Mondavi Case Instructions

1/28/2010

BUS 35201 Spring 2010 Week 3 Assignment – Mondavi Case Questions for the written assignment You have a handout describing a “grape harvest” plan under which Mondavi would complete investments planned for FY1994-97, then run the company strictly to maximize cash flow thereafter. A sxet of projections were included in the handout and are also available in a spreadsheet on Chalk.1 According to Mondavi’s treasury staff, the company’s estimated equity value under the grape harvest plan was ~$5 per share. The family had expected a higher value – perhaps harvesting grapes was the wrong strategy. As an alternative to the grape harvest plan, maybe the company should instead stick with what it had been doing from the beginning and continue to invest in additional capacity, acquisitions & other growth opportunities in the future. Come up with a methodology to analyze and value such a growth alternative. According to your analysis, is the company’s expected value under a growth alternative higher, the same, or actually lower than the value of the grape harvest plan? Why? Use comparable multiples to estimate a value per share for Mondavi as a publicly-traded company. Lets assume that Goldman Sachs [the company’s banker] came up with the same value you did. But suppose Goldman insisted that to sell stock in an IPO, the company would have to give investors a 15% discount to that value! Why is a discount jnecessary? Give me more than one reason. Who if anyone can take advantage of the discount? Would you expect Mondavi to agree to the discount? Food for thought Think about the following questions in preparation for class discussion. Why did Robert Mondavi want to take this company public? Why not simply borrow additional funds to meet capital requirements, at least for a few more years? If you were Mondavi’s account officer at Bank of America at the time, would you be pushing the bank’s commitments committee to extend more credit to the company? If BofA decided to cut Mondavi off, is there anywhere else the company could go to borrow additional funds? Should prospective investors in the IPO care whether additional bank financing would have been available to the company? Should investors care what Mondavi’s reasons for going public were? Give these questions some thought in advance, but don’t answer them as part of the written assignment.

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Except for cash flow estimates for 1998 and beyond, the projections in the handout and on Chalk are the same as projections in the Goldman analyst report in your CoursePack.

Information on Comparables Canandaigua is a producer and marketer of wines, imported beer and distilled spirits. The company is among the largest suppliers of table, dessert, kosher, and sparkling wines, most of which are sold at relatively low price points. The company has grown largely through acquisition. Chalone is a small supplier of high-end Chardonnay, Pinot Noir, Cabernet Sauvignon and other varietal wines, primarily from vineyards in California, all of which are sold at relatively high price points. Les Domaines Barons de Rothschild is a large shareholder of Chalone, and public shareholders with a minimum number of shares are given a limited opportunity every year to buy some Chateau Lafite-Rothschild wine at a discount. Both companies trade publicly. Following is certain summary information for 1993.

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