Financial Forecast for Goldengate Capital

Financial Forecast for Goldengate Capital

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Financial Forecast for Goldengate Capital
The forecasted balance sheets, income statements and assumption provided to Goldengate Capital by Ernst and Anderson are shown in Exhibits. All dollar figures quoted are in thousands. The financial forecasts are conservative case sales estimates from Dr. Martinez. The three main factors considered in the estimates were case sales trends & demand, inflation and real price increases reflecting Calaveras' strengthening brand recognition.
The first assumption is that the prices will increase 2% before inflation. The production level per ton of grapes and yield per acre will increase to 1992 levels due to the new market strategies. Sales are expected to grow 13% in 1995 after which estimate of 12%, 6%, and 8% for 1996, 1997 and 1998, respectively show growth while recognizing a shift toward white wines. The tax rate of 37% and inflation rate of 2% is factored in to the forecast. Therefore the prices per case for each category has 2% price growth as well as 2% inflation rate, total of 4% was reflected in arriving at the forecasted income statement. Maximum capacity of 110,000 was assumed in the forecast and does show that even with the increase levels of production will not hit this ceiling in the next 5 years. Depreciation was calculated on 5-year straight-line basis, while SGA was constant 14% of sales. The key drivers of this model are Gross margin on each of the 5 main product group, tax rate, inflation rate, real price growth level, interest rate, Inventory to COGS, Accounts Receivable to Sales ratio.

In order to analyze the financial position of Calaveras Vineyard, as mentioned in the "Financial Forecast Method and Assumptions" section, Proforma Income statement and Balance sheet was compiled using the assumptions mentioned in the previous section. We use the weight of products and the comparable companies’ unleveled beta to calculate the cost of capital. Using these assumptions, WACC was determined to be 16.1% .
Calaveras Vineyards
Cost of capital

Product line / Comparable Calaveras % Unlevered beta
Premium/Finn & Sawyer 74.40% 1.312
Generic/Canandaigua 9.00% 0.54
Specialty/Frogg's Jump 16.60% 0.867
Weighted average unlevered beta 1.169

Risk-free rate (30-yr T-bond) 5.85%
Market equity risk premium 5.70%
Calaveras unlevered cost of equity 12.51%

In order to determine the value of operations, and using proforma income statement and balance sheet statement, Cash flow statement was formulated for the next 5 years. The Account Receivables plus the Inventory minus the Account Payable was determined as Net Operating Working Assets. An organization cost of 0,000 was amortized over the 5-year period.

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Using these values, free cash flows were determined as shown in Exhibit. Also using these cash flows and discounting them at WACC (16.1%), the value of CV was calculated to be $3,647,000.

As an alternate using the P/E ratios to calculate the terminal value, we can find the value of CV is $5,128,000
Product line / Comparable Calaveras % P/E
Premium/Finn & Sawyer 74.40% 14
Generic/Canandaigua 9.00% 13
Specialty/Frogg's Jump 16.60% 15
Weighted average P/E 14.076

PV of
Term. Growth FCF(1+g%) Terminal value Terminal value
2.00% 502.86 7078.26 3368.60
4.00% 512.72 7217.05 3434.65
6.00% 522.58 7355.84 3500.70

PV of
Term. Growth TV of tax sh. Asset value
2.00% 543.61 4865.20
4.00% 741.28 5128.93
6.00% 1164.87 5618.57

The last method of valuing the operation to determine the fair market value of Calaveras Vineyard and to mitigate risk in a case of forced liquidation.
There are actually two types of liquidation value, depending on the time available for the liquidation process, Orderly liquidation value and Distress liquidation value.
1. Orderly liquidation value:
This assumes that the enterprise can afford to sell its assets to the highest bidder. It assumes an orderly sale process to sell each asset in its appropriate season and through channels of sale and distribution that fetch the highest price reasonably available.
Orderly liquidation value=Net working capital+ fixed assets- long term debt
  1994 1995 1996 1997 1998
Net working assets 2585 2887 3088 3304 3456
Fix asset 2020 2043 2017 1940 1874
LTD 1200 800 400 0 0
  3405 4130 4705 5244 5330
2. Distress liquidation value:
This is an emergency price. This assumes that the enterprise must sell all its assets at or near the same time, to offer the assets is a dealer who specializes in the liquidation of the entire assets of a company
We know CV can sell Accounts Receivable 85% of face value and Inventory 75% of book value and Equipment 40% of book value in a forced liquidation.
1994 1995 1996 1997 1998
Liquidation 2,329,340 2,896,560 3,182,470 3,364,060 3,537,530

