THE EMPIRE COMPANY LIMITED — THE

OSHAWA GROUPLIMITED PROPOSAL

TEAM ALPHA
 Report
On
Case analysis of
“THE EMPIRE COMPANY LIMITED — THE OSHAWA GROUP
LIMITED PROPOSAL”

Course Code: FB 501

Course Title: Modern Finance Theory

Submitted To
Chandon Kumar Paul
Dept. Of Finance & Banking
Jatiya Kabi Kazi Nazrul Islam University
Trishal , Mymensingh

Submitted By
Team Alpha
Name ID
ABU HORAYRA 17132612
ANTORA BASAK 17132611
TANJIL AHMED 17132649

Dept. Of Finance & Banking

Jatiya Kabi Kazi Nazrul Islam University
Trishal , Mymensingh

Date of Submission
18th September, 2022
 Letter of Transmittal
Date:18 September, 2022
Chandon Kumar Pal
Assistant Professor
Department of Finance and Banking
Jatiya Kabi Kazi Nazrul Islam University.
Subject: Submission of report on case analysis of "Empire Company Limited-The Oshawa
Group Limited proposal”.

Honorable Sir,
This is a great pleasure for us to submit the group report on the case analysis on ”Empire
Company Limited - The Oshawa Group Limited proposal “as a partial requirement of the
M.B.A. program in Jatiya Kabi Kazi Nazrul Islam University . Writing this report has been a
great pleasure & an interesting experience. To prepare this report we've tried to analyze the
company. This case study helped us tremendously to understand the implication of theoretical
knowledge in the practical field.
We have undertaken our sincere effort for successful completion of this report. If we've any
unintentional error and omission that may have entered into this report will be considered with
sympathy.
Therefore, We, beg your kind consideration in this regard, we will be very grateful if you
acceptor report and oblige thereby.
Sincerely yours,
On the behalf of (Team Alpha)
 ACKNOWLEDGEMENT

We are grateful to get this opportunity to give special thanks to the persons whose ideas, views
and supports have provided fluency to prepare this report and also enriched this report. And also
grateful to the persons whose books and related materials give continuous support to write this
report.
We are greatly appreciated and inspired by Chandon Kumar Pal, sir, Assistant Professor,
Department of Finance and Banking to write this report on the case study of Empire Company
Limited-The Oshawa Group Limited proposal. Finally, we would like to thank all others whose
strong support makes us able to complete this report.
 Executive Summary
Retail is the sale of goods and services to consumers, in contrast to wholesaling, which is sale to
business or institutional customers. Examples of retail businesses include clothing, drug, grocery,
and convenience stores.
Empire Company Ltd.is a Canadian Company which headquartered in
Stellarton,Nova,Scotia.This company’s krybusinesses are food retailing, through wholly owned
subsidiary Sobey. And the company grew into a diversified holding company with interests in
food distribution, real estate and corporate investment activities. The retailed group operated 112
stores under Sobeys name and it is the largest food retail and distribution company in Atlantic
Canada. The main focus of the real estate group was the acquisition, development and
management of properties portfolios. Oshawa was a food retail wholesale and distribution
company. And they are now divided into several parts. Empire company analysis the proposals
of Oshawa. And thus, they are also Atlantic Canadians largest chain of movie theater with more
than hundred screens and the empire theatre name.
Contents
Origin of the Study ........................................................................................................................................ 7
Objectives of the Study ................................................................................................................................. 7
Scope of the Study ........................................................................................................................................ 8
Methodology of the Study ............................................................................................................................ 8
Data Analysis Tools ...................................................................................................................................... 8
Limitations .................................................................................................................................................... 8
Chapter 1: Introduction ............................................................................................................................. 9
1.1 Overview Empire Company Limited: ............................................................................................ 9
1.2 Analysis Of the Economy: ........................................................................................................... 11
Canada's Top Industries: ........................................................................................................................ 12
• Real Estate, ..................................................................................................................................... 12
• Manufacturing, ............................................................................................................................... 12
• and Mining. ..................................................................................................................................... 12
Canada's Top Trading Partners: .............................................................................................................. 12
1.3Analysis Of Industry: .......................................................................................................................... 12
1.3.1 Porter’s Five Forces Model: ........................................................................................................... 12
Previously the.......................................................................................................................................... 13
. ............................................................................................................................................................... 16
1.3.2 Pestel Analysis................................................................................................................................ 16
Political Factors: ............................................................................................................................... 16
Economic Factors: ............................................................................................................................ 17
Social Factors: ................................................................................................................................... 18
Technological Factors:...................................................................................................................... 19
Environmental Factors:.................................................................................................................... 20
Legal Factors: .................................................................................................................................... 20
1.3.3 SWOT Analysis: .............................................................................................................................. 21
1.3.4 VRIO Analysis: ................................................................................................................................ 25
Chapter 2 - Problem Statement ............................................................................................................... 27
Chapter 3 Competitive landscape: .......................................................................................................... 29
3.1.1 Loblaws: ......................................................................................................................................... 29
3.1.2 Metro Richelieu:............................................................................................................................. 29
3.1.3 Provigo: .......................................................................................................................................... 30
 3.1.4 Overwaitea food Group: ................................................................................................................ 30
3.1.5 Canada Safeway: ............................................................................................................................ 30
3.1.6 The Great Atlantic and Pacific Company of Canada ltd: ................................................................ 30
3.2 Pros and Cons of Negotiation with Oshawa: .................................................................................... 31
Chapter 4: Financial Analysis.................................................................................................................. 32
4.1Analysis of each alternative: .............................................................................................................. 32
4.1.1 VALUATION-STAND ALONE BUSINESS:........................................................................ 32
4.1.2 Working Capital: ..................................................................................................................... 33
4.1.3 WACC:...................................................................................................................................... 34
4.1.4 Terminal Value: ....................................................................................................................... 35
4.1.5 VALUE OF PROPOSED SYNERGIES: ............................................................................... 36
4.1.6 ACQUISITION BID: ............................................................................................................... 38
4.1.7 FINANCING OF THE OFFER: ............................................................................................. 38
4.2 Financial Statement: ........................................................................................................................ 39
4.3 Ratio Analysis: Empire Company Limited ......................................................................................... 42
4.4 Business Risk Analysis: ...................................................................................................................... 49
.................................................................................................................................................................... 50
4.5 Financial Risk Analysis: ...................................................................................................................... 52
................................................................................................................................................................ 52
Chapter 5: Alternative Course of Actions: ............................................................................................. 53
Chapter 6 : Recommendation: ................................................................................................................. 54
6.1. Strengthen distribution network: .................................................................................................... 54
6.1.1. Control: .................................................................................................................................... 54
6.1.2. Stronger relation with consumers: ........................................................................................ 54
6.2. Develop unique marketing tactics: .................................................................................................. 54
6.2.1. Higher penetration: ................................................................................................................... 55
6.2.2. Forming a partnership with consumers: .................................................................................... 55
6.3. Adapt to different cultural aspects of different markets:................................................................ 55
6.3.1. Identify different consumer group characteristics:.................................................................... 55
6.3.2. Adapt to and respond to characteristics: ................................................................................... 55
6.4. Expand into new regions:................................................................................................................. 55
6.4.1. Market expansion: ..................................................................................................................... 55
6.4.2. Product diversification: ............................................................................................................. 56
 6.5. Strengthen value network: .............................................................................................................. 56
Chapter 7 : Conclusion:............................................................................................................................ 57
References:................................................................................................................................................. 59
Appendix: .................................................................................................................................................. 61
4.4 Business Risk Analysis: ...................................................................................................................... 75
.................................................................................................................................................................... 76
4.5 Financial Risk Analysis: ...................................................................................................................... 78
................................................................................................................................................................ 78

Origin of the Study

Practical knowledge gathering is much more important during the study life along with the
theoretical knowledge has. As per the requirement of our M.B.A. program of the course Modern
Finance Theory, this report has been prepared to acquire the practical business case solution. I
am assigned this report by our course instructor Chandon Kumar Paul for nourishing and
utilizing our theoretical knowledge by implementing them into practical scenario. This will help
me to improve my knowledge level on how to solve real life business problems and deal with
them.

Objectives of the Study

The specific objective of this report is to solve the business problems. Other auxiliary objectives
are-

➢ To develop the ability to deal with business problem

➢ To develop my skill in using analytical tools and techniques
➢ To develop my interpersonal views and concept through sharing among every member of
the group that is reflected in this report
➢ To be able to use theoretical knowledge into practice to determine the optimum corporate
restructuring
 ➢ To derive knowledge regarding going Acquiring Offer (AO)
➢ To find out the best timing of going public
➢ To identify the alternative that can increase firm value.

Scope of the Study

In this report I tried my level best to find out the solution for the company and provide
alternative solution if the prescribed one for consideration. Finally, I tried to provide some
recommended actions that will help the company to make better business decision.

Methodology of the Study

The report has been prepared based on secondary data. Data that have been used in this study
have been taken from the case of “THE EMPIRE COMPANY LIMITED — THE OSHAWA
GROUP
LIMITED PROPOSAL”. Besides I took help from our assigned textbook, suggestions given by
my honorable course teacher. Finally for risk analysis and valuation I use different mathematical
tools such as Monte Carlo simulation etc.

Data Analysis Tools

To prepare this report, I have used many alternative valuations model to value the firm
Acquisition/merger. For analyzing the given information, I have used various valuation
techniques such as risk analysis, DuPont, Ratio Analysis, Degree of Operating Leverage (DOL)
and Degree of Financial Leverage (DFL). Moreover, crystal ball software has also been used for
simulation and sensitivity analysis.

