Rawhide Brewery Case Solution

Since Upson was confronted with the problem of idle capacity, he tried to explore the possibilities in the Ontario brewery market. Tabby Cat beer was one rapidly growing micro-brewery, however, due to the increase in demand, the CEO, Bruce Mac Alpine was concerned about the strain, it would put on the brewery's fixed production capacity. He had speculated that in order to expand the operations to a bigger capacity, a hefty amount of 3 Million dollars would have to be borrowed which the CEO did not prefer to resort to. Upson decided to make use of these mutual needs in the industry by meeting Mc Alpine and reaching onto a few conclusions. One of the proposals given by Upson were to enter into a five- year contract with Rawhide Brewery Tabby for the use of all or a portion of its brewery operations. The costing was to be done on per case of the beer which could be allowed to be adjusted by the price of Hops, volume of beer produced and inflation. This also required an agreement by Rawhide that a promised number would be produced annually.

The second proposal suggested forming a new legal entity by the name of Newco. Rawhide would transfer all of its operations and debt financing to Newco and would be granted 5% of the common shares of the new company and a 1.5 million note receivable due in ten years for transfer of brewery operations. Tabby, on the other hand, get 95% of common shares of Newco. This new company would assume the transfer of ownership which would also take up the bank loan. The note receivable to Rawhide would be earning interest which was hedged to the profitability of the company. Therefore, this proposal allowed both Tabby and Rawhide to continue in beer production by paying the same fee for per case of beer. This was estimated to be 15% lesser than under proposal 1. Under this setup, Rawhide would guarantee the term loan and also get the authority over decision making.