CV’s value
DCF 3,796,000
P/E 5,128,930
Orderly Liquidation 3,405,000
Distress Liquidation 2,329,340
Average 3,664,818

Therefore using the discounted cash flows, P/E ratios and the liquidation method, it seems that $3.66 million is a good price. What is even more important is that cash flows generated by the forecasted revenues supports fully paying off the Term Loan by paying off principal payment of 60,000 per year for the next five years while at the end of the 5th year Revolving line credit could be reduced to 0.4 million and Debt Ratio was reduced from 75% in 1994 to 44% in 1998. This also allows the Calaveras to assume more funding in the case of expansion and/or reduce the interest expenses while boosting the return on investment.

Calaveras creditworthiness
  1994 1995 1996 1997 1998
Current ratio 0.82 0.95 1.15 1.48 2.16
Quick ratio 0.16 0.16 0.17 0.16 0.15
CL/E 170.07% 139.87% 106.18% 79.97% 45.01%
TL/E 256.22% 182.37% 122.34% 79.97% 45.01%
Collect period 374 382 373 376 370
S/I 1.59 1.61 1.66 1.65 1.68
A/S 124.37% 122.55% 115.57% 112.46% 106.30%
AP/S 5.08% 6.21% 6.04% 6.07% 5.95%
ROA 8.53% 9.52% 10.99% 12.02% 13.82%
ROE 32.83% 29.88% 27.28% 23.87% 22.19%
ROS(net profit margin) 10.61% 11.67% 12.70% 13.52% 14.69%
asset turnover 80.41% 81.60% 86.53% 88.92% 94.08%
equity multiple 3.85 3.14 2.48 1.99 1.61

1. Character: good
Character is an examination of the owner/manager’s experience, business skills and personal and business credit history. Here the lender is determining the company or owner’s likelihood of keeping financial promises. The following are the reasons why I think CV’s character is good.
a. Credit history:
We find the past outstanding debt and Debt/ Total Asset and Debt/Equity ratios decreased.

1990 1991 1992 1993
Debt 166,254 217,290 95,410 78,853
Debt/Total Asset 2.21% 3.03% 1.51% 1.12%
Debt/Equity 2.26% 3.12% 1.53% 1.13%

Upper Median Lower
CL/Equity 8% 44% 102.7%
TL/Equity 28.8% 103.4% 186.4%
We find the outstanding debt and Debt/ Total Asset and CL/Equity and TL/Equity ratios decrease. Compared with the industry’s average, the CL/Equity in 1998 will be in Median and Debt/Equity in 1998 will be between upper quartile and median.
1994 1995 1996 1997 1998
Debt 3,568,316 3,432,734 3,029,585 2,517,990 1,770,078
Debt/Total Asset 71.92% 64.59% 55.02% 44.44% 31.03%
CL/Equity 170% 140% 106% 80% 45%
TL/Equity 256% 182% 122% 80% 45%

b. New application for credit:
Upon acquisition of the vineyard, Winston-Fendall will take over marketing of the company and will treat as its flagship. In addition to handling the marketing, Winston-Fendall will provide collection and will pay Calaveras any receivables left unpaid after 90 days. Management believed these requirements would relieve Calaveras of credit risk.
c. Management experience and success:
Calaveras market strategy to move from the bulk-wine sales into the premium-brand market has been successful largely due Dr. Lynna Martinez. The new market concentration is to implement cautious price increase and develop special-accounts segment to fully use wines of lesser quality. Upon acquisition of the vineyard, Winston-Fendall will take over marketing of the company and will treat as its flagship.