Limitations

The major limitations encountered are as follows:

 • A lot of information regarding industry, economy, and company were required
• I didn’t find all the required information about the company so I had to assume several
points to complete the report

Chapter 1: Introduction
Empire Company Limited is a Canadian conglomerate engaged mostly in food retail and
corporate investments. The company is headquartered in Stellar ton, Nova Scotia. Empire
Company also owns the Sobeys supermarket chain. The company was founded in 1963. In total,
the company owns, affiliates or franchises more than 1,500 stores; in addition to Sobeys, brands
include Safeway, IGA, Foodland, Farm Boy, Fresco, Thrifty Foods and Lawton’s Drug.

1.1 Overview Empire Company Limited:

Empire’s Food retailing segment is carried out through Sobeys, a wholly-owned subsidiary.
Proudly Canadian, with headquarters in Stellarton, Nova Scotia, Sobeys has been serving the
food shopping needs of Canadians since 1907.

Empire Co Ltd (Empire) is a food retailer and real estate service provider. The company operates
food retail stores, wholesale, pharmacies, convenience stores, health care, liquor stores and fuel
stations in Canada. Its product portfolio includes deli, seafood, meat, bakery products, grocery
products, healthcare products, prepared foods, farm-fresh products, liquor and fuel. Empire
offers products under various banners such as Sobeys, IGA, Farm Boy, Fresh Co, Sobeys West,
Sobeys Ontario, Sobeys Quebec, Sobeys Atlantic, Thrifty Foods, Foodland, Longo’s, Lawtons
Drugs, FastFuel, Compliments, Marche Bonichoix, Panache, Atlantic and Safeway. It offers
products via e-commerce platforms under the banners s Voila by Sobeys, Grocery Gateway,
ThriftyFoods.com and IGA.net. The company’s operations are spread across the US and Canada.
Empire is headquartered in Stellarton, Nova Scotia, Canada.
Empire Company Limited is a Canadian company headquartered in Stellarton, Nova Scotia.
Empire’s key businesses are food retailing and related real estate

Headquarters: Canada

Address: 115 King Street, Stellarton, Nova Scotia, B0K1S0

Website: www.empireco.ca

Telephone: 1 902 7528371

No of Employees: 62,000

Industry: Retailing

Ticker Symbol & Exchange: EMP.A (TSE)

Revenue (2022): $24.1B 6.7%(2022 vs 2021)

Net Income (2022): 6.3%(2022 vs 2021)

Market Cap*: $7.4B

Net Profit Margin (2022) : 0.4%(2022 vs 2021)

1.2Analysis Of the Economy:

Canada's economy is highly developed and one of the largest in the world. In 2020, the
country's annual gross domestic product (GDP) was $1.64 trillion in current USD, according to
the latest available World Bank data. That made Canada the world's ninth-largest economy.1
Canada's economy is highly dependent on international trade with exports and imports of goods
and services each comprising about one-third of GDP.2 The country's three largest trading
partners are the U.S., China, and the U.K. Its three largest industries, measured by their
contributions to GDP, are real estate, rental, and leasing; manufacturing; and mining, quarrying,
and oil and gas extraction.3
Canada is home to the e-commerce company Shopify Inc. (SHOP.TO, SHOP), major banks
such as the Royal Bank of Canada (RY.TO, RY), and energy transportation and distribution
company Enbridge Inc. (ENB.TO, ENB).
The COVID-19 pandemic caused Canada's economy to pull back sharply in the first half of
2020 before rebounding in the latter half of the year. In the second quarter of 2020, real GDP
fell 11.3% quarter-over-quarter (Q/Q), but rose 9.1% Q/Q in the third quarter and then 2.2%
Q/Q in the fourth quarter of 2020, offsetting the steep decline earlier in the year.4
Real GDP was up 0.3% in the first quarter of 2021 compared to the first quarter of 2020. The
increase in first-quarter GDP was fueled in part by low mortgage rates, rising housing demand,
and government transfers to households and businesses.4
The CAD/USD exchange rate used in this story is 0.787149 as of Sept. 9, 2021.5
Some of the statistics below may vary between sources because each source uses its own
methodology for defining and calculating statistics.
Key Takeaway of Canada Economy:
• Canada has the ninth-largest economy in the world as of 2020, with a GDP of $1.64
trillion in USD.
• International trade, including both exports and imports, is a large component of Canada's
economy, each making up about one-third of GDP.
• Canada's largest trading partners are the U.S., China, and the U.K.
• The three largest industries in Canada are real estate, mining, and manufacturing.
Canada's Top Industries:
• Real Estate,
• Manufacturing,
• and Mining.

Canada's Top Trading Partners:

In May 2021, Canada's trade balance for goods and services was CAD$1.8 billion deficit
($1.41). Total imports were CAD$50.9 billion ($40.13 billion).15 Inventories, gross fixed
capital formation, and exports each comprise roughly a third, respectively, of Canada's GDP,
according to the Government of Canada.16

The country's top three trading partners in 2020, by total volume of the exports and imports of
goods and services, were the U.S., China, and the U.K.

1.3Analysis Of Industry:

The Grocery industry in Canada was already in a mature state. They were perceiving an increase
competition not only from traditional grocers but from non-traditional vendors. Example: drug
stores, discount retailers, wholesale clubs, and internet based operations. The market was very
price directed and customer sensitive. This implies that the normal way to grow within the
industry is by horizontal mergers or acquisitions. The grocery market was consolidating in the
United States and this would probably incite a consolidation in the Canadian Market. With many
competitors and very low margins in the market, it would be better to acquire a competitor than
to open new stores. By acquiring the company maintains customer knowledge, reduction of
advertising and marketing, attraction of qualified work force. Also the effect of the economies of
scale will maintain competitive prices, low cost in distribution and procurement. Without doubt
in this industry, it becomes very important to have a good amount of market share.

1.3.1 Porter’s Five Forces Model:

Porter's Five Forces Framework is a method of analysing the operating environment of a
competition of a business. It draws from industrial organization economics to derive five forces
that determine the competitive intensity and, therefore, the attractiveness of an industry in terms
of its profitability.
Previously the Grocery industry in Canada was fragmented one with no larger companies to
directorate the industry.

Threats of New Entrants:

New entrants in Resorts & Casinos brings innovation, new ways of doing things and put pressure
on Empire Resorts, Inc. through lower pricing strategy, reducing costs, and providing new value
propositions to the customers. Empire Resorts, Inc. has to manage all these challenges and build
effective barriers to safeguard its competitive edge.
How Empire Resorts, Inc. can tackle the Threats of New Entrants
By innovating new products and services. New products not only brings new customers to the
fold but also give old customer a reason to buy Empire Resorts, Inc. ‘s products.
By building economies of scale so that it can lower the fixed cost per unit.
Building capacities and spending money on research and development. New entrants are less
likely to enter a dynamic industry where the established players such as Empire Resorts, Inc.
keep defining the standards regularly. It significantly reduces the window of extraordinary
profits for the new firms thus discourage new players in the industry.

Bargaining Power of Suppliers:

All most all the companies in the Resorts & Casinos industry buy their raw material from
numerous suppliers. Suppliers in dominant position can decrease the margins Empire Resorts,
Inc. can earn in the market. Powerful suppliers in Services sector use their negotiating power to
extract higher prices from the firms in Resorts & Casinos field. The overall impact of higher
supplier bargaining power is that it lowers the overall profitability of Resorts & Casinos.

How Empire Resorts, Inc. can tackle Bargaining Power of the Suppliers
By building efficient supply chain with multiple suppliers.
By experimenting with product designs using different materials so that if the prices go up of one
raw material then company can shift to another.
Developing dedicated suppliers whose business depends upon the firm. One of the lessons
Empire Resorts, Inc. can learn from Wal-Mart and Nike is how these companies developed third
party manufacturers whose business solely depends on them thus creating a scenario where these
third party manufacturers have significantly less bargaining power compare to Wal-Mart and
Nike.

Bargaining Power of Buyers:

Buyers are often a demanding lot. They want to buy the best offerings available by paying the
minimum price as possible. This put pressure on Empire Resorts, Inc. profitability in the long
run. The smaller and more powerful the customer base is of Empire Resorts, Inc. the higher the
bargaining power of the customers and higher their ability to seek increasing discounts and
offers.
How Empire Resorts, Inc. can tackle the Bargaining Power of Buyers
By building a large base of customers. This will be helpful in two ways. It will reduce the
bargaining power of the buyers plus it will provide an opportunity to the firm to streamline its
sales and production process.
By rapidly innovating new products. Customers often seek discounts and offerings on
established products so if Empire Resorts, Inc. keep on coming up with new products then it can
limit the bargaining power of buyers.
New products will also reduce the defection of existing customers of Empire Resorts, Inc. to its
competitors.

Threats of Substitute Products or Services:

When a new product or service meets a similar customer needs in different ways, industry
profitability suffers. For example services like Dropbox and Google Drive are substitute to
storage hardware drives. The threat of a substitute product or service is high if it offers a value
proposition that is uniquely different from present offerings of the industry.

How Empire Resorts, Inc. can tackle the Treat of Substitute Products / Services
By being service oriented rather than just product oriented.
By understanding the core need of the customer rather than what the customer is buying.
By increasing the switching cost for the customers.

Rivalry among the Existing Competitors:

If the rivalry among the existing players in an industry is intense then it will drive down prices
and decrease the overall profitability of the industry. Empire Resorts, Inc. operates in a very
competitive Resorts & Casinos industry. This competition does take toll on the overall long term
profitability of the organization.
How Empire Resorts, Inc. can tackle Intense Rivalry among the Existing Competitors in Resorts
& Casinos industry
By building a sustainable differentiation
By building scale so that it can compete better
Collaborating with competitors to increase the market size rather than just competing for small
market.

.
1.3.2 Pestel Analysis

PEST analysis describes a framework of macro-environmental factors used in the environmental

scanning component of strategic management.

