Qi. @. Qs. qv. Qs. MnA3*,9°, Deal & PRD Exam epi & Back SM (Bat-6701) AUTUMN END SEMESTER EXAMINATION-2014 3° Sem. / 9" Sem./ Dual Degree / Ph.D. STRATEGIC MANAGEMENT BM - 6701 [2013-15 Admitted bateh | Fall Marks: 40 Time: 2 Hours Answer any: cestion No, 1 which is compulsory RT pein te ght eed marge nose fel ar Candidates ore fepared See Answer any FOUR questions from the finance position given in the exhibits. 4) Find out the extent of accounting rate of return for Cooley Distillery for 2010, and comment on the relative position as compared to the industry postion. Is it atrue measure of success? ») Find out the extent of economic value added for Cooley Distillery for 2010, and comment oon the relative position as compared to the industry position. The Beta Coefficient for Cooley has been 1.28. * ©) Has Cooley Distillery exhibitéd “Cost Advantage”? (Your answer should capture the associated measure (s) of Cooley Distillery and Industry. d) Has Cooley Distillery exhibited “Differentiation Advantage"? (Your answer should capture the associated measure (s) of Cooley Distillery and Industry), ©), What has been the mest important driver of value for Cooley Distillery? Justify your answer with the associated measures. What is the structure of the Irish Whiskey segment of the global spirits industry? What does it suggest about the opportunities and threats and key success factors? In assessing Cooley's position at the end period given in the case study, what are its particular strengths, weaknesses, and distinctive competencies? Should Cooley partner with « major spirits company through joint venture? What are the pros and cons? Should Cooley be bought out by a rival multinational company? What are the pros and Cons? Should Teeling take the firm private through Management Buyout (MBO)? What are the pros and cons? Should Cooley simply exit the branded whiskey business and set up as a producer for other companies that wished to field an entry in the segment? What are the pros and cons? 1e with its current strategy of selling its own branded products, and support whatever marketing investments it could manage? What are the pros and Should Cooley cont those products cons? KIIT-()201480M/Aueur End Sem. Examination 2014 w 25] 25] 2.5] [25] 25) [6] (6) (6] [6] (6) {6] {9}Cooley Distillery: The Independent Spirit of Ireland ‘What you need above everything else is the idea. It must be your vision and you must believe in it absolutely. Don't go into something that you don't believe in, because you'te going to have to drag this thing through the mire. John Teeling, Founder and Chairman of Cooley Distillery John Teeling believed absolutely in his vision for Cooley Distillery. It was simple enough: Use {traditional methods, native ingredients, and Ireland's perfect climate to distill and mature superb single ‘malt and blended Irish whiskeys. Brand them under new labels inspired by Irish history, or using historic old fabels acquired from long-gone distillers. Indeed, seated in his modest office in Dublin in September 2011, Teeling was looking forward to the following year when Cooley would celebrate its twenty-fifth anniversary as the only independent Irish-owned distillery on the island of Ireland. Indeed, many observers were surprised that Cooley had survived this long; more than once during its lifetime Cooley had come close enough to the brink. Teeling, however, had litte leisure to rest on his laurels. Even as he reflected on the past and prepared to celebrate the firm's achievements, his attention was focused on the future. Cooley's most stubbom challenge remained the struggle to develop a branded whiskey business in néw: markets, in an environment dominated by the distributive muscle and outsize promotional budgets of ‘the huge multinational spirits companies. As a small niche player in the rapidly growing premium Irish whiskey segment, Cooley had always struggled to get its brands on the shelves, Now, as it strove to penetrate the most lucrative consumer markets like the ULS., the challenge of marketing. and distribution took on added importance, even as it became more difficult. Even as a niche player, Cooley had plenty of room for growth; but. what would be, impossible without improved access to distribution channels. Without it, Cooley's growth would be stuhted, and its strategy of developing and marketing premium Irish whiskey brands would be in serious jeopardy. With 2010 sales of € 15,9 million, Cooley was dwarfed by the major players and had little funding available for the sorts of promotional and brand-building investments that were required. Although Cooley had survived its first quarter century, some analysts believed that it would never achiove globel reach without a joint venture or strategic alliance with a multinational player. There ‘was also the possibility that Cooley, a non-listed public limited company, could itself be acquired by a larger player. Ofcourse, Teeling, as the Chairman, had the interests of all 290 sharcholders to consider, and he knew almost all of them personally. They had been enormously patient over tife years as all profits were reinvested in the b Pooley had never paid a dividend. Was it time for these loyal shareholders to be rewarded in a tangible way? Selling Cooley to a larger global player could accomplish thet. But having weathered so many storms, tured @ comer with regard to profitability, and built an enviable reputation for quality, was it beiter to continue to go it alone? And finally, how hard would it be for Teeling to sell an enterprise that he and his team had built from seratch? He had only stepped down as Executive Chairman two years prior when his son Jack assumed the role of Managing Director; he was now “only” the Chairman. In any event, 2012 was shaping up as not only a year of celebration, but also a year of decisio |, End Semester Paper Page 2JOHN TEELING A native of Dublin, John Tecling attended university in the United States during the late 1960s and early 19703, eaming an MBA at the Wharton School and a DBA at the Harvard Business School. While at Harvard, he wrote a thesis