Should JBT buy Key Technologies’ sorter division for $50 Million? To answer this question, our team conducted an examination of the value the division will provide to both your company and your customers, and the effects the purchase will have on your company’s financials and yearly marketing goals. After analyzing these factors, we recommend that JBT should move forward with this purchase.
Value Added to Customers. The proposed acquisition of the sorting division provides JBT customers with an enhanced portfolio of products they can purchase and have serviced from a single source. Also, food processors with employee wage rates greater than $4,081 per annum benefit from purchasing a sorter by the efficiencies gained in reducing manpower on the sorting line. Looking at the largest market – the United States – a food-processing firm will save $338K per year when it shifts its sorting line from manual to automated. This means that the labor savings can offset the cost of the machine in less than two years.
Value Added to Company. The proposed acquisition will provide JBT with a solution for its declining operating profits (from 10.7% to 7.8% YOY). A main cause for this was an unfavorable mix of aftermarket products sold compared to the prior year. By introducing a high-quality, high-margin product (50%) to their product mix; JBT should see increases in their operating profits, which will positively impact their bottom line. In addition, profits from servicing the equipment will provide an additional consistent and profitable revenue stream over the life of the product.
Acquiring Key’s Sorter Division will also provide the JBT sales force with an exciting new exclusive product. The optical sorter has a concrete business case behind it as it provides overhead reduction savings, gained operational efficiencies in the engineering department, and a better value proposition for JBT as a wider range food processor products and services provider.
Effects on Company Financials. JBT can finance its acquisition of Key Technology’s sorting division through a payment combination of $5M from cash reserve and $45M from long-term debt. With a 6.45% weighted average cost of capital, the debt will translate to a yearly interest expense of about $3M for 5 years.
Effects on Yearly Marketing Goal. The $62M total acquisition cost, including interest payments, will increase the yearly quota of your company’s sales department. Nevertheless, the sorting equipment’s gross margin of 50% translates to a manageable required market penetration of 1% per year, or 42 machines per year, to break even. We believe this marketing goal is attainable for JBT.
Based on the analysis of the case, we recommend that JBT should go ahead with the purchase of Key’s sorter business for $50M because it will:
● provide JBT with an enhanced product portfolio, increase operational efficiencies in the engineering department, and add a better value proposition for JBT as a wider range food processor provider overall ● positively impact JBT’s bottom line by providing a solution for declining operating profits by introducing a high-quality, high-margin product (50%) to the product mix ● add an additional consistent and profitable revenue stream over the life of the product through profits from servicing the equipment ● help JBT enter niche international markets where employee wage rates are greater than $4,081 (per annum) ● provide the JBT sales force with an exciting opportunity of selling an innovative, exclusive and patented technology ● provide labor cost-reduction value to its customers; especially those who are operating with high wage rates ● provide more value to JBT’s customers because of enhanced range of products they can purchase and have serviced from a single source
RISKS AND ASSUMPTIONS
Risk. The overall risk associated with the purchase of Key Technologies sorting division is low. A breakeven estimate of 5.6% total market penetration of establishments in United States and Canada within seven years provides JBT with an attainable target for its sales team; and also assures your investors that financial loss from this acquisition is very slim. The untapped demand of international markets only helps the case for the acquisition of the sorting division. In addition, the equipment’s high technology barrier provides the company with a sustainable competitive advantage over the competitors for the next 7 years.
Key Assumptions. The recommendation is postulated on the following assumptions:
● an automated sorting machine replaces 20 manual sorters and will require two machine operators to operate ● both manual and automated sorting systems produce the same quality of service ● annual average salary for US manual sorters is $23,608 ● annual average salary for US machine operators is $30,000 ● number of food processing companies in the US and Canada is 5,511 ● market demand for food processors in the US and Canada will not decline in the next seven years ● Interest rate for long-term debt is constant at 6.45% for five years ● Service accounts for 1/8th of total revenue and provides a gross margin of 23-25%
Customer Value. Customer Savings were based on US companies using 20 employees for manual sorting. Salaries for sorting were obtained from the International Labor Organization. Two machine technicians will be required to operate the sorter. Salary information was obtained from Glassdoor.com using a ConAgra machine operator. Estimations were made for electricity usage, and servicing costs were estimated based on current JBT FoodTech service revenue rates of 13%.
From this computer annual savings, payback period is computed as: Years to Payback = Initial Cost/ Annual Savings = $500,000/$337,971 = 1.47 years
Cost of Capital. JBT’s cost of capital to fund the acquisition was estimated using their current Weighted Average Cost of Capital (WACC). The amount of debt, rates on the debt, and stock equity were pulled from the JBT 2001 10-K. The risk-free rate (Rf) uses the 10-year Treasury Bond. The JBT stock Beta (Bs) was computed by Yahoo Finance. The equity risk premium (ERP) was estimated historical spreads between market rates and risk-free rates. JBT bond weighted average was 5.87%, the rate on JBT stock was computed at 7.72%. The WACC is 6.45%.
Discounted Cash Flows. Future cash flows were evaluated at their present values. Financing for the acquisition was estimated at $5 million cash and $45 million at the current JBT WACC. The 5 year loan period is consistent with current JBT loans. Price inflation was estimated to be 2%. The discount rate was estimated at 9%. Profits per unit sold include $250,000 profit on the machine, and an additional $31,250 for servicing contracts. Payback within 7 years requires approximately 41.5 units to be sold per year. [pic] Market Share. The required market share to break even in 7 years using the calculated 41.5 units a year is listed below. Both the world market and both US and Canada market are listed. Establishments using manual labor for sorting were approximated using 75% based on the given information that “most” companies use manual labor. Initial sales in the US and Canada focused on establishments using manual labor can shift to both worldwide distribution and to companies looking to replace aging machinery.