Political Factors:
Political factors play a significant role in determining the factors that can impact Empire
Resources Limited's long term profitability in a certain country or market. Empire Resources
Limited is operating in Materials in more than dozen countries and expose itself to different
types of political environment and political system risks. The achieve success in such a dynamic
Materials industry across various countries is to diversify the systematic risks of political
environment. Empire Resources Limited can closely analyze the following factors before
entering or investing in a certain market-

• Political stability and importance of Materials sector in the country's economy.

• Risk of military invasion
• Level of corruption - especially levels of regulation in Materials sector.
• Bureaucracy and interference in Materials industry by government.
• Legal framework for contract enforcement
• Intellectual property protection
• Trade regulations & tariffs related to Materials
• Favored trading partners
• Anti-trust laws related to Materials
• Pricing regulations – Are there any pricing regulatory mechanism for Materials
• Taxation - tax rates and incentives
• Wage legislation - minimum wage and overtime
• Work week regulations in Materials
• Mandatory employee benefits
• Industrial safety regulations in the Materials sector.
• Product labeling and other requirements in Materials

Economic Factors:
The Macro environment factors such as – inflation rate, savings rate, interest rate, foreign
exchange rate and economic cycle determine the aggregate demand and aggregate investment in
an economy. While micro environment factors such as competition norms impact the
competitive advantage of the firm. Empire Resources Limited can use country’s economic factor
such as growth rate, inflation & industry’s economic indicators such as Materials industry
growth rate, consumer spending etc to forecast the growth trajectory of not only --sectoryname--
sector but also that of the organization. Economic factors that Empire Resources Limited should
consider while conducting PESTEL analysis are –

• Type of economic system in countries of operation – what type of economic system there
is and how stable it is.
• Government intervention in the free market and related Materials
• Exchange rates & stability of host country currency.
• Efficiency of financial markets – Does Empire Resources Limited needs to raise capital
in local market?
• Infrastructure quality in Materials industry
• Comparative advantages of host country and Materials sector in the particular country.
• Skill level of workforce in Materials industry.
• Education level in the economy
• Labor costs and productivity in the economy
• Business cycle stage (e.g. prosperity, recession, recovery)
• Economic growth rate
• Discretionary income
• Unemployment rate
• Inflation rate
• Interest rates

Social Factors:
Society’s culture and way of doing things impact the culture of an organization in an
environment. Shared beliefs and attitudes of the population play a great role in how marketers at
Empire Resources Limited will understand the customers of a given market and how they design
the marketing message for Materials industry consumers. Social factors that leadership of
Empire Resources Limited should analyze for PESTEL analysis are -

• Demographics and skill level of the population

• Class structure, hierarchy and power structure in the society.

• Education level as well as education standard in the Empire Resources Limited ’s

industry

• Culture (gender roles, social conventions etc.)

• Entrepreneurial spirit and broader nature of the society. Some societies encourage

entrepreneurship while some don’t.

• Attitudes (health, environmental consciousness, etc.)

• Leisure interests

Technological Factors:
Technology is fast disrupting various industries across the board. Transportation industry is a
good case to illustrate this point. Over the last 5 years the industry has been transforming really
fast, not even giving chance to the established players to cope with the changes. Taxi industry is
now dominated by players like Uber and Lyft. Car industry is fast moving toward automation led
by technology firm such as Google & manufacturing is disrupted by Tesla, which has stated an
electronic-car-revolution.

A firm should not only do technological analysis of the industry but also the speed at which
technology disrupts that industry. Slow speed will give more time while fast speed of
technological disruption may give a firm little time to cope and be profitable. Technology
analysis involves understanding the following impacts –

• Recent technological developments by Empire Resources Limited competitors

• Technology's impact on product offering
• Impact on cost structure in Materials industry
• Impact on value chain structure in Materials sector
 • Rate of technological diffusion

Environmental Factors:
Different markets have different norms or environmental standards which can impact the

profitability of an organization in those markets. Even within a country often states can

have different environmental laws and liability laws. For example in United States – Texas

and Florida have different liability clauses in case of mishaps or environmental disaster.

Similarly a lot of European countries give healthy tax breaks to companies that operate in

the renewable sector.

Before entering new markets or starting a new business in existing market the firm should
carefully evaluate the environmental standards that are required to operate in those markets.
Some of the environmental factors that a firm should consider beforehand are –

• Weather
• Climate change
• Laws regulating environment pollution
• Air and water pollution regulations in Materials industry
• Recycling
• Waste management in Materials sector
• Attitudes toward “green” or ecological products
• Endangered species
• Attitudes toward and support for renewable energy

Legal Factors:
In number of countries, the legal framework and institutions are not robust enough to protect the
intellectual property rights of an organization. A firm should carefully evaluate before entering
such markets as it can lead to theft of organization’s secret sauce thus the overall competitive
edge. Some of the legal factors that Empire Resources Limited leadership should consider while
entering a new market are -
• Anti-trust law in Materials industry and overall in the country.
• Discrimination law
• Copyright, patents / Intellectual property law
• Consumer protection and e-commerce
• Employment law
• Health and safety law
• Data Protection

1.3.3 SWOT Analysis:

SWOT Analysis includes the four key elements - Strengths, Weaknesses, Opportunities, &
Threats. The strengths and weaknesses address the internal factors of the company, opportunities
and threats are the macro challenges that Empire Company is facing in Canada and other
international markets that it operates in.
Strengths of Empire Company:
Strengths are the firm's capabilities and resources that it can use to design, develop, and sustain
competitive advantage in the marketplace
- Market Leadership Position - Empire Company has a strong market leadership position in the
Retail (Grocery) industry. It has helped the company to rapidly scale new products successes.
- Talent management at Empire Company and skill development of the employees - Human
resources are integral to the success of Empire Company in Retail (Grocery) industry.
- Success of new product mix - Empire Company provides exhaustive product mix options to
its customers. It helps the company in catering to various customers segments in the Retail
(Grocery) industry.
- Wide geographic presence - Empire Company has extensive dealer network and associates
network that not only help in delivering efficient services to the customers but also help in
managing competitive challenges in Retail (Grocery) industry.
- High margins compare to Retail (Grocery) industry's competitors - Even though Empire
Company is facing downward pressure on profitability, compare to competitors it is still racking
in higher profit margins.
- Diverse Revenue models - Over the years Empire Company has ventured into various
businesses outside the Services sector. This has enabled the company do develop a diversified
revenue stream beyond Services sector and Retail (Grocery) segment.

Weaknesses of Empire Company:

Weaknesses of Empire Company can either be absence of strengths or resources of capabilities
that are required but at present the organization doesn't have. Decision makers have to be certain
if the weakness is present because of lack of strategic planning or as a result of strategic choice.

- Declining per unit revenue for Empire Company - competitiveness in the Retail (Grocery)
industry is putting downward pressure on the profitability. A starting guide to manage this
situation for companyname is – objectively assessing the present value propositions of the
various products.
- Declining market share of Empire Company with increasing revenues - the Retail (Grocery)
industry is growing faster than the company. In such a scenario Empire Company has to
carefully analyze the various trends within the Services sector and figure out what it needs to do
to drive future growth.

- Low investments into Empire Company's customer oriented services - This can lead to
competitors gaining advantage in near future. Empire Company needs to increase investment
into research and development especially in customer services oriented applications.

- Extra cost of building new supply chain and logistics network - Internet and Artificial
Intelligence has significantly altered the business model in the Services industry and given the
decreasing significance of the dealer network Empire Company has to build a new robust supply
chain network. That can be extremely expensive.

- Business Model of Empire Company can be easily imitated by the competitors in the Retail
(Grocery) industry. To overcome these challenges companyname needs to build a platform
model that can integrate suppliers, vendors and end users.

- Gross Margins and Operating Margins which could be improved and going forward may put
pressure on the Empire Company financial statement.

Opportunities for Empire Company:

Opportunities are potential areas where the firm chan identify potential for - growth, profits, and
market share.

- Customer preferences are fast changing - Driven by rising disposable incomes, easy access
to information, and fast adoption of technological products, customers today are more willing to
experiment / try new products in the market. Empire Company has to carefully monitor not only
wider trends within the Retail (Grocery) industry but also in the wider Services sector.
- Opportunities in Online Space - Increasing adoption of online services by customers will also
enable Empire Company to provide new offerings to the customers in Retail (Grocery) industry.
- Increasing government regulations are making it difficult for un-organized players to operate
in the Retail (Grocery) industry. This can provide Empire Company an opportunity to increase
the customer base.
- Accelerated technological innovations and advances are improving industrial productivity,
allowing suppliers to manufacture vast array of products and services. This can help Empire
Company to significantly venture into adjacent products.
- Rapid Expansion of Economy As the US economy is improving faster than any other
developed economy, it will provide Empire Company an opportunity to expand into the US
market. Empire Company already have know-how to operate into the competitive US market.
- Trend of customers migrating to higher end products - It represents great opportunity for
Empire Company, as the firm has strong brand recognition in the premium segment, customers
have experience with excellent customer services provided by Empire Company brands in the
lower segment. It can be a win-win for the company and provides an opportunity to increase the
profitability.

Threats to Empire Company:

Threats are factors that can be potential dangers to the firm's business models because of changes
in macro economic factors and changing consumer perceptions. Threats can be managed but not
controlled.
- Distrust of institutions and increasing threat of legal actions for Empire Company - As the
WTO regulations and laws are difficult to enforce in various markets. Legal procedures have
become expensive and long drawn process. It can lead to less investment into emerging markets
by Empire Company thus resulting in slower growth.
- Competitive pressures - As the new product launch cycles are reducing in the Services
industry. It has put additional competitive pressures on players such as Empire Company. Given
the large customer base, Empire Company can't respond quickly to the needs of the niche
markets that disruptors are focusing on.
- Competitors catching up with the product development - Even though at present the Empire
Company is still leader in product innovation in the Retail (Grocery) segment. It is facing stiff
challenges from international and local competitors.
- Shortage of skilled human resources - Given the high turnover of employees and increasing
dependence on innovative solution, companyname can face skilled human resources challenges
in the near future.
- Commoditization of the product segment - The biggest challenge for Empire Company and
other players in the industry is the increasing commoditization of the products in Services
industry.
- Changing demographics - As the babyboomers are retiring and new generation finding hard to
replace their purchasing power. This can lead to higher profits in the short run for Empire
Company but reducing margins over the long run as young people are less brand loyal and more
open to experimentation.