2. Capital: not good
Capital is the overall financial strength of your company based on sales and asset utilization. To examine how the company manages credit relationships and the value of its assets, lenders typically calculate key financial ratios for its business and compare them to the ratios of other companies of similar size in similar industries. This gives the lender a relative comparison of its business’s financial stability. The following are the reasons why I think CV’s Capital is not very good.
a. Liquidity:
1994 1995 1996 1997 1998
Current ratio 0.82 0.95 1.15 1.48 2.16
Quick ratio 0.16 0.16 0.17 0.16 0.15
Upper Median Lower
Current ratio 5.5 2.5 1.5
Quick ratio 1.2 0.4 0.2
Compared with the industry, its current ratio in 1994 is below the lower quartile but it increase and it . Its quick ratio is at the lower quartile. It indicates a higher risk and warning that the company may not be able to pay unexpected expenses or carry new debt.
b. efficiency:
1994 1995 1996 1997 1998
Days in AR 18.25 34.37 34.59 35.45 35.20
Days in Inventor 387.04 385.86 376.23 378.02 372.37
Days in AP 31.26 38.59 37.62 37.80 37.24
Collect period 374 382 373 376 370
Upper Median Lower
Collect period 29.2 51.3 69.2

Collection period is much higher than the industry’s lower quartile
3. Cash flow(Capacity): OK
Capacity refers to the company’s ability to generate sufficient cash flow from normal operations to meet future obligations
a. Profitability
1994 1995 1996 1997 1998
ROA 8.53% 9.52% 10.99% 12.02% 13.82%
ROE 32.83% 29.88% 27.28% 23.87% 22.19%
ROS(net profit margin) 10.61% 11.67% 12.70% 13.52% 14.69%
We find the ROA and ROE and ROS would continue increasing. And compared with the industry, all of them are in the upper quartile. It is very good signal.
b. EBITDA/Debt
1994 1995 1996 1997 1998
EBITDA/Debt 0.28 0.33 0.42 0.54 0.84
However we find the EBITDA/Debt ratios are less than one. It means the EBITDA can not cover the Debt. But it would the trend of increase and in 1998 is closed to 1.
4. Collateral: Good
Collateral is considered a secondary or even tertiary source of repayment for a loan. However, its importance to the structure of the loan should not be under estimated.
We know CV can sell Accounts Receivable 85% of face value and Inventory 75% of book value and Equipment 40% of book value in a forced liquidation.
1994 1995 1996 1997 1998
Liquidation 2,329,340 2,896,560 3,182,470 3,364,060 3,537,530
Compared with the industry’s liquidation (655,037), CV’s liquidation is much higher.
5. Condition: Good
Condition represents all the external factors—including the economy, the industry and government regulatory changes—that could impact the company
I think the condition in grape industry is nice due to the following reasons. Wine sales in supermarkets have grown 7.4% in 1992, while beer sales have grown only 2.2%, less than inflation. One of the explanations for the increase is noted by Standards & Poor's to be a broadcast by 60 minutes stating there is a relation between drinking wine and the lowering of the heart attack risk. Using the ‘C’s of Credit, we summarize Calaveras creditworthiness is ok, but we need to be aware of the capital.
After reviewing the cash flow statement and proforma income statement and balance sheet, it is our recommendation that Goldengate Capital should acquire Calaveras Vineyard. The ROA and ROE are lucrative. This is evident at the sensitivity analysis at no price growth. This shows that even without any price growth just adjusting for 2% inflation rate, the value of CV is $3,204,000 million. When adjusting even without inflation adjustment it still could be about million and still has the value $3,726,000.

Our recommendation is that Goldengate review Calaveras Vineyard financial health on a quarterly basis while setting up with few covenants to guide through the initial years. As you see in Quick Ratio and Current Ratio are lower than the lower quartile of the industry. We encourage Calaveras to streamline the fixed assets especially the non-vineyard land and the idle assets to improve the productivity of the operation. Covenants should be set forth to avoid obtaining further debt by putting a cap on Debt ratio of 55%. The equity level should be improved and we recommend that after paying off the Term Loan to carry out the revolving line of credit thus making efficient in WACC. And I think the CFO Calaveras Vineyards can use warrants which would be more attractive to the bank than other methods to Goldengate propose to the bank enhance the credit to avoid being turned down altogether. Because warrant gives the bank the right to purchase securities (usually equity) from the Calaveras Vineyards at a specific price within a certain time frame. Warrants are often included in a new debt issue as a "sweetener" to entice investors
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