the same, it is assumed that the gearing is low for both the companies hence it is used as basis of calculating the average P/E ratio on that. As Lindt and Sprungli are both in the same industry, they own the same business risk; hence it is better to use the P/E ratio of Lindt and Sprungli to value the equity of Zetar plc. The P/E ratio calculated is used by multiplying it with the profit of Zetar plc to value the equity of the company. This process gives a value of equity worth 12.972 million (Lindt and Sprungli, 2010; Zetar Plc, 2010). Besides this method, the other method that can be used to value the firm is by using the market capitalization method to calculate the value of equity. The market capitalization can be considered as the equity value for Zetar plc as it gives the value of the ordinary shares of the firm, hence it can be said that the market capitalization of Zetar plc is calculated and is deemed to be around ?27 million. This market capitalization represents the 74% equity value based upon the gearing ratio. Hence it leaves 26% debt which should be calculated as follows: ?27 million = 74% - Equity ?9.5 million = 26% - Debt It now shows that the value of debt using the market capitalization method is ?9.5 million. If both the value of equity and the value of debt are added together, they would give the total value of the firm. Hence according to this calculation, the value of the firm is judged to be ?36.5 million i.e. Value of equity + the value of debt (?27 million + ?9.5 million) (Lindt and Sprungli, 2010; Zetar Plc, 2010). Pros and Cons of a Combination of Lindt and Zetar A business acquisition or merger may have many implications; it may be beneficial for one company and may be detrimental to the other. The pros and cons of combining Lindt and Zetar would be as follows: Pros of the combination The combination of both these firms may be beneficial for both the organization especially Lindt and Shrungli. This combination would lead Lindt to enter the UK market and without having to put up a set up of their own within the UK. It would be very easy way for Lindt and Shrungli to expand into areas where Zetar plc used to operate such as Ireland, Australia, etc. This way Lindt would easily access newer markets. Besides the newer markets, Lindt would be able to reduce its competition by acquiring its competitor i.e. Zetar plc. Synergies would also be achieved via this combination. Lindt would be able to reduce its cost by manufacturing and supplying within the UK through the factory and the channel of distributions used by Zetar plc, not only would Lindt manufacture the popular products offered by Zetar plc, it would also be able to manufacture and supply its own products at the factories set up by Zetar plc. The other benefits for Lindt would be achieving the economies of scale by reducing per unit costs of their existing products, economies of scope and the elimination of any inefficiency already carried out by any of the company by knowledge sharing and best practice sharing. This combination would also increase the market power of Lindt as it would own a higher market share by capturing the customers of Zetar plc. The combination of a firm with a value of around ?36.5 million would also add up to the asset base of Lindt and Sprungli. Cons of the combination The biggest disadvantage of such a combination would be that Lindt and Sprungli might face the risk of failure, this may be because of the difference in the geographical regions in which these firms operate. Besides this issue, the other main issue may arise because of the difference in cultural issues of both the companies. Lindt and Sprungli come from a rather different culture than that of one present within Zetar plc. Such cultural issues may lead to inconsistency within the workforce of the organization. Such acquisition usually requires immediate change and action by the management and such a change may not be acceptable by the management because of the change in culture and the working environment. Lastly it can be said that company being acquired with the intention to gain synergies might not actually provide the actual synergies anticipated (Lindt and Sprungli, 2010; Zetar Plc, 2010). Conclusion Finally it can be said both the companies are strong admirers of organic growth, hence it can be said that Zetar plc might be a difficult acquisition target for Lindt and Sprungli. Zetar plc might defend any takeover bids because of the fact that the company itself is performing excellently. If such combination is made, it would be highly favorable for Lindt and Sprungli. Bibliography Top of Form BARTHWAL, R. R. (1984). Industrial economics: an introductory text book. New Delhi, Wiley Eastern. Bottom of Form Top of Form GILL, J. O. (1999). Understanding financial statements: a primer of useful information. Menlo Park, Calif, Crisp Publications. JAGELS, M., & RALSTON, C. E. (2007). Hospitality management accounting. Hoboken, N.J., John Wiley & Sons Lindt ?& ?Sprungli, 2010. Annual report 2010, Switzerland: Lindt ?& ?Sprungli Zetar Plc, 2010. Annual Report and accounts 2010, London: Zetar Plc Zetar Plc, 2011, Our History. [online] Available at: [Accessed 10 July 2011] Bottom of Form Read More