1.3.4 VRIO Analysis:

Resource-based strategic analysis is based on the assumption that strategic resources can
provide Oshawa Limited an opportunity to build a sustainable competitive advantage over its
rivals in the industry. This sustainable competitive advantage can help Oshawa Limited to enjoy
above average profits in the industry and thwart competitive pressures.

Resources Value Rare Imitation Organization Competitive Advantage

Customer Yes, 23% of the Yes, firm has Has been tried by Company is Provide medium term
Network and customers invested to competitors but leveraging competitive advantage
Loyalty contribute to more build a strong none of them are the customer
than 84% of the customer as successful loyalty to
sales revenue loyalty good effect
Sales Force and Yes No Can be imitated Still there is Can provide sustainable
Channel by competitors lot of competitive advantage.
Management potential to Potential is certainly
utilize the there.
excellent
sales force
Customer Yes, as customers Yes, the firm It is very difficult Going by the Providing Strong
Community are co-creating has able to build to imitate the data, there is Competitive Advantage
products a special culture and still a lot of
relationship community upside
with its dedication
customers
Distribution and Yes, as it helps in No Can be imitated Yes Medium to Long Term
Logistics Costs delivering lower by competitors Competitive Advantage
Competitiveness costs but it is difficult
Brand Yes No Can be imitated Yes, the firm Temporary Competitive
 Resources Value Rare Imitation Organization Competitive Advantage
Positioning in by competitors has Advantage
Comparison to but it will require positioned its
the Competitors big marketing brands based
budget on consumer
behavior
Successful Yes, without a No, as most of Can be imitated One of the Digital strategy has
Implementation comprehensive the firms are by competitors leading become critical in the
of Digital digital strategy it is investing into player in the industry but it can't
Strategy extremely difficult digitalizing industry provide sustainable
to compete operations competitive advantage
Opportunities Yes, new niches are No, as most of Yes can be Brand Temporary Competitive
for Brand emerging in the the competitors imitated by the extensions Advantage
Extensions market are also competitors will require
targeting those higher
niches marketing
budget
Marketing Yes, firms are No, as most of Pricing strategies Yes, firm is Temporary Competitive
Expertise within competing based on the competitors are often matched leveraging its Advantage
the Oshawa differentiation in also have decent by competitors inhouse
Limited the industry marketing know expertise
how

Product Yes, it is valuable Most of the Can be imitated The firm has Provide short term
Portfolio and in the industry competitors are by the used it to competitive advantage
Synergy among given the various trying to enter competitors good effect, but requires constant
Various Product segmentations & the lucrative details can be innovation to sustain
Lines consumer segments found in case
preferences. exhibit

Access to Cheap Yes No Can be imitated Not been Not significant in

Capital by competitors totally creating competitive
exploited advantage
 Chapter 2 - Problem Statement
The problem statement refer to the concise description of the issues that needs to be addressed. It
identifies the issues or gap between the current and desired type of the organization, and thus
requires to be stated in order for the management to look for change. The main idea of the
problem statement is to answer the 5 w’s that include the answering who, what, where and why,
to allow the organization resolve the problem, by stating it in clearly in 2 to 3 lines.
In recent period, the problems statement are widely used by the firms to allow the management
execute the improvement process or identify the loopholes that are effecting the overall
performance or profitability of the company. Moreover, the problem statement allow the
management to trim down the symptoms of the problem an organization is facing and look on to
the real problem that is causing the damage to any specific aspect of the company.
Basically, developing a problem statement is an extensive process and requires the proper brain
storming of the teams in order to identify the underlying loopholes or inefficiencies within the
organization. Also, it offers the specific insights to the management in understanding and
looking at the factors that have been hidden from the management sight, effecting the
performance slowly and gradually.
Apart from this, while developing the problem statement, it is important for the Problem
statement to be clear and concise. Such is due to the fact, that it allows the management,
stakeholder to quickly understand the finding and also look on the main problem, rather getting
entangled in the symptoms of the problem. The conciseness of the problem statement is the key,
as it allows the reader to quickly understand the issue.
Moreover, clarity of the Empire Company Limited The Oshawa Group Limited Proposal
problem statement is important to maintain, in order to avoid the misunderstanding between the
shareholders and stakeholders. The clear problem statement is developed by stating the factors
and the operations getting effected and its overall impact on the organization specific the areas,
such as Profitability, sales or brand equity. Also, the purpose of the problem statement is to
describe the external environment and its effect on the overall organization in short and long-
term. Moreover it also delineates the impact of such changing factors on the users, and other
stakeholders.
Many times, under the case analysis, the purpose of the problem statement is to improvise the
current state of the organization through pursuing innovation or other changes. hence ins uh
cases, the direct problem is no the ultimate organization factors but the process implementation
that is needed to e in lace, in order to bring change , avoiding the upcoming risk and hence
sustaining the competitive edge in the market (Spradlin, 2012).
Furthermore, the establishment of the problem statement, allows the organization and the
management teams to work in a specified direction. Such is important in order to allow the
organization move in a specified direction, reducing the chances of deviating From the actual
path. Also, it offers the benchmark to match the desired condition of the organization, hence
putting the efforts of the team in the right direction.
Yet, it is important to note that, the good problem statement does not delineates the solution or
the symptoms of the problem, but it clearly states the gap that lies within the organization.
Moreover, it is also determined, that a clear problem statement is half of the solution, hence it is
important To state the problem correctly.
In addition, the problem statement is a group process, and hence requires a detail understanding
of the issues the organization may be facing, by all members in the team. This will allow the
team to develop a better solution plan addressing all the factors and considering all the risk
associated with it.
Perhaps, stating the Empire Company Limited The Oshawa Group Limited Proposal problem
statement is not just writing the fact, it’s more about the factors that are effecting or may affect
the organization in long term, therefore, while developing the problem statement, the factors
such as human resource skills innovation, technology, change resistance are considered, that
have a direct effect on the organization or is hidden cause of the problem. It is important to note,
that the problem statement can cover tangible or intangible issue but it needs to have a clear
relationship with the organization end goal.
In addition, while stating the problem statement, the aim of the management is to see the mission
and vision of the company and then analyze the current state of the organization, such also allow
the right identification of the problem and the lead to the development of concrete problem
statement.
All in all, the problem statement gives a direction to the organization in understanding the right
solution path and also development of the solution sets in order to overcome the current issues
that are deteriorating the organizational performance or productivity. Perhaps, while writ the
problem statement, it is important to consider the small factors that are often overlooked such as
the intangible factors that effects the productivity of the organization in the long-term.

Chapter 3 Competitive landscape:

The idea is not to overpay the Oshawa company for the control, so it was important to analyse
the possible bidders that could add up at the moment of the negotiation. A possible bidding war
could come from 3 major competitors including Loblaws, Metro Richelieu, and Provigo.

3.1.1 Loblaws:
Loblaws has 20% of the national Market. It is the only company competing on a national Basis.
Loblaws is the only company in the running that really operates on a national level. They could
increase their stores across the country with the acquisition and become the top dog in the
grocery industry in Canada.

3.1.2 Metro Richelieu:

Metro-Richelieu is the largest food retail in Quebec. An acquisition of this size would be
beneficial to the company, strengthening much more the Quebec market share, and giving them a
immediate national scope.

3.1.3 Provigo:
Provigo, has an advantage over Metro-Richelieu because they already have stores in Ontario.
With this acquisition they would improve market share in Ontario and also would achieve a
national scope. If they acquire they would become the largest in Quebec.

3.1.4 Overwaitea food Group:

It is a potential rival for the bidding. They have a small presence in British Columbia and an
acquisition would provide a national exposure.

3.1.5 Canada Safeway:

They have the financial capacity to become a bidder for Oshawa. They have not shown interest
in entering the competitive Ontario market.

3.1.6 The Great Atlantic and Pacific Company of Canada ltd:

They are not seen as a potential rival bidder. The parent company has never expressed interest in
expanding their Canadian operations

In the exhibit 9 found in the case we perceive the three major competitors for a bidding war:

CANADIAN FOOD STORE COMPANY

COMPARISON

Metro-
(in millions of dollars) Empire Oshawa Loblaws richtlieu Provigo
Market value of equity (as of 2/13/98) 776 951 6735 850 990
Total debt 918 135 876 77 327
Enterprise value 1695 1086 7629 927 1317
revenues 3208 7052 10554 3432 5859
 EBITDA 219 165 534 155 232
EBITDA Margin 6.80% 2.40% 5.10% 4.50% 4.00%
Net Income 59 49 199 66 90
Net Margin 1.80% 0.70% 1.90% 1.90% 1.50%
Beta 0.74 0.77 0.55 0.59 1.2
Credit Rating A AA A n/a BBB

Table: 1

3.2 Pros and Cons of Negotiation with Oshawa:

Pros:
Oshawa has 845 stores franchised operations with a market share of 12.7%. This would bump
empire into the number 2 in the grocery industry based on sales. Empire has 5.6% of industry
sales and with the acquisition of The Oshawa Group, it would increase their grocery sales by
$6.8 billion, and the market share to a total of 18.3%. As we read before in the analysis, it
becomes attractive and almost obligatory to search for market share for the growth to be
possible. This increase would increase the possibility of more competitive prices and less costs
proportional costs in marketing and advertising. As we also read before, it is easier in the
industry to grow horizontally than to open new stores. In other words, horizontal acquisitions
were the primary source of growth on the revenue side for the grocery business. By buying
Oshawa they would gain of local customer maintaining experience without disrupting shopping
experiences. One very positive issue is the capital structure for Oshawa. The voting control could
be acquired just by buying the common shares owned by the family, with no need of bidding for
the Class A Shares. An additional opportunity would be that Oshawa has been trading on the last
20 days at 26.46 and is has traded as high as 29.25. This means a possible valuation at the
moment of the merger, if the price was based on the actual market trade. The company showed a
sustainable growth of 6% based on historical data, and can be projected with this growth in the
future. And finally Empire would be buying a company already being restructured by very
capable executives, selling non-core holdings, improving the initial performance at the moment
of a merger.
Cons:
In the other hand we can perceive that it is a very risky business with very low margins in a
mature state, and a very competitive industry. Oshawa has been operating insufficiently with the
worst EBITDA of the industry. Regarding the negotiation, the 100% holding in one family can
be negative. They would unlikely sell, unless payed premium price over market value. If the
offer is not welcomed immediately, it could increase the price of the shares by adding up new
bidders. Also, Empire needs to retain majority of the equity interest and voting control over
business. Analyzing the assets stores in poor condition, buying Oshawa with high capital
expenditures, up to 2% of Sales for the next 5 years.

