Buyout Strategies A researcher works within the finance division of a large alcoholic and beverage company which is interested in expanding the company line of business. The company considers the buyout strategy to enhance the competitive market advantages as well as expanding the presence of its product range in the UK wines and spirits market. A Finance Director of the company identifies Blavod Wines and Spirits plc as a potential buyout target. Before implementing the buyout strategy, a Finance Director asks the researcher to provide a report analyzing the financial strength of Blavod Wines and Spirits and recommends whether Blavod Wines and Spirits could be a potential buyout target.

Fundamental objective of this report is to analyze financial strengths of BLAVOD WINES and SPIRITS plc and recommends whether BLAVOD WINES and SPIRITS plc is a potential buyout target for the company.

: Overview of Blavod Wines and Spirits plc

Blavod Wines and Spirits plc is a UK-based company formerly known as Blavod Extreme Spirits plc. The company engages in the selling and marketing of Blackwood's Gin and Blavod Black Vodka globally. The company also market varieties of brands of wines and spirits across the United Kingdom. The company brands include Blackwoods, Blavod Black Vodka, Bruichladdich Whisky, Cockspur Rum, Arran Malt Whisky, Lejay Lagoute, Borghetti, Carpano Punte Mes, and other quality wines and spirits. The company aims to pursue a strategy in enhancing the quality of its brands within the UK and the international market. Typically, the company primary assets are its brand that the company is aggressively expanding locally and internationally. The company subsidiaries include Blavod Properties Limited, Blavod Drinks Limited, Blavod Extreme Spirits USA Inc., the Original Black Vodka Company Limited, Blackwood's Gin globally, and Blavod Black Vodka.

Despite the aggressive method that the company employs to promote its brands locally and internationally, the company has recorded a decline in the financial performances within the last three years. The company total revenue declined from £8.3 Million to £7.2 Million between 2010 and 2011. Over the past two years, Blavod Wines and Spirits plc has incurred loss in the net income within the last two years. The company recorded the loss of £15,000 in the net income at the end of 2010 fiscal years. At the end of the 2011 fiscal year, the net income loss increased to £173,000. Blavod Wines and Spirits recorded a decline in the net income because the company profits were affected by the poor performances of Blavod Black Vodka, which is the company highest margin brand. (Annual Report, 2011). Moreover, the company faces aggressive competitions from other wine and spirit company making Blavod Wines and Spirits to record a loss in the market shares. Based on the net income loss that the company has recorded in the last two years, Blavod Wines and Spirits has taken a steps to improve its financial performances as well as improving the company overall long-term prospects. An extract from broker's report reveals that Blavod Wines and Spirits focus on the key brads to increase sales. The company has implemented new sales order transaction to improved efficiencies. (Joshua, Joshua, 2011, Brealey, 2010).

Typically, the company emphasizes on four new export markets which include America, Europe and Asia. With these strategies, the company expects to increase sales in new and existing European markets. Despite the strategy that the company intends to implement, Blavod Wines and Spirits is still facing financial difficulties because the company financial performances decline within the last few years.

1.2: Analysis of BLAVOD WINES and SPIRITS plc

In the contemporary business environment, organization employs different strategies to achieve competitive market advantages, and one of the strategies that organizations employ to achieve competitive market advantages is the implementation of buyout strategy. The concept buyout is a financial and business strategy that a company employs to acquire substantial shares of the target firms. Incorporating a buyout strategy is one of the common techniques that organizations employ to gain access to the new markets, and it is one of strategy that organizations employ to grow business. Typically, buyout strategy is one of the fast methods that organizations employ to achieve market advantages. Despite the benefits that organizations derive from buyout strategy, an organization needs to implement a strong business plan to identify the target companies. The business plan should include the industry analysis and analysis of the target company. Moreover, the business plan should include the historical financial statement of the target company. The business plan should also include the detailed financial project such as balance sheet, the income statement and the cash flow. (Nisar, 2010). The report provides the financial ratios of Blavod Wines and Spirits to enhance greater understanding of our company whether Blavod Wines and Spirits is a buyout target.

1.3:Financial Ratio Analysis of Blavod Wines and Spirits

Financial ratio analysis is a financial evaluation and the interpretation of the financial data of the company. Ratio analysis along with other pertinent financial information enhances investor's financial decision on a company. Typically, ratio analysis is a critical...