on the decline and fall of the Irish whiskey industry. When he returned to Ireland to teach management at University College Dublin, he realized that there were significant opportunities in Irish whiskey, and believed that he could do better than those already ‘competing in the industry. Academic life could not hold him. After a few years, he tured his hand to more entrepreneurial and lucrative ventures. He began investing in the siock market, taking equity stakes (with partners) in a variety of Irish businesses. In fact he was considered, rather pejoratively, an “asset stripper,” or more delicately a "restructuring" specialist, an investor who bought a firm with undervalued assets to split into pieces and sell individually for a higher price. mid-1980s, having made a considerable amount of money, he left the stock market and began investing in mineral exploration in Ireland, Africa, and South America. But even as he expanded his ‘exploration and mining activities, a new opportunity presented itselfthe chance to enter the consummately Irish business of distilling whiskey. It was a business with which this serial entrepreneur would remain engaged for decades. IRISH WHISKEY Irish whiskey was distinctive. For ohe thing, unlike Scotch whisky, it was spelled with an "e”. For another, it was required by Irish law to be distilled and matured for at least three years in wooden ‘easks on the island of Ireland. At one time, Irish whiskey represented a highly successful export industry; in the middle of the nineteenth century Irish whiskey was the world’s alcoholic sprit of choice. This was no surprise, since whiskey was perfected by the Celts who even gave the product its ‘name; in Irish "uisce Beatha” (sounds like ishka baha') meant ‘water of life,” giving rise to the term whiskey.” ‘The production process required considerable craft. Malt whiskies (rom malted barley) were istlled in pot tills (large, copper Kettles with long necks); these represented a traditional technology that was hundreds of years old. Grain whiskeys (from com) were generally distilled in modern column stills, in a continuous distillation process. Irish whiskies were sold as single malt whiskies (using only malted barley), single grain whiskies (using only com), variants of "peated" malts or grain whiskies (Gried with Irish "peat" which imparted a smoky taste), or blended whiskies that contained various proportions of malt and grain whiskies, Tecling needed little prompting to extol the unique qualities of Irish Whiskey: Whiskey is Irish. It really cannot be made to the same quality anywhere else in the world, Itis the Irish climate, Irish water is good, as i the barley, but is the climate that gives Irish whiskey the unique mellow flavor. The oak barrels breathe in the gentle climate. Too hot, like the U.S. in summer, and the oak expands allowing quicker and harsher maturation. Too cold, like Canada and Scotland, and the oak closes up reducing maturation. A moist climate brushed by temperate winds from the Gulf Stream coming in from the Atlantic Ocean is perfect. a ne 'BM6701-2004, End Semester Paper Page 3Irish whiskey distillers aged their products in oak casks. Over the maturation period the whiskey gradually took on the character of the wood in which it was stored, affecting its taste, fragrance, and colour. Irish whiskey had a smoother and sweeter taste than other whiskies. ‘THE IRISH WHISKEY INDUSTRY The liquor splattered over Tim. ‘Now Tim revives, see how he rises, ‘Timothy risin’ from the bed, Sayin’ "Whirl your whiskey around like blazes, D’anam don diabhal (your sou! to the devil] do ye think I'm dead?” Lyrics from "Finnegan's Wake"-Traditional music hall song, In 1779 Ireland boasted some 1,200 distilleries, and through the mid-nineteenth century Irish whiskey dominated the international market for spirits, accounting for nearly 60 percent of the world market. But the industry suffered during the twentieth century, and by the early 1980s there were only two distilleries operating in Ireland. The two later merged into the monopolistic Irish Distillers Group, whose brands and distilleries were subsequently sold to multinational giants Diageo and Pernod Ricard. At its lowest point in the mid-twentieth century, Irish whiskey sales were only 2 percent of Scotch whiskey sales and seemed to be in terminal decline. . But Pernod Ricard's arrival on the scene in 1988 sparked a revival, and by the end of 2011 Irish whisky was enjoying annual growth of around 11.5 percent the highest in the whiskey category. This double-digit growth was forecast to continue. Yet irish whiskey remained a mere fraction of the global whiskey market, which totaled around 145 million cases in 2010, with sales of $68.8 billion (approximately 26.5 percent of the total global spirits market), (See Table 1.) ‘Table 1: Market Share by Category of Whiskey Whiskey (origin) Percent of Market Millions of Cases ‘Scotch 2 90 21 30 14 20 3 3 ‘The reasons for this resurgence were unclear, but mirrored the movements of younger consumers towards "brown spirits." One factor was the immense marketing muscle of Diageo and Pemod Ricard, and the positive impact of their concerted marketing efforts on behalf of their marquee brands, Bushmills and Jameson. Worldwide sales of Jrish whiskey were projected to increase to 8,000,000 cases by 2015. (Exhibit 2 provides forecasted global sales of trish whiskey, by brand.) This growth was expected to be most pronounced in the important U.S. market, where Jrish whiskey sales had grown at a torrid 18 percont annually over 2005-2010. As Tecling liked to say. "the trend is your friend” and the trend towards brown spirits was the rising tide that helped to lift all Irish whiskey brands. Teeling thought it would continue, "The tide is dragging us along... and brown spirits look like they're going to have at least another 10-20 years of growth.’ (Sec Exhibit 3 for U.S. sales trends.) A SHORT HISTORY OF COOLEY DISTILLERY ner BM6701-2004, End Semester Paper Page 4In 1987, Teeling opened a newspaper to find a state-owned distillery in Dundalk, County Louth for sale; the business, which had been put into liquidation, distilled alcohol from potatoes and sold it for use in "white alcohol” drinks like gin and vodka. Tecling bought the distillery, sight unseen, for the equivalent of €134,600 and his assurance that he would attempt to “rescue and resuscitate it"* He was confident that if his plans to produce Irish whiskey failed to materialize, he'd still be able to profitably dispose of the assets “The barriers to entry were significant. Equipment was expensive, and it would take atleast three years to produce anything saleable (in practice most whiskey was matured for at least seven to eight years). Even more, the Irish whiskey industry had been in decline for many years. Prospects for short-term cash flow were poor. Why would banks or investors provide financing for a project with a long time horizon in a declining industry? But Teeling saw opportunity, given that all Irish whiskey was produced and sold by a monopoly whose marketing was uninspired at best. "The logic was where ‘there's a monopoly, there's an opportunity” said Tecling,’ He was convinced he could compete and win, Teeling was not only audacious, but resourceful. Over a few years, he increased the inital investment in the firm t0 €6.6 million by bringing in investors who brought additional facilities and brand names to Cooley. These included the long-shuttered Locke's Distillery in Kilbeggan, County Westmeath, which claimed to be the oldest licensed distillery in the world, as well as the assets of the old A.A, Watt distillery in County Derry. Cooley began distilling in 1989. Teeling believed that he could last eight to ten years on borrowed ‘money while he produced an inventory of whiskey. The plan was for Cooley to sell its own branded products exclusively. Unfortunately, Cooley ran out of money before the whiskey was resdy for sale and by 1991 the company was in trouble. On the brink of bankruptcy, it was bailed out by a U.S. spirits company, Heaven Hill, which advanced them funds by effectively taking on Cooley's distribution in the U.S. To generate cash flow, Cooley added retail private label production for major UK and Trish supermarket chains; this endured as an important part of its business. Cooley also sold bulk whiskey, which generated significant revenues in the early 2000s. Finally, it produced whiskey for companies without distilling facilities in Ireland that marketed their own branded Irish whiskies. In more recent times, Cooley began to refocus its efforts in support of its own (higher margin) branded whiskey products. It took Cooley almost a decade to achieve its first profit, a tiny €90,000 in 1996. Its 2010 sales and profits totaled €13.9 million and €2.3 million respectively, and 2011 results were expected to show significant gains. (See Exhibit 4-6 for Cooley's financial statements.) Cooley sold in over forty countries, but 80 percent of its total sales (including branded, retail private label, other labels and bulk) were concentrated in five primary markets: the U.S. 21.5 percent), the UK (20 percent, Ireland (17 percent), France (12.5 percent), and Germany (12 percent). Fifty percent of Cooley's sales were from its own branded products, and the largest market for branded sales was Germany. Overall, the U.S. remained Cooley's most attractive market; Cooley's sales there doubled from 2009 to 2010. COMPETITORS: 'BM6701-2004, End Semester Paper Page SCooley had many competitors. As a producer of Irish whiskey (exclusively) it competed with other Irish whiskey distillers/marketers. It also competed at a category level with distillers of other types of whisky (Scotch, American, and Canadian primarily), from which some of the Irish whiskey category's gains were coming. Most broadly, Cooley competed with distillers of other forms of liquor, the so- called "white spirits” like vodka, gin, and tequila, not to mention beer and wine. (See Exhibits 7 and 8 for selected competitive data.) Irish Whiskey Distillers and Marketers Diageo ple Diageo ple, headquartered in London, was the largest spirits business in the world, with sales of $15.9 billion and profits of $3 billion in 2010, Its brand portfolio included many category leaders, including Crown Royal (Canadian Whisky), Johnnie Walker (Scotch), Smimoff (vodka), Bailey's Irish Cream Giquor), Jose Cuervo (tequila), and Tanqueray (gin). Its major entry in the Irish whiskey category was Bushmills, which ran third to Jameson and Tullamore Dew in global sales, and was distilled at the Bushmills Distillery in Norther Ireland. It had purchased Bushmills from Pernod Ricard in 2005. (Pemod had acquired both Bushmills and Jameson with its purchase of the Irish Distillers Group not long before.) Bushmills sold an estimated $951 million in 2010, but still ranked only third in global sales of Irish whiskey, with 10 percent of the éverall market. Diagco's total firm-wide marketing expense in 2010 was $2.9 billion. Pernod Ricard Group . a Pernod Ricard, a French multinational giant, had sales of $11 billion and profits of $1.6 billion in 2010. Its wide portfolio included Absolut (vodka), Chivas Regal (Scotch), Beefeater (gin), and Kahlua (Ciquor). In 2010, its Jameson brand claimed 61 percent of the global market for Irish whiskey. Pernod ‘was reportedly supporting Jameson in the U.S. with a promotional budget of approximately $40 ion annually (out of ial averising and promotion budge! of $21 billion” Pernod’ efforts er responsible for developing and reinvigorating the eae Ish whisky category. Said Texing They really revolutionized it-{with a] good product, excelleit packaging and good marketing." sas6201, Pood was well ino the grovces Of dosing the capecky of ts Silky fo Midas Country Cork, where Jameson was distilled, bottled, and matured. The investment was estimated to be in the neighbourhood of €100 million.” Willian Grant & Sons, Ltd. Willian Grant & Sons was the third largest distiller of Scotch whisky in the world. A family-owned distiller since its founding in 1887, Grant had only recently entered the Irish whiskey category with the purchase of Tullamore Dew and other brands from