Chapter 4: Financial Analysis

4.1Analysis of each alternative:

4.1.1 VALUATION-STAND ALONE BUSINESS:

VALUATION-STAND ALONE
BUSINESS

Free cash flows (in millions) 1997 1998 1999E 2000E 2001E 2002E 2003E
Sales and other revenues 5987 6813 7221 7655 8114 8601 9117
Cost of saled and expenses 5837 6651 7047 7466 7911 8381 8880
EBITDA 150 161 174 188 203 219 237
EBITDA% 2.50% 2.40% 2.40% 2.50% 2.50% 2.60% 2.60%

Depreciation and
Amortization 59.7 66.2 71 75.3 79.8 84.6 89.6
Interest -6.5 -7.9 -8.4 -8.9 -9.4 -10 -10.6
- - - -
Interest/Debt 1.20% -1.40% -1.50% 1.50% 1.60% 1.70% -1.80%
EBIT 90.4 95.2 103.4 113.2 123.7 135.1 147.4

Taxes(40%) -36.2 -38.1 -41.4 -45.3 -49.5 -54 -59

 NOPAT(Net Operating After Tax) 54.2 57.1 62 67.9 74.2 81.1 88.4

Table: 2

To come up with an assessment of Oshawa’s value as a stand-alone business, we used a

discounted cash flow analyses (DCF) and made future projections for a 5 year period. For this
we used as many approaches as possible to value the company for us to have an idea of the
current market value. As recalled in the case, we used the assumptions from Vaux which were:
Annual growth estimated 6% for each projected period, EBITDA for year 1998 started at 2,4%
and gradually increased to 2,6% in the next five years, CAPEX investments decreased from 2%
to 1% in the next five years.
In terms of depreciation and amortization percentage related to the sales was of 1% from 1994 to
1998, we used this percentage to project the following years. We used the same income tax rate
of 40% for the forecast.

4.1.2 Working Capital:

The idea was to calculate the working capital using projections of the assets and liabilities of the
company. The projections for the assets and liabilities were made taking 1997 and 1998 financial
information in the balance sheet, where we weighted each one of the items and averaged both
years. As seen in the following table, the working capital Variation was 23.5 in 1999, -9.6 in year
2000, 6.8 in 2001, -1.5 in 2002 and finally 2.7 in 2003. We then calculated the present value of
our free cash flows using our calculated terminal value and discount rate WACC.

WORKING
CAPITAL

1997 1998 1999E 2000E. 2001E 2002E 2003E

Plus:
Depreciation 59.7 66.2 71 75.3 79.8 84.6 89.6
Working Capital 292 262 285.45 275.86 282.62 281.17 283.84
Less: Changes in working
capital 99 30 23.5 9.6 6.8 1.5 2.7
Less: Capital Expenditure 135 130.4 144.4 134 121.7 107.5 91.2
Capex % 2.30% 1.90% 2% 1.80% 1.50% 1.30% 1%
Revenue
Less: Changes in Other
Assets 75.5 -31.2 17.6 -6.9 5.5 -0.8
Plus: Changes in Other
Liabilities 11.8 -5.2 2.8 -1.2 0.8 -0.2

Table: 3

4.1.3 WACC:
For the calculation of the WACC we used Exhibit 9 values which include the market value of
Equity, Total Debt, Enterprise Value, Beta, Credit Rating. With all this data we calculated a
WACC of 7.7% (See Annex 3). WACC was used as an approach to determining a discount rate.
The WACC method determines the subject company’s actual cost of capital by calculating the
weighted average of the company’s cost of debt and cost of equity. We used the 10 year
government bonds yield of 5.8% as our risk-free rate.

WEIGHTED AVERAGE COST OF CAPITAL

Equity/Value E/V 0.46 0.88

Debt/Equity D/E 1.18 0.14
Value/Equity V/E 2.18 1.14
Debt/Value D/V 0.54 0.12
Beta*E/V 0.34 0.67
Beta*D/V 0.4 0.1

91 day treasury bills 5.60%

10 year government bond
weild Rf 5.80%
Market Rate Rm 5.30% Assumptions
Cost of Debt Rd 7.30% Calculation
Cost of Equity Re 5.40%

WACC 7.70%

Table: 4
 4.1.4 Terminal Value:
To calculate the terminal value of Oshawa we used the perpetuity method, for this we calculated
the long term growth of Oshawa Group. The calculation of the growth rate for this analysis was
based upon the Unlevered Free Cash Flow Variation, we believe this indicator can truly estimate
the growth of the company on the following years. The total growth rate is of 1.04% for Oshawa
Company. To calculate the terminal value, we forecasted the free cash flow for 2004, by
multiplying our 2003 FCF by our growth rate, and dividing the value by our WACC minus our
growth rate. This gave us a terminal value of 1,454.08 billion dollars.

TERMINAL VALUE

Period Year 1994 1995 1996 1997 1998 1999E 2000E 2001E 2002E 2003E

Unlevered
Free Cash - -
Flow 120.06 40.78 -8.82 4.04 31.25 55 84.85

Unlevered
Free Cash
Flow VAR 79.28 31.96 12.86 27.22 23.75 29.85
- - -
59.69% 59.77% 111.69% 12.74% 25.68%
Present
Value
Free Cash
Flow 5.48
Growth Rate 1.04%

WACC 7.70%
Terminal Value 1287.76
TV+CF5 1454.08
PV of FCF -8.19 3.48 25.02 40.49 58.358 932.12
EV 1051.9

Table: 5
 Then, we calculated the NPV of the free cash flow using a WACC of 7.7% and the terminal
value of $1,454.08 for the amount of periods projected, this is the present value at a future point
in time of all future cash flows when we expect stable growth rate forever. With this information
Oshawa is valuated for US$ 1.051,9. At an EV of US$1,051.90 and a total shares outstanding of
38 million the price of the share is of US$38 dollars.

4.1.5 VALUE OF PROPOSED SYNERGIES:

In the second discounted cash flow analysis (DCF), we did the same process to forecast
Oshawa’s cash flows five years into the future except this time, we took into account projected
synergies that could result with the merging of Oshawa and Empire. The case mentioned that
Vaux considered two kind of potential synergies: those related to margin enhancements and
those related to cost reductions. They also estimated EBITDA improvement for the following
years even though except for the first year. Further cost synergies based on elimination of
duplicate administration, merchandising, buying, pricing and accounting were also estimated.
Distribution and divisional management cost savings were estimated with a fixed value per year
and reflected the rationalization of direct operating and warehouse ratings. Advertising savings
were also estimated based on the ability to merge retail banners. The estimated merger costs
were of approximately $80 million.

With this information, we calculated the following:

VALUE OF PROPOSED SYNERGIES

SYNERGIES ASSUMPTION 1999 2000 2001 2002 2003 Total

EBTIDA Margin
Improvements
Stronger and more coordinated buying power 0.00% 0.15% 0.25% 0.50% 0.50%

Cost Improvements
Elimination of duplicate admin, merchandising, pricing, etc. 39.5 39.5 39.5 39.5 39.5 197.5
Distribution and Management cost savings 4.1 4.1 4.1 4.1 4.1 20.5
Advertising savings 2 2 2 2 2 10
45.6 45.6 45.6 45.6 45.6 228

Cost Execution
% Estimated 0.00% 37.50% 75.00% 75.00% 75.00%
Estimated Ammount - 17.1 34.2 34.2 34.2 119.7

Merger Charges (One time - Tax Deductible)

Severange packages, converting retails spaces 80

Synegies Estimated Impact 1999 2000 2001 2002 2003 Total

New EBITDA including Margin Improvements % 2.40% 2.60% 2.80% 3.10% 3.10%
EBITDA Margin
Improvements $ - 11.5 20.3 43 45.6 120.4
Cost Improvements 45.6 45.6 45.6 45.6 45.6 228
Total Synergies 45.6 57.1 65.9 88.6 91.2 348.4
Total Synergies Impact (One Time - Tax Deductible) - 21.4 49.4 66.5 68.4 205.7
7.70%
NPV Synergies $154.60
Synergy - Merger cost $74.64

Table: 6

The EBITDA for the projected 5 years would be of $120.4 increase, this considerable increase
was generated through stronger and more coordinated buying power including cost synergies by
eliminating duplicate administration. The cost improvements for the 5 years were of $228.0.
With both of these synergies the total impact (estimated execution of the synergy should be of
US$205.7.
4.1.6 ACQUISITION BID:
So Oshawa, has a value in the range of $35.00 per share to $38. per share, these values are
without taking into account any of the synergies that potentially could occur between Empire and
Oshawa. These figures also do not yet include a premium to market that will be needed in order
for the Wolfe family to be willing to sell their shares. After taking these synergies into account
when doing the DCF analysis, we obtained a firm value of $1,724.89 million and a total of 38
million shares outstanding the price per share is of $45.5.
n other words, Empire could offer the Wolfe Family approximately $45.5 per share to obtain
their voting shares and Empire could offer the Class A shareholders anywhere from $35 to $38
per share plus an additional premium. This offer should appeal to the Wolfe family and Class A
shareholders, and thus, should not start a bidding war.

