Question 1: Why would Lion do a deal with Blackstone? Why would Blackstone do one with Lion? What does each risk? What can each gain?
Lion and Blackstone are joining together to leverage industry expertise and financing power.
Lion has a strong understanding of consumer-focused brands and using proprietary deals to turn an existing medium-sized player into a larger busines by using it as a platform for acquisitions. Examples of such deals include Weetabix and Jimmy Choo.
Blackstone has the power to bring very large financing into a deal, capable of investing up to $1 billion in a company, while also having an international presence, bringing synergies across borders.
However, this partnership also brings in a lagging pace in closing deals and public visibility and scrutiny.
Lion typically moves quickly on deals, and already has decided ahead of Blackstone on timing and price. Blackstone, however, still needs to conduct due diligence and have the deal reviewed by the investment committee. Moreover, Lion’s partnership with Blackstone brings it into the Financial Times’ front page and pressures it further to perform.
Question 2: Is Orangina a good deal? It seems that Lion and Blackstone are paying a pretty full price; what angle might the Blackstone-Lion consortium have found to justify it?
Yes, Orangina is a good deal, for its brand power, its resilience, its financing-friendly nature, and its operating and distribution network in France and Spain.
Orangina has iconic brands that are well known in France and Spain, and it commands a strong presence in its niche without intruding on the soft drink space of brands such as Coca Cola.
It can be levered easily, as it is in a defensive sector, has strong cash flows, and with tangible assets that can be claimed.
Despite being undermanaged, it continued to perform well in bad times, indicating that it has a working operating infrastructure and does not depend on a personality to guide the business.
Moreover, the team has a good understanding and fit with the company. Javier Ferrán of Lion, a Spanish national who speaks French, is well suited to understand a company with operations concentrated in Spain and France, and is also ideal for his past experience in the soft drinks sector.
Question 3: Based on the information provided in the case, how would you value
We will NOT value the company based on any discount cash flow model, including LBO valuation or APV model, as we are dealing with a private company, whose beta and future capital structure are unfeasible to estimate. Private companies have no estimable beta, since they are not publicly traded and are illiquid – their value does not move in any direction with respect to the market. There are also no strong barriers to entry in a soft drink market, so terminal growth also can’t be easily estimated.
However, we can first attempt a simple Venture Capital valuation model to get a quick ballpark for our valuation.
We find that a reasonable equity valuation for a private equity buyer lies between $900 million and $1.9 billion.
This implies an equity valuation between 760 million euros and 1.6 billion euros.
With plans to place 900 million euros of debt, Orangina can be priced at 1.7 billion euros to 2.5 billion euros. We can assume that the 1.85 billion euro valuation of Blackstone and Lion is quite reasonable.
Question 4: What is the best deal approach?
The team needs to make a bid that will make them one of the trusted and approved buyer candidates immediately, even with the risk of overpaying.
They need to become one of the groups with access to the Orangina management team and their advisors, and begin asking the questions they need answered on the company – such as the implementation of a stable management team in a time of a high management turnover, the ability to grow in the food channel or obtain higher bidding power in the out of food channel, and a turnaround strategy for France.
Given that Blackstone and Lion have a special edge that Lion’s team understands the sector, the business, and the geography well, they should be willing to pay up front in the early auctions, so that they can eliminate strategic buyers such as Pepsi, while also discouraging other financial buyers who don’t have the same level of understanding, edge, or angle on this sector.
Once the likelihood of a deal is strong enough, Blackstone and Lion can begin negotiating a definitive merger agreement with prices and terms that are a bit more suitable and fair for it. However, the current priority should be to get into the buy and cut others out as soon as possible.