Euroland Foods SA Case Analysis
I. Introduction
Euroland Foods Company was a publicly traded company since 1979. Theo Verdin founded the company in 1924 as a result in developing his dairy business. Euroland Foods Company saw itself as a multinational producer. The four products were high-quality ice cream, yogurt, bottled water, and fruit juices. Each product accounted for 60%, 20%, 10%, and 10% of the company’s revenue respectively. The company’s headquarters was in Brussels, Belgium. Since the day the company was founded, it has experienced steadily development.
II. Background of Firm
The board of directors of Euroland Foods Company had 12members. Three of them were the Verdin family, four of them were from the management, and the left five members came from outside. The combined Verdin family, the combined company executive, Venus Asset Management, and Banque du Bruges et des Pays Bas were the four biggest stockholders. Each had 20%, 10%, 12%, and 9% of the company’s shares outstanding respectively. Senior Management Committee was responsible for the capital budgeting and presenting it to the board of directors every year. Seven members, including five managing directors, one PDG, and one finance director, were on the committee.
III. Statement of Situation
Euroland Foods Company had two major problems comparing with its peers. One was the high debt-to-equity ratio, another one was the low price-to-earnings ratio. The debt-to-equity ratio was 125%, which made the Banque du Bruges, Euroland’s bank, could not keep silence. Banque du Bruges strongly pushed a debt reduction program to Euroland. No project could be financed if the leverage level was beyond the current debt-to-equity ratio.
The lower the price-to-earnings ratio, the lower the stock price was. In this case, the Euroland’s stock price was lower than average of peers. At the current ratio 14, Euroland’s market value was below its book value. Euroland Foods Company failed in the trying of new product introduction. Its sales had been stopped since 1998. The creditor, Banque du Bruges, was worrying about the Euroland’s ability to pay its debt back. The one of the biggest stockholder, Venus Asset Management, was worrying about cutting off the dividends.
IV. Constraints on Solution
Due to the high debt-to-equity ratio, the board of directors decided to limit capital spending to EUR 120 million. There were eleven projects on the table, and up to total EUR 316 million. There was estimated minimum acceptable IRR and maximum acceptable payback years. (Table 1)
V. Possible Solutions
In order to increase the sales, Euroland Company has to choose projects wisely under the EUR 120 million budget limitation, minimum IRR limitation, and maximum payback period limitation. Net present value, internal rate of return, and payback period are the main measures Euroland Company used to analyze each project. According to Exhibit 3, project 1 replacement and expansion of the truck fleet, project 2 a new plant, project 3 expansion of a plant, project 4 development and roll-out of snack foods, and project 5plant automation and conveyor systems are eliminated for the over maximum acceptable payback period.
The left projects are all considerable. The special project in this case is the effluent-water treatment at four plants. Because it belongs to the safety or environments category, there is no measurement yet. Euroland Company could see it as a future expenditure, and if Leyden was right, we can spend EUR 6 million today instead of EUR 15 million four year later. This project will save Euroland a lot in the future. (the saving amount equals to the net present value of EUR 15 million minus EUR 6 million) The project is going to be mandatory four year later.
VI. Recommended Solution
If I was on the board of directors, I would approve project 11, Acquisition of a leading schnapps brand and associated facilities, which is analyzed as project 10 on the Exhibit 3; project 7, Market expansion southward, which is analyzed as project 6 on the exhibit 3; and project 9, Development and introduction of new artificially sweetened yogurt and ice cream, which is analyzed as project 8 on the exhibit 3. The capital budget for the three projects are EUR 60 million, EUR 30 million, and EUR 27 million respectively, which give us the total EUR 117 million. We still have EUR 3 million can use, and I will propose to use it in the effluent-water treatment at four plants project.
Although the project estimated cost is EUR 6 million, companies barely pay such a huge amount in one day. We can negotiate with the seller to come up a payment plan; in addition we need to make a deal which the first payment is not greater than EUR 3 million. Project 7 market expansions southward and project 8 market expansions eastward are similar, but I decided to approve project market expansions southward instead. Besides the higher net present value and internal of rate of return, the purchasing power is stronger and competition is less intense.