4.1.7 FINANCING OF THE OFFER:

As the case mentioned in deal financing and structure; Empire is currently in debt it carries a
substantial debt lad due to its competitors, so incurring in another debt could affect the
company´s A debt rating. It is also important to notice that Empire is publicly traded so they
could issue additional equity to finance the acquisition. However, stock is trading at a substantial
discount to its true value. The other option is to spin off the food business into another entity and
finance the acquisition by guaranteeing Oshawa shareholders equity for the new company, the
issue with this option is that new shares would not be publicly traded until the transaction is
completed and shareholders could have a bad reaction to this. Considering all of the possibilities
we suggest that the better option for financing the acquisition would be spin off the food business
into another entity and finance the acquisition by giving Oshawa shareholders equity from this
new entity. We considered this was a very strategy because Empire is currently in debt, there is
not enough money for them to pay the bid and by asking for a loan they could risk their current
A qualification. And also, generally speaking, firms which believe that their stock is under-
valued will not use stock to do acquisitions. The grocery business is currently making up 95% of
the company’s revenue, but only 37% of operating income, so by spinning off the grocery
business into its own company, Empire can raise equity by issuing shares through this new
company to fund the financing of the Oshawa acquisition. Also, Class A shareholders of Oshawa
could have the option of receiving shares in the new business Empire creates, or choose to have
the cash payout for their shares.

4.2 Financial Statement:

EMPIRE COMPANY LTD FINANCIAL STATEMENTS

CONSOLIDATED INCOME STATEMENT (in thousand of dollars)

1998 1997

Revenue 3,320,000 3,149,773

Cost of sales, selling and administrative expenses 3,127,112 3,127,112
192,888 177,848

Depreciation 70,404 65,433

122,484 112,415

Investment income 41,253 35,568

Operating income 163,737 147,983

Interest expense
Long term debt 64,340 70,512
Short term debt 12,328 8,746
76,668 79,258
87,069 68,725

Gain on sale of
investments and
properties 6,524 1,447
93,593 70,172

Gain on sale of
investment in Jannock
Limited 35,868 -
Share of asset
impairment provision by
equity accounted
investment 8,788 -
120,673 70,172

Income taxes
Sale of
investment
in Jannock
Limited 7,792 -
Other operations 25,092 16,930
32,884 16,930
Minority interest 7 363
32,891 17,293

Net
earnings 87,782 52,879

Table: 7

CONSOLIDATED BALANCE SHEET

(in thousands of dollars)

1998 1997

Assets
Current Assets
Cash 28,268 32,185
Receivables 89,153 78,701
Inventories 197,650 194,126
Prepaid Expenses 15,319 14,100
Investments, at cost
(quoted market value
$246,418;
$211,468
1997 ) 156,388 148,746
486,778 467,858
 Investments, at
equity (quoted
market value
$800,436;
$575,133
1997 ) 325,579 300,447
Current assets and
marketable
investments 812,357 768,305
1,069,02 1,001,87
Fixed assets 6 3
Other assets 25,850 27,193
1,907,23 1,797,37
3 1

Liabilities and Shareholder's Equity

Current Liabilities
Bank loans and notes payable 286,532 239,757
Payables and
accruals 338,774 298,550
Income taxes
payable 9,712 11,462
Long term debts due within one year 24,222 89,702
659,240 639,471

Long term debt 616,571 606,843

Minority interest - 171
Deferred income taxes 73,083 71,336
1,348,89 1,317,82
4 1

Shareholders' Equity
Capital stock 229,889 234,130
Retained earnings 305,422 228,254
Foreign currency translation 23,028 17,166
558,339 479,550

1,907,23 1,797,37
3 1

Table: 8
4.3 Ratio Analysis: Empire Company Limited

Ratios Formula 1997 1998

Liquidity
Ratio
Current assets / Current
Current ratio liabilities 1.20147 1.232263

Table: 9

1998 1997
Solvency Ratio
Debt Ratio Total liabilities/ Total assets 71% 73%
Debt to Equity Ratio Total liabilities / Total equity 242% 275%
Equity Multiplier Total assets / Total stockholder's equity 342% 375%
Long-term debt / (Long-
term debt + Preferred stock + Common stoc
Long-term debt ratio k) 73% 100%
Times Interest Earned Income before interest and income taxes /
Ratio Interest expense 256% 209%
(EBIT+Depreciation & Amortization) /
Cash coverage ratio Interest 305% 269%

1998 1997
Profitability Ratios
Profit Margin Ratio Net Income / Net Sales 3% 2%
Return on Assets Ratio -
ROA Net Income / Total Assets 5% 3%
Return on Equity Ratio-
ROE Net Income / Shareholder's Equity 16% 11%

Asset Management
Ratios
Fixed Asset Turnover
Ratio Net annual sales / fixed asset 311% 314%
Asset Turnover Ratio Net sales / Average total assets 179% 170%

DuPont Analysis Formulas

Profit Margin Net Income / Net Sales 3% 2%
Total Asset Turnover Net Sales / Total Assets 174% 175%
Financial Leverage Total Assets / Total Equity 342% 375%
Profit Margin * Total Asset Turnover *
DuPont Analysis Financial Leverage 16% 11%

Table: 10
 Current Ratio Return on Equity
Ratio- ROE
1.232262
909
16%

11%

1.201469
652

1997 1998 1998 1997

Figure: 1 Figure: 2

Profit Margin Ratio Debt Ratio

3%
73%

2%

71%

1998 1997 1998 1997

 Figure: 3 Figure: 4

Return on Assets Ratio - Fixed Asset Turnover

ROA Ratio

314%

311%

1998 1997 1998 1997

Figure: 5 Figure: 6

Cash coverage ratio Debt to Equity Ratio

305%
275%

269% 242%
 Figure: 7 Figure: 8

Equity
Times Interest Multiplier
Earned
Ratio
375%

256%
209%

342%

1998 1997

1998 1997

Figure: 9

Long-term debt ratio

100%

73%
 Figure: 10

Asset Turnover Ratio

179%

170%

1998 1997

Figure: 11

Profit Margin

3%

2%
 Figure: 12

Total Asset Turnover

175%

174%

1998 1997

Figure: 13

Financial Leverage

375%
 Figure: 14

DuPont Analysis

16%

11%

1998 1997

Figure: 15

4.4 Business Risk Analysis:

 1997 1998 1999 E 2000 E 2001
Variability in Sales E
Revenues 5987 6813 7221 7655 8114
standard Deviation of
revenue 584.07 628.689 710.108 814.74

mean revenue 6,400 6,674 6,919 7158

revenue variability(CV) 0.09 0.09 0.10 0.11

2001
Variability in EBIT 1997 1998 1999 E 2000 E E
EBIT 150 161 174 188 203
standard Deviation of EBIT 7.77817 12.0139 16.419 21.064
mean EBIT 155.50 161.67 168.25 175.2

EBIT Variability 0.05 0.07 0.10 0.09

Degree of Operating 2001

Leverage 1997 1998 1999 E 2000 E E
EBIT 150 161 174 188 203
Change of EBIT 11 13 14 15
Revenue 5987 6813 7221 7655 8114
Change of revenue 826 408 434 459
Operating Leverage 0.53153 1.34833 1.33871 1.3307

1998 1999 E 2000 E 2001 E

Degree of Operating
Leverage 0.53153 1.34833 1.33871 1.3307

Table: 11

Variability in Sales
0.11

0.10
0.09
0.09
 Figure: 16

Variability in EBIT

0.10
0.09

0.07

0.05

1998 1999 E 2000 E 2001 E

Figure: 17

Operating Leverage

1.348328462 1.338709677 1.330656376

 Figure: 18

4.5 Financial Risk Analysis:

Degree of Financial Leverage 1997 1998

EBIT 147983 163737
EBT 70172 120673
DFL 2.108861084 1.356865247

Interest Coverage Ratio 1997 1998

EBIT 147983 163737
Interest 79258 76668
Interest Coverage Ratio(TIE) 1.867104898 2.135662858

1997 1998
Degree of Financial Leverage 2.108861084 1.356865247
Interest Coverage Ratio(TIE) 1.867104898 2.135662858

Table: 12

Degree of Financial Leverage

2.5

2 2.108861084

1.5

1.356865247
1
 Figure:18

Chapter 5: Alternative Course of Actions:

The particular section deals with the different ways the problem can be resolved. In particular
section, the management/teams develops different options through which the problem can be
resolved. Many times these options are already in hand with the management or re-developed
from the scratch through strong brain storming.
In typical situation, there are three options that are developed in by the organization to deal with
the given problem. The options developed entails and includes the maximum factor that the
organization should analyze or achieve, thus offering great value.
While developing The Alternative, the following factor are taken in account, in order to develop
the best alternative that may resolve the problem effectively.

These factor includes the consideration of the following:

• Cost
• Reliability
• Invulnerability
• Merit
• Simplicity
• Compatibility
• Reversibility
• Robustness
 • Stability
• Riskiness

Chapter 6 : Recommendation:
Based on the overall internal and external analysis done for Empire Company Limited The
Oshawa Group Limited Proposal, this section will offer recommendations which will help the
company take on strategic directions that will enhance its core competencies and capabilities, as
well as reduce its chances for risks and threats? The following recommendations are thus made
for Empire Company Limited The Oshawa Group Limited Proposal:

6.1. Strengthen distribution network:

6.1.1. Control:
This is an important strategic recommendation as it will allow higher control to the company
over its products in different markets. The company will be able to control where its products are
placed, and thereby, will also be able to enhance the accessibility and easy availability of its
products.

