A Financial Analysis of New Century Coffee's Potential Acquisition of Portable Coffee Express

Background on New Century Coffee and Portable Coffee Express

New Century Coffee (NCC) Company is a 124-store coffee retailer headquartered in Stockton and operating throughout 6 western states. Its stores are known for their stylish and artistic atmosphere, quick and friendly service, and social consciousness. One glaring, but intentional, omission from each location is a drive-through service channel. The company’s model is to establish locations that serve as a gathering place for customers, as opposed to more traditional quick-service models that focus on volume and efficiency.

Although NCC does not want to alter its traditional storefront appeal (nor does it want the expense of adding drive-throughs) it does want to add additional revenue streams by reaching new customers and servicing existing customers more frequently. To do this, NCC is considering acquisition options to diversify its service channel. One opportunity that is under consideration was initiated by Portable Coffee Express CEO Marcy Chapman. 

Ms. Chapman founded and has grown Portable, a privately held company, into a flourishing 358 location drive-through and walk-up coffee stand business. Portable has a strong presence in NCC’s three largest states (by location), but no presence in the other three states NCC operates in. However, Portable has many locations in large cities across the country, including New York, Chicago, Boston, Washington D.C. and Philadelphia.

To determine the viability of an acquisition of Portable Coffee Express by New Century Coffee Company, Ms. Chapman has provided recent financials for her company to NCC CFO Marisa Garcia. Mrs. Garcia has run cash flow forecasts for the consolidated company and estimated incremental cash inflows after taxes from the acquisition over the next 30 years (the relevant time horizon for the analysis). The pertinent financial data is included in the tables below.

Complete the questions below in one original Excel file. Show all calculations and formulas for solutions to questions 1 and 3. For other questions that require text-based responses, create a text box in Excel for each (Insert-Text-Text Box). Type-written responses should be at least 1-2 fully developed paragraphs for full credit. This assignment is to be completed individually with no help from others.

1) Based on the estimated future incremental cash flows, what is the highest price (total amount, not per share) NCC should offer Portable for a cash acquisition? Assume a cost of capital of 12%. 

2) If NCC planned to finance the acquisition cost from question #1 mostly with bonds, how might the issuance of each type of bond below affect the firm? Include in your answer the characteristics and pros and cons of each bond type.

A. Straight bonds

B. Convertible bonds

C. Bonds with stock warrants attached

3) A. What is the ratio of exchange in a stock swap acquisition if NCC pays $19 per share for Portable? Explain. (Reference Example 18.5 on page 779 of your textbook for help.)

B. What effect will this stock swap have on the EPS of the original shareholders of each company? Explain. (Reference Example 18.6 on page 780 of your textbook for help, particularly Table 18.5.)

4) What alternative merger proposals could NCC make to Portable shareholders?

5) If Portable were a foreign-based company, what impact would this have on the analysis? Describe added costs, regulations, benefits, international cash flow factors and risks (economical, political, currency).

6) A. The case specifically mentions diversifying revenue streams as a merger/acquisition motive. Detail two other merger benefits (motives) that could potentially be applicable in this case.

B. Detail two impediments that, if existed, could potentially threaten the short- or long-term success of the acquisition.

7) Based solely on the financial analysis, should NCC move forward with the acquisition? Why?