Thursday, September 23, 2004

Something's Rotten In Oakville

In a presentation to Bank of America Mondavi CEO Greg Evans outlined how the company's proposed divestment (divestiture?) of its luxury assets, including the flagship Napa brand will make the resulting company sing. Evans also noted that they expected to net $500M after taxes on the divestment.

The fly in the ointment is that when you actually crunch some of the numbers beyond what's presented, you get some odd results. According to Evans (who used to be CFO and understands numbers pretty well) the luxury portfolio contributes 19% of the revenue, 17% of the Earnings
Before Interest Taxes Depreciation and Amortization (EBITDA) and 14% of the Earnings before taxes and Depreciation (EBIT).

Given that, we can break out financial results as follows :

Revenues$379M$89M $468M
EBITDA $78M $16M $ 94M
EBIT $53M $8.6M $ 62M

We can then apply MOND's financial results above to the company's overall value as follows:

Market Cap = $638M
Debt = $382M
Total = $1 billion

Therefore, the overall company is valued at the following multiples of the financial results above:

Revenues $1 billion / $468M = 2.1x
EBITDA $1 billion / $ 94M = 10.6x
EBIT $1 billion / $ 62M = 16.1x

Extrapolating these values to the results of just the Luxury division, we get:

Revenues 2.1 x $89M = $187M
EBITDA 10.6 x $16M = $170M
EBIT 16.1 x $8.6M = $138M (low from the large amounts of depreciation in the luxury division).

Even given the highest end of the range, this falls well short of the $500M (after tax!) Evans believes they will get for the luxury portfolio. Perhaps if you assume that MOND is undervalued by 30% or so, you might get these ranges up to as high as $250M, but that is sill well below the range Evans is expecting......Something smells and its not Brett..............


Anonymous Anonymous said...

Say Prof, this isn't going to be on the test later is it?

Interesting process, but it's probably why I flunked accounting all those years ago.
Boil it down for us - so he's a bit high on his estimate to get the bank's "OK"?

September 24, 2004 9:15 AM  
Blogger Huge said...


Thumbnail version. You buy the luxury assets for $500M and they have a current return (at the EBITDA line) of $16M. That's just over 3% return with a huge risk. Pretty shitty. Take out the hugely profitable Opus One (which will revert back to the French) and the hugely profitable Ornellaia (which will revert to the Italians) and the return gets EVEN WORSE.....

The test is Tuesday, please bring a scantron sheet a #2 pencil and a blue book.


September 24, 2004 10:38 AM  

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