C&C Group for a total of €300 million. Tullamore Dew was the second largest Irish whiskey brand in the world. i Grant, however, did not have its own distillery in Ireland, and thus by law could not produce Irish whiskey, Instead, it was sourcing its whiskey from Diageo's Midleton distillery (where Jameson was distilled). Given the positive growth prospects for Tullamore Dew, there was a fair amount of certainty that Grant would either build its own distillery, or alternatively, seek an arrangement with, or buy out, Cooley. It was common knowledge that Grant had been involved in talks with Cooley earlier in 2011. In order to meet expected growth in sales, Grant needed to assure the availability of the necessary distilling capacity Sidney Frank Importing, Inc. a etre ne enemas BM6701-2004, End Semester Paper Page 6Privately held with sales of $32.1 million in 2010, Sidney Frank imported and distributed a range of irits in the U.S., ineluding well-known brands like Jagermeister and Barenjager Honey Liqueur. Its biggest coup was its creation of Grey Goose vodka with French distiller H. Mounier, an development of the brand as a premium brand in the U.S. It sold the rights to Bacardi in 2004 for $2 billion. Sidney Frank sold Michael Collins Irish whiskey in the U.S., a brand it developed with, and currently sourced from, Cooley Distillery. Of course, since it did not produce its own whiskey, surety ‘of supply was an ongoing risk. Selected Global Spirits Firms (with no presence in Irish whiskey category) Many large spirits companies with a global presence category. not yet have an entry in the Irish whiskey Beam, Inc. Based in Kentucky, Beam Inc. was until October 2011 a part of Fortune Brands, a conglomerate with @ varied portfolio of businesses including golf balls, home security products, and spirits. Beam Inc., ccame into existence with its demerger from Fortune Brands and by late 2011 was focused exclusively ‘on its spirits businesses. Beam was best known for its bourbons (Jim Beam, Maker's Mark, and Old Grand-Dad), Canadian Club whisky, Teacher's Scotch whisky, and other well-known brands. Its bourbons (basically an American whisky) were gfowing rapidly. Industry (global) sales of bourbon ‘were estimated at $3.8 billion in 2011. Although one of the largest spirits companies in the world, with (restated) sales of $2.1. billion in 2010 (and preliminary 2011 sales of $2.3 billion), and even as it sought to grow by acquisition, Beam itself was widely rumored to be a takeover target. Constellation Brands Constellation Brands’ strength was in its wine; it was the largest producer in the world and boasted such brands as Robert Mondavi, Ravenswood, Inniskillin and Jackson-Troggs. In addition it had beet brands and several spirits brands iricluding Black Velvet Canadian Whisky and Svedka Vodka, With sales of $3.3 billion in 2010, it had expanded through a steady process of acquisitions throughout the 1990s and the first half of the 2000s. In more recent years it had divested a number of businesses. After losing money in 2008 and 2009, it returned to profitability in 2010. Brown Forman Based in Louisville, Kentucky, Brown Forman, with 2010 sales of $2.6 billion and net income of $572 nillion, marketed its 25 wine and spirits brands in 135 countries. lis primary brands were Jack Daniels (the biggest selfing American whiskey in the world), Finlandia, and Southern Comfort, as well as wine brands like Sonoma-Cutrer Korbel. The firm was stil controlled by its founders, the Brown family. Remy Cointreau Group . Remy was best-known for its Remy Martin cognac, but also boasted a portfolio of premium spirits and liquors including Cointreau, and Mount Gay rum, and held distributing agreements for Piper- Heidsieck champagnes and several premium Scotch and vodka brands. It was controlled by the Heriard Dubreuil family and had 2010 sales of $1.3 billion and net income of $97 million. Bacardi Ltd. 'BMS701-2004, End Semester Paper Page?Still controlled by descendants of the founder Facundo Bacardi y Masso, privately held and Bermuda- headquartered Bacardi was not required to file financial reports with the SEC. It last reported sales of $6.3 billion in 2007. It sold over 20 million cases of its flagship rum product annually, but also sold ‘more than 200 other brands in over 100 countries including Bombay Sapphire gin, Martini vermouth, Dewar's Scotch whisky, Grey Goose vodka, and many other brands of liquor, cognac, brandy, and sparkling wine, It maintained twenty-four production locations around the world, Davide Campari-Milano S.p.A. With annual sales of $1.5 billion and net income of $208 million, Campari, based in Milan, Italy, marketed mote than forth brands around the world. It was best known for its bittersweet Campari liqueur, and also distributed Glenfiddich Scotch, Jagermeister, and Ouzo. It had been growing rapidly vvia acquisition in recent years, COOLEY'S PRODUCT LINE AND PRODUCTION PROCESS. Although Cooley had originally distilled two styles of Irish whiskey that it believed to be more in keeping with modem tastes, a single malt and a premium blend (branded as Tyrconnel Pure Pot Still Single Malt and Kilbeggan Premium Blend, respectively), it had by 2011 expanded its product offerings to four primary categories: single malts, single grains, blended whiskies, and peated single ‘malts. This was in keeping with its'mission to reintroduce old styles of trish whiskey; such rare and traitional styles (called "expressions") remained a hallmark of Cogley Distillery. {n the process, Cooley had won almost every award conceivable for a distiller. Most conspicuously, it. won the European Distiller of the Year awarded annually by the International Wine and Spitits Council (IWSC) for an unheard of fur years in a row from 2008 through 201 1. It also won the World Distiller ofthe year award in 2008. Cooley's strategy in 2011 focused on developing sales of its higher margin branded products, which represented 50 percent ofits sales revenue. Despite this, contthued production for other Irish whiskey sellers (like Sydney Frank) for retail private label