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Acova Radiateurs Case Solution

Solution Id Length Case Author Case Publisher
2452 1454 Words (6 Pages) Lisa Meulbroek Harvard Business School : 295150
This solution includes: A Word File A Word File and An Excel File An Excel File

Acova Raditeurs is a radiator manufacturing and distributing company that does most of its sales in France. However, it holds a substantive market share in the rest of the European countries as well. In total, Acova’s market share is around 18.5%. Acova has built a niche for itself in the decorative radiators industry. Moreover, Acova boasts a strong and hardworking management team which has put forth interesting distributions and sales models. Baring Capital is an investment firm which invests in management buyouts and late-stage development capitals in and around Europe. Baring capital is looking to stage a Leveraged Buyout and wishes to put forth a reasonable bid to beat its own competitors. The study focuses on Baring’s decision to bid and how much to bid based on Acova’s projections and historical data which is presented in the case file. The decision to bid and the proposed acquisition price will be affected by multiple factors, which are discussed below.

Following questions are answered in this case study solution

  1. Is Acova a good LBO candidate?

  2. What is the value of Acova? Does it merit the proposed acquisition price of FFr 340MM?

  3. Why does Baring Capital Investors seek such a high rate of return of 30 – 35%?

  4. How does the levered cost of equity compare to BCI’s 30 – 35% hurdle rate on investment?


Case Analysis for Acova Radiateurs

1. ACOVA, a good LBO candidate?

Yes, Acova is a good Leveraged Buyout Candidate because of the following reasons. The company for the last several years, has had a 10% sales growth rate and is projected to continue to do so. Even though a 10% long term growth rate is highly unlikely, it can reasonably be assumed that the long-term growth rate would be closer to 3-4%, considering France’s GDP and calculating a correlated long-term growth rate. Even though Barings Capital’s forecasts indicate that the radiators market does not have high growth prospects, Acova can pull through in the coming years. It is a company with a track record of generating positive cash flows, boasting a professional and hardworking management team. Acova’s growth, one can argue has peaked, or it will peak soon, but it can weather the weights of the oncoming economic contraction. Moreover, Acova is projected to be profitable for several oncoming years since Cost of Goods Sold is from 10% to 15% of Sales from the projections. Acova has an 18.5% market share in the radiator industry, and it leads the industry in decorative radiators. It is reasonably assumed that Acova is a going concern since it can easily pay off its debt and interest payments with the internally generated cash flows once the LBO has taken place. The productions of radiators by Acova are poised to be thoroughly optimized by the management, which will imply that its profitability would increase. Acova has a differentiating sales strategy that focuses on the decorative niches, sells directly to wholesalers, creates high entry barriers for competitors, and thus ensures a captive market. These strategies have proven the test of time, and Acova has been able to generate positive cash flows in the past five years. Therefore, it is reasonable to believe that Acova is a good LBO candidate.

2. What is the value of Acova? Does it merit the proposed acquisition price of FFr 340MM?

Yes, 340MM FFr is a reasonable acquisition price for Acova. To calculate the value of Acova, the APV method was employed.

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