The most important pertinent financial tools to evaluate the financial strength of a company are financial ratio analysis. A financial ratio is a useful indicator to calculate the financial performances of a company. This report uses the Profitability ratio such as net profit margin, Return on Equity, Return on Asset, asset turnover ratio, financial leverage ratio and Return on Invested Capita to evaluate the financial performances of Blavod Wines and Spirits. Analysis of the financial ratio of the company will enhance greater understanding of a Finance Director about the investment prospect of Blavod Wines and Spirits. The ratio analysis also assists in making decision on whether Blavod Wines and Spirits should be a buyout target.
Profitability Ratio: Profitability ratio measures the success of a firm to generate profits. The most important tool to determine the profitability ratio is net profit margin.

Net Profit Margin: A net profit margin measures the net profits that a company earns from sales. The company realizes a net profit margin after all the operating expenses, taxes, interests and dividends have been deducted from the company total revenue. A formula to calculate the net profit margin is as follows:

Net Profit Margin= Net Profit/Total Revenue.

Table 1: Financial Ratio of Blavod Wines and Spirits Plc

Profitability ratio

2005

2006

2007

2008

2009

2010

2011

TTM

Net Margin

(125.74)%

(54.85)%

(107.81)%

26.47%

2.18%

(0.18)%

(2.40)%

(9.41)%

Asset Turnover (Average)

0.30

0.67

0.56

1.34

2.02

2.25

1.95

1.58

Return on Assets

(37.65)%

(36.79)%

(60.81)%

35.44%

4.41%

(0.41)%

(4.67)%

-14.89

Financial Leverage (Average)

1.11

1.28

6.68

1.63

2.17

2.41

2.42

3.06

Return on Equity

(41.90)%

(43.81)%

(105.48)%

8.44%

(0.93)%

(11.27)%

(41.47)%

Return on Invested Capital %

-41.85

-43.76

-84.31

8.44

-0.75

-8.95

-31.96

As being revealed in the Table 1 and Fig 1, the net profit margin of Blavod Wines and Spirits is negative since 2005. It was only between 2008 and 2009 that the company recorded gain from the net profit margin. Since 2005, the company recorded a net income loss except 2008 and 2009. Between 2010 and 2011, the company recorded a loss in net income margin. The company net income margin in 2010 was (0.18) % and the net income margin loss increased to (2.40) % in 2011.

Fig 1: Net Profit Margin of Blavod Wines and Spirits

Return on Equity: A return on equity measures the profits that a company earned from each dollar invested in the company stocks. The formula to calculate the return on equity is as follows:

Return on Equity (ROE): Net Income/Shareholder Equity

Since 2005, Blavod Wines and Spirits have not increased the value of the shareholders except 2008 and 2009 where the company recorded 107.12% and 8.44% respectively on ROE. Between 2010 and 2011, the company was not able to increase the value of shareholders. The company recorded (0.93) % and (11.27) % between 2010 and 2011 repectively. (See Fig 2).

Fig 2: Return on Equity of Blavod Wines and Spirits

Return on Asset (ROA): A return on asset reveals the percentage of revenue that the company is able to generate from the assets. ROA measures the ability of a company to generate profits from its assets. The formula used to calculate ROA is as follows:

Return on Asset: Net Income/Total Assets

As being revealed in Table 1 and Fig 3, Blavod Wines and Spirits have not been able to generate revenue from the company total assets in 2005, 2007, 2010 and 2011. It was only between 2008 and2009 that the company was able to generate revenue from the total asset. Typically, the company recorded (0.41) % and (4.67) % on ROA between 2010 and 2011 respectively.

Fig 3: Return on Asset of Blavod Wines and Spirits

1.3: Comment on the Ratio Analysis of Blavod Wines and Spirits

Analysis of the company financial strength reveals that the company has recorded poor financial performances since 2005 except 2008 and 2009. The company last two-year financial record shows that Blavod Wines and Spirits has not been able been to increase its ROA, ROE, Net Profit Margin and Return on Invested Capital. Typically, the company recorded percentages loss in most of its financial ratios within the last two years.

The report provides the company valuation to determine the amount to pay for the buyout of Blavod Wines and Spirits plc.

2: Valuation of Blavod Wines and Spirits plc.

The paper provides the valuation of the Blavod Wines and Spirits plc based on the debt free basis.…