brands, and for bulk sales was necessary to provide needed revenue, Cooley sold its branded products in four primary product categories: Single-Maits Tyroconnell represented the first of Cooley's brands, a single malt whiskey distilled in pot stills and aged from eight to eighteen years, This old and distinguished brand, with a heritage reaching, back nearly 200 years, had gone extinct by the beginning of the twentieth century and was acquired by Cooley shortly after its founding. As a single malt, Tyrconnell had a mellow and slightly sweet taste, lighter and sweeter than most blended Irish whiskies. ; Blends Kilbeggan, another brand with a heritage of over 200 years, was @ premium blend, meaning it had a relatively high percentage of malt mixed with grain whiskey. It was a smooth blend with a malt finish and was Cooley's best-selling brand. Peated Single-Mal BM6701-2006, End Semester Paper Page‘Traditionally, the barley used in whiskey was malted (dried) using tur (or peat) fires, which imparted Sitmohy, “Peaty” taste tothe barley. This method had fllen out of favor ater coal was inttodieed ng cheaper form of energy. Cooley revived it with production of Connemarss Pes? ‘Single Malt with it distinctively smoky and sweet taste. Tecling called it "a whiskey drinker's whiskey [that] challenges you." Single Grains Greenore was a single grain whiskey made fiom maize. Invoduced by Cooley in 2006, it remained innovative and rare, in thet most distillers used grain whiskey only for blending, Other Brands Teese Produced whiskey for firms that had developed their own Irish whiskey brands, but not the facilities or the desire to distill their own product. The largest a fiend of malt and grain whiskey matured in Concannon Vineyards’ own wine barrels and ceca for the American market. Concannon, based in California, was part of the Wine Group, the third largest Wine company in the U.S. Also in this category was Michael Collins, a blend of single malt and blended whiskies produced for Sidney Frank Importing, Overall, thic category accounted for 20 percent of Cooley's sales in 2010. Retail Private Label Cooley produced a rarge of private label branded products for Sainsbury's Tesco, Carrefour, Dunes wear sg otter large European supetmarket chains. Private label made up 30 percent of Cooley's reiy aks in 2010, Although it had been an excellent revenue producer for Cooley. it did not offers ies hefty margins that Cooley realized on its own branded products, Bulk Whiskey Sales Cpoley sold bulk product for use in products like cream liqueurs, candies, and other food products, Mile such sales flourished in 2007 and 2008, the trade hadargely disappeared by 2010, its place taken by cheap bulk Scotch, Overall the market outlook for Irish whiskey was exceptional, and Cooley's brands seemed well positioned, Said Teeling. “oung people tend not to drink the products consumed by thei parents. Further, es incomes grow in developing counties, the emerging middle class like to show their wealth by moving to important drinks. Boh these trends are very beneficial for ish whiskey. In. the’ let Ta005 Young people in the U.S. rediscovered bourbon. This led them to the mellower sweeter tasting Irish whiskey. The effect has been spectacular. . i Facilities and Process ‘fie Cookey distillery was fited out with both pot sil and column (continuous) stills and represented the company's primary distilling operation. After distillation, raw spirit produced in Cooley was loaded into tankers and transported to Kilbeggan where it was pul into eak eacks thet eradually imparted a smooth, mellow taste and amber color to the maturing whiskey. The barrels were stored i 'BM6701-2004, End Semester Paper Page 9‘granite warehouses there. Only when the master blender determined that "the time was right" was the whiskey either blended, or bottied and sold as single malt or gain whiskey. The old Kilbeggan (Locke's) Distillery was refurbished and equipped with a refited 180-year old ‘small copper pot still, and distilled single malt spirits. Whiskies were casked and matured there, and it also boasted a visitor center and museum, all eventually owned and operated by Cooley. In 2009 and 2010, Cooley invested 2 total of €7.5 million in expanded and improved facilities. This enabled Cooley to increase efficiencies, install state-of-the-art production controls, and erect new warehouses. Total distilling capacity was over one million cases per year (250,000 cases on the pot stills and $800,000 cases for the column stills.) Indeed, Cooley distilled at full capacity for most of 2011. It held over seven million liters of whiskey in stock, maturing in over 60,000 oak casks, This represented ‘almost two million cases of product. Cooley's fixed plant and equipment had a book value of €8 million and their replacement cost was in excess of €40 million. Similarly, while total inventories (primarily whiskies that were maturing) had a book of €28 million, they were insured for €80 million. GOVERNANCE . Cooley was a non-listed public compaily with 290 sharcholders and 9,098,935 shares outstanding, The Teeling family owned 36 percents of the shares, and other members of the Board of Directors owmed a further 9.1 percent, thus insuring effective control of the enterprise. The non-family board members (see Table 2) were all business associates of Teeling, ‘Table 2: Share Ownership by Non-family Board Members Director ‘Shares at 12/31/2011 John J. Teeling 2,035,119 a ‘Lee Mallaghan 1,037,699 Jack Teeling 510,201 William McCarter 357,234 David Hynes 81,000 James Finn 82,648 ‘Lee Mallaghan was an Irish financier who owned the renowned Carton House, a luxury hotel and golf resort in County Kildare. Willie McCarter was the former managing director of Fruit of the Loom, Iretand and one of the founders of Cooley Distillery. David Hynes was a former managing director of Cooley, and James Finn was the chief financial executive for a number of Teeling’s other ventures, and also served as Cooley Board Secretary. The remaining $4.9 percent was owned by a close circle of individual shareholders who were much like family. in