6.1.2. Stronger relation with consumers:

At the same time, the strengthening of the distribution network will allow the company to work
more closely with end consumers by being able to reach them with the same high quality of
products across different markets.

6.2. Develop unique marketing tactics:

6.2.1. Higher penetration:
This strategic recommendation will help the company reach a higher number of consumers and
penetrate deeper into target consumer groups. Also, this strategy will allow the company to
increase trial and consumption and sales of its products.

6.2.2. Forming a partnership with consumers:

Unique marketing tactics will involve new and informed strategic means of communicating with
the consumers and engaging them with the brand. One way that this can be done is by making
consumer co-producers for the brand. Another way that Empire Company Limited The Oshawa
Group Limited Proposalcan do this is through co-branding with other similar, yet dissimilar
brands and companies to enjoy higher market visibility amongst target consumers.

6.3. Adapt to different cultural aspects of different markets:

6.3.1. Identify different consumer group characteristics:

Each market and target group has distinct characteristics. This recommendation is suggested so
that the company can connect better with different target groups in different markets.

6.3.2. Adapt to and respond to characteristics:

By adapting to different cultural and regional characteristics, the company will be able to present
itself better to target consumers – who would then feel a greater affinity, and more likeliness of
consuming the product and the service.

6.4. Expand into new regions:

6.4.1. Market expansion:

Another strategic recommendation for Empire Company Limited The Oshawa Group Limited
Proposalis to expand into newer regions and markets. This can be done by expanding into new
markets, firstly. This expansion will give the company exposure to new consumer groups.
Increase the overall consumption rate, as well as diversify income streams. Also, it will give the
company related expansion exposure regionally as well as internationally.

6.4.2. Product diversification:

Another means of expansion is through product diversification. By adding new products, the
company will be Abe to penetrate deeper into existing markets bye exploring new consumer
groups, and new target consumer groups. This will also diversify income streams for the
company, and increase its overalls hare of the market.

6.5. Strengthen value network:

By strengthening the value network further, and by adding quality and enhanced elements at
different stages, the company will be able to maintain competitive advantage, as well as put off
new players from the industry by increasing barriers to entry. This will allow the company to
maintain sustainable competitiveness over other players, as well as maintain a possible
leadership position in the local and international markets and industry.
 Chapter 7 : Conclusion:
THE EMPIRE COMPANY LIMITED has contracted the our team to consult their company on
whether to go after Taking acquire ; the Oshawa Group Limited. THE EMPIRE COMPANY
LIMITED does not want to miss out on the potential opportunity at hand. Boeing owns the Very
Large grocery industry with their 747 and has no close competitors as of now. THE EMPIRE
COMPANY LIMITED feels that if they can create a superior model to the grocery industry, they
can potentially steal away customers from others rival and reduce their market share in the
grocery industry. In theory, This acquiring offers diverse advantages that could potentially make
it the market leader.
Mergers and acquisitions activities are pointed out as the key role in a company’s growth. The
benefits of M&A really improve and support for the long term development scheme. Perhaps the
effectiveness of M&A depends on the strategies of the Board, the flexibility of negotiation
period and enthusiasm of parties, but they could reach to the target if they are well prepared and
target to conduct mergers and acquisitions successfully.
The achievement of certain corporate goals and objectives may involve the external acquisition
of assets and resources needed for growth, a step that may be more efficient than internal
expansion. If a buyer pays exactly what the business is worth on a stand-alone basis, then any
benefit obtained from the planned changes (i.e., synergy) is profit to the buyer. Conversely, if a
buyer adds no value to the seller’s operations, then paying fair value does not provide the buyer
with particular advantage and disadvantage. Therefore, we should make a careful consideration
before conducting M&A, avoiding the unfortunate consequence of capital and time. The Board
of both sides could use law consulting services of law firms or finance consulting services at
KPMG, PwC, and so on to improve the quality of preparation and negotiation periods.
In conclusion, I want to emphasize the importance of M&A to the development of corporations.
M&A is really confirmed to be one of the most useful methods to overcome current difficulties
and improve the development of companies. M&A really support for the growth of global
economics, for it make companies in crisis become bigger in capitals, human resources.
Therefore, the competition advantages of companies bring them to success and prosperity.
Mergers and acquisitions are extremely noticeable ways to tackle with difficulties in the 21st
century.
To finish we will forecast the demand for the Grocery market and compare to our break-even
number. After the break-even analysis, we transitioned into a 5 net present value analysis. From
these 3 fronts, our consulting team will recommend whether THE EMPIRE COMPANY
LIMITED should pursue this investment.
 References:
Chandon Kumar Pal, Assistant Professor, Department of Finance and Banking,
Jatiya Kabi Kazi Nazrul Islam University.
Bierly, P. & Hämäläinen, T., 1995. Organizational learning and strategy. Scandinavian Journal
of Management, 11(3), p. 209–224.

Cole, G., 2003. Strategic Management. Boston: Cengage Learning EMEA.

Collier, D. & Evans, J., 2009. Operations Management. Boston:MA: Cengage Learning.

Haron, A., 2016. Standardized Versus Localized Strategy: The Role of Cultural Patterns in
Society on Consumption and Market Research. Journal of Accounting and Marketing, 5(1).

Hartline, M. & Ferrell, O., 2006. Marketing Strategy. Boston:MA: Cengage Learning.

Keller, L., 2006. Strategic Brand Management Process, in Perspective of Modern Brand
management. s.l.:s.n.

Kotler, P., 1997. Marketing management: Analysis, planning, implementation and control. New
Jersey: Prentice-Hall.

Kotler, P., 211. Reinventing marketing to manage the environmental imperative. Journal of
Marketing, 75(4), pp. 132-135.
Kotler, P., Armstrong, G., Adam, S. & Denize, S., 2014. Principles of Marketing. Melbourne:
Pearson, Australia.

Kotler, P. & Keller, K., 2009. Marketing Management. New Jersey: Prentice Hall.

Lehman, D. & Winer, R., 2005. Product Management. New Delhi: McGraw-Hill Education.

Murray, A., 1988. A contingency view of Porter's “generic strategies”. Academy of management
review, 13(3), pp. 390-400.

Reddi, C., 2009. Effective Public Relations and Media Strategy. New Delhi: PHI Learning Pvt.
Ltd.

Schivinski , B. & Dabrowski , D., 214. The Effect of Social Media Communication on Consumer
Perceptions of Brands. Journal of Marketing Communications, Volume 12, pp. 1-26.

Thompson, J. & Martin, F., 2010. Strategic Management: Awareness & Change. Hampshire:
Cengage Learning EMEA.

Weng, X., 2002. Local Brand Strategy. Hangzhou: Zhejiang People’s Publishing House.

Wirtz, J., 2016. Winning in Service Markets: Success through People, Technology and Strategy.
Singapore: World Scientific.

Witcher, B. & Chau, V., 2010. Strategic management: Principles and practice. s.l.:Cengage
Learning EMEA.

Witcher, B. J. & Chau, V. S., 2010. Strategic Management: Principles and Practice. Boston:
Cengage Learning EMEA.
Appendix:
 CANADIAN FOOD STORE COMPANY
COMPARISON

Metro-
(in millions of dollars) Empire Oshawa Loblaws richtlieu Provigo
Market value of equity (as of 2/13/98) 776 951 6735 850 990
Total debt 918 135 876 77 327
Enterprise value 1695 1086 7629 927 1317
revenues 3208 7052 10554 3432 5859
EBITDA 219 165 534 155 232
EBITDA Margin 6.80% 2.40% 5.10% 4.50% 4.00%
Net Income 59 49 199 66 90
Net Margin 1.80% 0.70% 1.90% 1.90% 1.50%
Beta 0.74 0.77 0.55 0.59 1.2
Credit Rating A AA A n/a BBB

Table: 1
 VALUATION-STAND ALONE
BUSINESS

Free cash flows (in millions) 1997 1998 1999E 2000E 2001E 2002E 2003E
Sales and other revenues 5987 6813 7221 7655 8114 8601 9117
Cost of saled and expenses 5837 6651 7047 7466 7911 8381 8880
EBITDA 150 161 174 188 203 219 237
EBITDA% 2.50% 2.40% 2.40% 2.50% 2.50% 2.60% 2.60%

Depreciation and
Amortization 59.7 66.2 71 75.3 79.8 84.6 89.6
Interest -6.5 -7.9 -8.4 -8.9 -9.4 -10 -10.6
- - - -
Interest/Debt 1.20% -1.40% -1.50% 1.50% 1.60% 1.70% -1.80%
EBIT 90.4 95.2 103.4 113.2 123.7 135.1 147.4

Taxes(40%) -36.2 -38.1 -41.4 -45.3 -49.5 -54 -59

NOPAT(Net Operating After Tax) 54.2 57.1 62 67.9 74.2 81.1 88.4

Table: 2
WORKING
CAPITAL

1997 1998 1999E 2000E. 2001E 2002E 2003E

Plus:
Depreciation 59.7 66.2 71 75.3 79.8 84.6 89.6
Working Capital 292 262 285.45 275.86 282.62 281.17 283.84
Less: Changes in working
capital 99 30 23.5 9.6 6.8 1.5 2.7
Less: Capital Expenditure 135 130.4 144.4 134 121.7 107.5 91.2
Capex %
Revenue 2.30% 1.90% 2% 1.80% 1.50% 1.30% 1%
Less: Changes in Other
Assets 75.5 -31.2 17.6 -6.9 5.5 -0.8
Plus: Changes in Other
Liabilities 11.8 -5.2 2.8 -1.2 0.8 -0.2

Table: 3
WEIGHTED AVERAGE COST OF CAPITAL

Equity/Value E/V 0.46 0.88

 Debt/Equity D/E 1.18 0.14
Value/Equity V/E 2.18 1.14
Debt/Value D/V 0.54 0.12
Beta*E/V 0.34 0.67
Beta*D/V 0.4 0.1

91 day treasury bills 5.60%

10 year government bond
weild Rf 5.80%
Market Rate Rm 5.30% Assumptions
Cost of Debt Rd 7.30% Calculation
Cost of Equity Re 5.40%

WACC 7.70%

Table: 4

TERMINAL VALUE

Period Year 1994 1995 1996 1997 1998 1999E 2000E 2001E 2002E 2003E

Unlevered
Free Cash - -
Flow 120.06 40.78 -8.82 4.04 31.25 55 84.85

Unlevered
Free Cash
Flow VAR 79.28 31.96 12.86 27.22 23.75 29.85
- - -
59.69% 59.77% 111.69% 12.74% 25.68%
Present
Value
Free Cash
Flow 5.48
Growth Rate 1.04%

WACC 7.70%
Terminal Value 1287.76
TV+CF5 1454.08
PV of FCF -8.19 3.48 25.02 40.49 58.358 932.12
EV 1051.9
 Table: 5

Table: 6

EMPIRE COMPANY LTD FINANCIAL STATEMENTS

CONSOLIDATED INCOME STATEMENT (in thousand of dollars)

VALUE OF PROPOSED SYNERGIES

SYNERGIES ASSUMPTION 1999 2000 2001 2002 2003 Total

EBTIDA Margin
Improvements
Stronger and more coordinated buying power 0.00% 0.15% 0.25% 0.50% 0.50%

Cost Improvements
Elimination of duplicate admin, merchandising, pricing, etc. 39.5 39.5 39.5 39.5 39.5 197.5
Distribution and Management cost savings 4.1 4.1 4.1 4.1 4.1 20.5
Advertising savings 2 2 2 2 2 10
45.6 45.6 45.6 45.6 45.6 228

Cost Execution
% Estimated 0.00% 37.50% 75.00% 75.00% 75.00%
Estimated Ammount - 17.1 34.2 34.2 34.2 119.7

Merger Charges (One time - Tax Deductible)

Severange packages, converting retails spaces 80

Synegies Estimated Impact 1999 2000 2001 2002 2003 Total

New EBITDA including Margin Improvements % 2.40% 2.60% 2.80% 3.10% 3.10%
EBITDA Margin
Improvements $ - 11.5 20.3 43 45.6 120.4
Cost Improvements 45.6 45.6 45.6 45.6 45.6 228
Total Synergies 45.6 57.1 65.9 88.6 91.2 348.4
Total Synergies Impact (One Time - Tax Deductible) - 21.4 49.4 66.5 68.4 205.7
7.70%
NPV Synergies $154.60
Synergy - Merger cost $74.64
 1998 1997

Revenue 3,320,000 3,149,773

Cost of sales, selling and administrative expenses 3,127,112 3,127,112
192,888 177,848

Depreciation 70,404 65,433

122,484 112,415

Investment income 41,253 35,568

Operating income 163,737 147,983

Interest expense
Long term debt 64,340 70,512
Short term debt 12,328 8,746
76,668 79,258
87,069 68,725

Gain on sale of
investments and
properties 6,524 1,447
93,593 70,172

Gain on sale of
investment in Jannock
Limited 35,868 -
Share of asset
impairment provision by
equity accounted
investment 8,788 -
120,673 70,172

Income taxes
Sale of
investment
in Jannock
Limited 7,792 -
Other operations 25,092 16,930
32,884 16,930
Minority interest 7 363
32,891 17,293
 Net
earnings 87,782 52,879

Table: 7

CONSOLIDATED BALANCE SHEET

(in thousands of dollars)

1998 1997

Assets
Current Assets
Cash 28,268 32,185
Receivables 89,153 78,701
Inventories 197,650 194,126
Prepaid Expenses 15,319 14,100
Investments, at cost
(quoted market value
$246,418;
$211,468
1997 ) 156,388 148,746
486,778 467,858

Investments, at
equity (quoted
market value
$800,436;
$575,133
1997 ) 325,579 300,447
Current assets and
marketable
investments 812,357 768,305
1,069,02 1,001,87
Fixed assets 6 3
Other assets 25,850 27,193
1,907,23 1,797,37
3 1

Liabilities and Shareholder's Equity

Current Liabilities
Bank loans and notes payable 286,532 239,757
 Payables and
accruals 338,774 298,550
Income taxes
payable 9,712 11,462
Long term debts due within one year 24,222 89,702
659,240 639,471

Long term debt 616,571 606,843

Minority interest - 171
Deferred income taxes 73,083 71,336
1,348,89 1,317,82
4 1

Shareholders' Equity
Capital stock 229,889 234,130
Retained earnings 305,422 228,254
Foreign currency translation 23,028 17,166
558,339 479,550

1,907,23 1,797,37
3 1

Table: 8

Ratios Formula 1997 1998

Liquidity
Ratio
Current assets / Current
Current ratio liabilities 1.20147 1.232263

Table: 9
 1998 1997
Solvency Ratio
Debt Ratio Total liabilities/ Total assets 71% 73%
Debt to Equity Ratio Total liabilities / Total equity 242% 275%
Equity Multiplier Total assets / Total stockholder's equity 342% 375%
Long-term debt / (Long-
term debt + Preferred stock + Common stoc
Long-term debt ratio k) 73% 100%
Times Interest Earned Income before interest and income taxes /
Ratio Interest expense 256% 209%
(EBIT+Depreciation & Amortization) /
Cash coverage ratio Interest 305% 269%

1998 1997
Profitability Ratios
Profit Margin Ratio Net Income / Net Sales 3% 2%
Return on Assets Ratio -
ROA Net Income / Total Assets 5% 3%
Return on Equity Ratio-
ROE Net Income / Shareholder's Equity 16% 11%

Asset Management
Ratios
Fixed Asset Turnover
Ratio Net annual sales / fixed asset 311% 314%
Asset Turnover Ratio Net sales / Average total assets 179% 170%

DuPont Analysis Formulas

Profit Margin Net Income / Net Sales 3% 2%
Total Asset Turnover Net Sales / Total Assets 174% 175%
Financial Leverage Total Assets / Total Equity 342% 375%
Profit Margin * Total Asset Turnover *
DuPont Analysis Financial Leverage 16% 11%

Table: 10
 Current Ratio Return on Equity
Ratio- ROE
1.232262
909
16%

11%

1.201469
652

1997 1998 1998 1997

Figure: 1 Figure: 2

Profit Margin Ratio Debt Ratio

3%
73%

2%

71%

1998 1997 1998 1997

Figure: 3 Figure: 4
Return on Assets Ratio - Fixed Asset Turnover
ROA Ratio

314%

311%

1998 1997 1998 1997

Figure: 5 Figure: 6

Cash coverage ratio Debt to Equity Ratio

305%
275%

269% 242%

1998 1997 1998 1997

Figure: 7 Figure: 8
 Equity
Times Interest Multiplier
Earned
Ratio
375%

256%
209%

342%

1998 1997

1998 1997

Figure: 9

Long-term debt ratio

100%

73%

1998 1997

Figure: 10
 Asset Turnover Ratio

179%

170%

1998 1997

Figure: 11

Profit Margin

3%

2%

1998 1997

Figure: 12
 Total Asset Turnover

175%

174%

1998 1997

Figure: 13

Financial Leverage

375%

342%

1998 1997
 Figure: 14

DuPont Analysis

16%

11%

1998 1997

Figure: 15

4.4 Business Risk Analysis:

1997 1998 1999 E 2000 E 2001

Variability in Sales E
Revenues 5987 6813 7221 7655 8114
standard Deviation of
revenue 584.07 628.689 710.108 814.74

mean revenue 6,400 6,674 6,919 7158

revenue variability(CV) 0.09 0.09 0.10 0.11

Variability in EBIT 1997 1998 1999 E 2000 E 2001

 E
EBIT 150 161 174 188 203
standard Deviation of EBIT 7.77817 12.0139 16.419 21.064
mean EBIT 155.50 161.67 168.25 175.2

EBIT Variability 0.05 0.07 0.10 0.09

Degree of Operating 2001

Leverage 1997 1998 1999 E 2000 E E
EBIT 150 161 174 188 203
Change of EBIT 11 13 14 15
Revenue 5987 6813 7221 7655 8114
Change of revenue 826 408 434 459
Operating Leverage 0.53153 1.34833 1.33871 1.3307

1998 1999 E 2000 E 2001 E

Degree of Operating
Leverage 0.53153 1.34833 1.33871 1.3307

Table: 11

Variability in Sales
0.11

0.10
0.09
0.09

1998 1999 E 2000 E 2001 E

Figure: 16
 Variability in EBIT

0.10
0.09

0.07

0.05

1998 1999 E 2000 E 2001 E

Figure: 17

Operating Leverage

1.348328462 1.338709677 1.330656376

0.531533495

1998 1999 E 2000 E 2001 E

 Figure: 18

4.5 Financial Risk Analysis:

Degree of Financial Leverage 1997 1998

EBIT 147983 163737
EBT 70172 120673
DFL 2.108861084 1.356865247

Interest Coverage Ratio 1997 1998

EBIT 147983 163737
Interest 79258 76668
Interest Coverage Ratio(TIE) 1.867104898 2.135662858

1997 1998
Degree of Financial Leverage 2.108861084 1.356865247
Interest Coverage Ratio(TIE) 1.867104898 2.135662858

Table: 12

Degree of Financial Leverage

2.5

2 2.108861084

1.5

1.356865247
1

0.5

0
1997 1998
Figure:18