a way, they had grown old with Teeling; the average shareholder was around or beyond retirement age. Tecling used to joke that at age sixty-five, he was among the younger ones. Most of the shareholders had invested between 1989 and 1991 under an Irish tax incentive scheme whereby their investment was offset against taxable income. Par value was €.12Sishare and the average price paid was €.89/share. Although their investment in Cooley had yet to produce any financial returns, they had given no obvious signs of dissatisfaction, Teeling attributed atleast some of BM6701-2004, End Semester Paper Page 10their patience to what he called "the green thing"-the idea that their investment was helping to rebuild an old Irish industry and that the success of Cooley Distillery was as much a matter of national pride ‘as financial return. tt was hard to say how prevalent this sentiment was, but it clearly existed. Over the life of the Cooley enterprise, there had been little pressure from small shareholders to sell the company. This despite the fact that it was never possible to pay a dividend; given other demands for cash, there were simply insufficient funds to do so. As an unlisted public company, it was legal to trade Cooley's shares. There was a "grey market" whereby sellers would be matched with buyers through the Financial Director, but Teeling never encouraged this. In reality, shareholders had litte alternative but to hold the shares. (It is important to note that over this period Teeling, with the backing of these same investors, had listed [on the FTSE] and sold twelve other companies, so there was always considerable financial activity going on with this group of investors.) Cooley's shares were never sold back to the company; that was not a common practice in Ireland. In 2010, John Teeling's older son, Jack, was appointed managing director. Jack Teeling had been with Cooley since 2002, and had been sales and marketing director since 2007, Teeling’s other son, Stephen, was commercial manager. Both had made it clear that they were strongly committed to the business for the long term, CURRENT SITUATION AND STRATEGIC CHALLENGES ‘An te nach bhfuil laidir, ni folair do bheith gli. [He who is not strong must be clever.] , Irish saying In 2010, sales increased 13 percent to €15.9 million, while profits declined to €2.3 million; lower profits were attributed to "a fall in bulk whiskey sales, rising input costs and a beefed up management feam to develop our branded sales." Although 2011 results would not be released until the second ‘quarter of 2012, Teeling expected sales to grow by 68 pervent fo approximately €26.7 million, with profits of €3.9 million and EBITDA of €5.2 million."” Cooley's strategy had been deceptively simple: to produce the best Irish whiskey in the world and to reinvest all profits into the business. Said Teeling: Few indigenous Irish companies have the luxury of producing a product which can only be made in into a growing worldwide market. Developing Cooley brands is the focus. Now ‘that capital expenditure on facilities is largely completed we intend to put more money behind our brands. At the same time we will continue to develop the bulk and private label [businesses] which provide cash, liquidity and seale forthe overall business. In an oligopolistic industry Cooley faced daunting odds. Tecling did not sugdrcoat the challenge: While the long term objective of Cooley isto devatop brands, route to market and rotation on shelves pose major obstacles. World spirits is dominated by two giant companies with a second tier of major multinationals. These companies dominate distribution channels and have advertising and promotion budgets hundreds of times greater than Cooley's total sales. Stephen Tecling commented, "Quality’s our main concem here. Who can compete with those ad campaigns [of competitors]? Our focus is making a superior product that Irish whiskey drinkers will a 'BM6701-2004, End Semester Paper Page 11love." This did not solve the problem of lack of marketing and distribution muscle; it had never been easy for Cooley to get its branded products on retail shelves. John Teeling had long ago seen a seemingly obvious way to deal with the challenge. Interviewed in 1990, he sai OF course, we shall eventually joint-venture it [Cooley]. There is absolutely no future for Irish ‘whiskey trying to survive on its own in the intemational marketplace. It needs a big, powerful, world- ‘wide partner. But that partner needs a producta distinctively Irish product. There is now only one ‘way they can get it: buy it from us or make it themselves. Ithey want to make it themselves, they are twoto three years behind us. ‘Twenty years later, and in the midst of a boom in sales of Irish whiskey around the world, this still had not happened! Moreover, the two largest drinks companies in the world already had their own branded Irish whiskey. Cooley, in the meantime, chose to lead with its strength, its branded businesses. Teeling. saw a huge opportunity, and claimed that he could triple Cooley's business within a decade, given enough support. In other words, it would take a substantial investment to drive consumer awareness, and 10 achieve widespread distribution and retailer push. Where this marketing investment would ‘come from was unclear; Cooley's profits were scareely more than petty cash for the major drinks players. Teeling had not given up on some sort of partnership, for the logic to him seemed clear: [If Irish whiskey continues growing at the current rate, it seems inevitable that there will be ‘more interest from the other major drinks groups without an Irish whiskey in their portfolio. Cooley is very well positioned with its quality reputation, portfolio of brands and inventory ‘of whiskey to be able to take advantage of these opportunities.** Cooley had world class products and plenty of capacity. The upside seemed enormous. After a quarter of a century and building the business, during which shareholders had received nothing, and the firm's cash flow modest at best, how could Cooley get into the real action? Was it destined to remain a niche player, if not a boutique distillery? And if'so, how would it ever repay its investors? STRATEGIC OPTIONS During the early days of Cooley Distillery, John Teeling had said: I have no emotional ties to any of my project Sure, its nice to think you have built something, bu there is always another one over the hill.” ‘Teeling agreed that he no longer felt that way about Cooley; it was special to him and the entire ‘Teeling family. Despite this emotional connection, Teeling was determined to make the best decision hhe could for the interests of shareholders, employees, community, thg Teeling family, and the sustainability of the business itself. If it were to grow, Cooley desperately needed additional investment in marketing and distribution. The large spirit companies averaged nearly 16 percent of sales in marketing and distribution activities. ‘Some analysts believed that Cooley could barely manage half that rate: Yet even as Cooley's brands demanded significantly increased support, Teeling felt a responsibility to begin offering some tangible returns to his shareholders. He saw no fewer than five options. First, Cooley could partner with a major spirits company. Second, it could sell out. Third, as some family members urged, Teeling could take the firm private. Cooley Page 12could also simply exit the branded whiskey business and set up as a producer for other companies that wished to field an entry in the category. Finally, Cooley could soldier on as it was: after all, it was still growing and making money, and its reputation had never been better. The most obvious potential partner was William Grant & Sons, Ltd. They had already had discussions and Grant had twice before agreed to purchase Cooley, but pulled out at the last minute. This was before Grant purchased Tullamore Dew. Teeling saw a compelling logic in some sort of alliance; after all, Grant owned the second largest Irish whiskey brand in the world and didn't distil its own product, whilst Cooley had capacity and a reputation for quality, but difficulties in getting its brands on retail shelves. It scemed a natural fit. Yet Grant was already poised to begin construction of its own distillery. Were there other potential partners? Afterall, one of Teeling’s avowed goals was to "get 2 distribution and marketing deal with a second-tier multinational drinks company." He was quite blunt: =: We need a sugar daddy, and that has to be somebody who needs an Irish whiskey, which we will make for them. We need one of about five companies to handle our worldwide distribution-Bacardi, Brown-Forman, Jim Beam, Remy, or Campari. know them all and they know us. But the category is too small for them at the moment, Do they really want to enter a category and build a brand white up against Pemod and Diageo? There ae probably easier things to do in life. Since Cooley represented the only independent: producer of Irish whiskey, it was no surprise that Cooley had been approached by many spirits companies over the years. A sale of the company remained viable, but was not Teelisi’s preferred option. In 2007, he cautioned that: ‘The price for Cooley] would be astronomical. And that also unlikely because we dont want sell. There is nota shortterm need (to make 2 decision), as neither the banks nor my shareholders are putting pressure on us, eventhough were not yet making any kind of & decent return, People who set up businesses doit doit forthe money. W's the challenge-'sthree- quarters of the way there, and its going te work Teeling had again addressed the issue earlier this year (2011) with a reporter, saying that Cooley. was not encouraging formal offers, ‘but simultangously citing a value for Cooley of £44 milli (approximately €53 million)” (As a point of reference, Williash Grant bought Tullamore Dew in 2010 for €171 million, or twenty-three times EBITDA). See Exhibits 8 and 9 for additional competitor and industry data, Regarding the third option of taking the firm private, Teeling had not kept secret the family’s keen interest in management buyout. He believed that the family/ management group could muster roughly €50 million * Given the state of the Irish economy in late 2011, mired in recession and still suffering badly from the implosion of the banking system in 2008, he believed it was impossible to raise more, Banks were unwilling to take the risk. Cooley could also simply exit the business of selling branded Irish whiskey and concentrate on the business of supplying Irish whiskey for others. Margins would be lower, bit marketing expense would be negligible, Would such a business really reflect what Cooley was about? Finally, Cooley could continue on with its current strategy of selling its own branded products, and support those products with whatever marketing investment it could manage. In the rapidly growing ish whiskey category, there was plenty of room for aniche player. After all, the fact chat Cooley was small, independent, and Irish, itself represented a competitive advantage of some value. End Semester Paper Page 13Teeling had relished his role in Cooley's David and Goliath story, but he now struggled with what he and the board owed to the aging shareholders who had gone without any return for so long. In fact, the shareholder meeting was in two weeks and Teeling expected the usual sixty or so shareholders to attend, As he began his preparations, Teeling remarked ruefully, "They've probably given up on me.” BM6701-2004, End Semester Paper Page 14Total ‘Exhibit 2: Global irish Whiskey Sales in 2010 Quantity of sales (cases) Firm 2010 Pemod Ricard 9,000,000 61% Witiam Grant 600.000 12% Diageo 500,000 10% Cooley Distitery 250,000 5% 530.000 11% 4,880,000 Source: Davy ResearcivWS Rand Cooley Annual Report 2010, Forecast assumes same distrbution across brands as 2010 Cases contain S-itres Forecast 2011 3,381,148 676.230 583,525 281,762 597,336 5,500,000 Forecast, 2015 4,918,033, 983,607 819.672 409,836 868,852 8,000,000 Brand Jameson Bushmills Tullamore Dew* John Power ‘Kbeggan, etc. Other Total Databank). Pemod Ricard Diageo Witiam Grant & Sons Pemod Ricard Cooley Distitlery Exhibit 3: Irish Whiskey Sales in U.S. Market (000's casos) (Thousands of Sliter cases) 2005 2006 2007 2008 2009 2010 360 439540 195 tg (188 2 48 8 3 2 er 3 8 3B 6 8 615732855, * Acquired from Grupo Campari in 2011 ‘Source: Day Research/Beverage Information Group-Liquor Handbook (from Impact 4 1,040 218 1037 9 170 e788. 3238 3B 15 79° ° 95 1175 1,420 % % Change Change tyear Syears 21.2% 0.6% 1.5% 9.4% 15.4% 20.0% 23.8% 47% 10.2% 38% 48% 182% 2011 2015 1,244 2,191 204-359 82 144 a2 74 8% 2 110 201 1,700 3,000 1BM6701-2004, End Semester Paper Page 15Exhibit 4: Cooley Distillery Income Statement, € 000% 2010 20092008 € € € Tumover(Sales) 15,931 14,194 18,713, Materials 9.138 6,933 11098% Staff Costs 3223 2858 2,752 Depreciation 301277207 Other Operating 402040714 Expense Interest 37816788, Operating Costs 13933 10892 15.459 Operating Profit 2,998 3,902 3.254 Other income 2 358 Profit before 2510 3337 3,330 Taxation Tex 2188 Profit after Taxation €2.259 €3,003 €2.997 Note: Fiscal year ends on December 31. 11,585 6127 2879 173, 440 630 10,049 1,596 1.556 185 €1,401 11,730 eea7 2.228 167 473 558 10,073 1,857 1.87 170 € 1,507 2005 2008 € €9,208 10.012 3668 4,989 2.005 1,827 168167 1548 1.214 518499 7,905 8.596 19011418 28 16 1,929 1,432 41185 €1,188 €1,277 1BM6701-2004, End Semester Paper Page 16Exhibit §: Cooley Distillery Balance Sheet € 000s 2010 2008 ~«2008~=~=«R007~=«O0B~~«C«00S «2008 Current Assets Cah €183 €595 © €38 99 E245 E14 E2Bt AR 3.809 3,368 46453248 -2,785 2322 2,175 Materials & In-Process Inventory 27,730 25882 24,704 24871 22.405 20,304 18,273 Finished Goods Inventory 765—« 475. 403.44 205 286219 Total Inventories 28475 26.057 25.107 25215 22,700 20,500 18.492 ‘Total Current Assets 32.467 30021 29790 28,560 25,710 23.028 20,048 Other Assets PPaE 8128 7.179 6034 4785 «4.658 4,708 3,886 Investments 3 6 MM 6 6 6 2B Total Piued Assets 8151 7,204 6059 4.820 4683 4.791 3,091 € € € € € € €3,091 Total Assets 40818 37,225 35849 33,380 30.999 27.757 Current Liabilities AP 2901 2573 4341 2,700 3.048 2721 2.660 Payable to Banks 42,096 10.960 10882 13,115 11,244 10,521 8,954 Total Current Liaiies «14,937 13.533 15223 15815 14,202 13,242 11,614 Long-Term Debt 4.811 2.081 2018 1,964 1,801 1,828 1,764 Provision for Liabilties & 26° 2160-218 216216 = 2008 Charges , Total Liabilities 16,964" 18630 17.487 17,985 16,909 15.270 13,542 Capital & Reserves Called-up Share Capital = 1,138 1,138 1.198 1.138 1.498 1198 1,196 Capital Conversion 7 7 7 7 7 7 7 Reserve Share Premium Account 6.937. 6.937 6.937 6937 6.937 6937 6.937 Profit Loss Account 15,562 - 13,303 _ 10,300 5902 4395 3207 Total Shareholders’ Funds 23.654 21,995 18.302 15,595 13984 12487 11,207 Tota Li € € € € € € € Frees Funds 40618 37,225 35849 38,380 90,903 27,787 24,899 Exhibit 6: Cooley Distillery Cash Flow Statement € 00's 2010 2009-2008 ~—«<2007~—«2008-~=«OS«=«00d Net Cash inflow(Outflow) 844. €3.161 €4,902 (E701) E462 E241 E767 from Operating Activities, Interest Paid 37a 418788630558 STG Tax Paid 258488, «203 142182105 Copital Expenditure 4097 1,703 «14,738 BAe 1358193, RabCaenPowBsiore aes) 80-212 aon aetna) t8| Financing Incrosse/(Decrease) in 4076 = 782.233) «1.871 = 723-—1,869_Unavall Borrowings Net Cash Flow From 4,076 78 23) 14871723 1,868 2 Financing {Decroaseyincrease in (E413) €558 (E61) (E140) E131 (ETON) ETT Cash 'BM6701-2004, End Semester Paper Page 17| Exhibit 7: Selected Financial & Operating Data-2010 Competitors $ Millions Pernod Constellatio Brown Diageo Ricard = Beam on Forman Remy Campari 6/30/201 127910201 argorzo1 3i201 12/34/201 Fiscal Year End 1 ersorz014 0 2rasi2014 1 1 o Home County UK FR us us us FR fs ‘Gites $15915 $10,998 $2,095 $3,932 $2,586 $1,280 $1,541 Gross Profit 9.482 6634 1,236 1190 4,728 731 884 Gross Profit % 59.6% 609% 589% 357% 667% 57.1% = S74. Marketing 2.464 2.084 308 368 404 a7 Expense SGADther 2.872 1,822 387 eat 574 104 Expense Operating Income 4.157 2,685 552 503 855 170 357 ems Bales 3,780 2,005 395 551 829 128 308 ‘Taxes (incl. nonoperating) Net Income 3,043 1,550 296 560 572 or 208 Market $00,288 $25,686 «$7,137 $4,291 $10,189 $3683 $3,719 Capitalization Long Term Debt) : Equty Ratio 192.4% 109.2% 64.1% 1229% ' 245% Retum on Equity 41.1% 111% 15.3% 218% 29.2% = 10.4% 13.6% Cash $2537 $2aa_ $865, $9 $567 Sate $344 Current Ratio 146 3.98 2.05 344279249 228 Long-term Debt $11,110 «$9,386 $3,637 $3,137 $504 Net ProfitMargin 19,196 141% 14.1% 168% 221% 7.8% 13.5% # Employees 24,020 18,226 24,600 4300 3,900 1,621 2207 Source: Hoover's & Worldscope és Note: Income figures for Beam, Inc. reflect pro-forma restatements to account for discontinued and divested businesses connected with the spin off of other businesses during 2017. Other numbers, however, reflect unadjusted 200 year end. Exhibit 8: Selected Market Data-2010 Competitors Pomod Conetoltatio Brown Diageo Ricard © Beamon Forman Remy Campari ersor20t 6/30/201 12131/201 430/201 3/31/201. 12/31/2041 Year End 1 1 0 2ze2011 1 1 0 Price/Eamings 76 1878 32.45 623 2008 zas7 18.87 Ratio Prbw Beck Ratio 709 (205 1430 159° 869325 234 Price/Seles Ratio 340258 112 1410427 3.43 282 Beta Cooficient 07 087 1.54 104 070 nla va For Valuation of Cooley Market Risk Premium for Ireland 6.00% Based on historical returns of ISEQ (Irish Stock Exchange) Risk Free Yield 1.97% Based on 10-year Treasury bond rates. 'BM6701-2004, End Semester Paper Page 18Exhibit 9: Industry Benchmarks ‘Averages for All Distilleries-All Sizes ‘Quick Ratio 0.99 Current Ratio 3.52 Current Liablities/Net Worth 319% Current Liabilties/inventory 047 Total Debt/Net worth 1.03 Fixed Assets/Net Worth 0.64 Days /R 400 Inventory Turnover 039 Total Assets/Sales 124% ‘Working Capital/Sales 49.2% A/P/Sales 13.0% Pre-Tax ROS. 8.2% Pre-Tax Return on Net Worth B.4% Interest Cover 23% EBITDA to Soles 16.2% Capex to Sales 32% Source: Hoove'sIndustry Oata sourced on 1 August 2012at http: /bseriber hoover. com. cy? store edu eds2048/4/home/index: htm for [NAICS 31214-Dstiled Uuors. Osta based cr FY 2021 (varied ve closing date] for over [35.000 frms reporting in ths category BM6701-2004, End Semester Paper Page 19