Euroland Foods Company Case Study

Introduction

Theo Verdin founded Euroland Foods Company to develop his dairy business in 1924, and became a publicly traded company in 1979. The company's headquarters was in Brussels, Belgium, the company was a multinational producer of high-quality ice cream, yogurt, bottled water, and fruit juices. High-quality ice cream and yogurt accounted 60%, 20% of the company total revenue, and bottle waters and fruit juice divided equally other 20% revenue at 10% each.

Background

There were 12 -member board of directors in Euroland Foods Company, three of them were from the Verdin family, and four members were from the management and five outside directors. Verdin family combined was the biggest stockholders with 20% of the Euroland Foods's shares outstanding. The company executives combined, Venues Management and Banque du Bruges et des Pays Bas were the other main stockholders, and each owned 10%, 12%, and 9% of the company's shares outstanding.

Euroland Food has a senior management committee to help company's board director to decide the new capital budget. In early January 2001, the senior management committee gave company's board of directors 11 major projects, total counted about EUR316 million, but in this year the board of directors had imposed a spending limit on capital project was only EUR120 million, so it was necessary to choose the key projects and allocate funds in order to help company increase revenue and maximize the shareholders' equity.

Statement

Euroland Foods Company had two main problems: high debt-to-equity ratio and low price-to-earnings ratio. The high debt-to-equity ratio was 125%, which made directors used debt reduction program to Euroland Foods Company. The lower price-to-earnings ratio makes the stock price dropped and the stock price lower than average of peers.

In all of these 11 projects, there are three projects are about new product or new market, four projects are related to product or market extension, three projects are about efficiency improvements, and one project is about safety or environmental. The new product or new markets have minimum acceptable IRR and maximum acceptable payback years which are 12% and 6 years. For product or market extension, the minimum acceptable IRR is 10% and with 5 years maximum accept payback years. Efficiency improvements have the 8% in minimum acceptable IRR and 4 years in maximum accept payback years.

Based on the NPV and Corp.WACC(10.6%) and IRR to rank all these projects except effluent-water treatment at four plants. The first in the ranking list was the project of strategic acquisition with the highest IRR and NPV. The project of expand truck fleet had the negative spread and NPV, and this project should be the most unacceptable project.

Analysis of projects

Replacement and expansion of the truck fleet

The main idea of this project was to update the truck fleet and sold the old trucks in order to improve the conveying efficiency so that can reduced the traffic time and inventory can flow into the market rapidly. At the same time, the fuel and the maintenance of new trucks will be efficient. The total cost of the project will be EUR33 million, without EUR4.05 million sales of the old trucks, and will increased EUR11.6 million over the next seven years. The project IRR will be 7.8% which below the 8% minimum accept IRR, and the resulting payback years will beyond 4 maximum acceptable payback years about two years. The negative NPV can show that this project couldn't make revenue for the company.

A new plant:

The main objective for this project was reducing the production pressure and the cost of the shipping and delivery. A new plant can helped to take the burden off the Melun and Strasbourg plants and fulfilled the market demand. This project will costs EUR45 million over 10 years, the IRR should be 11.3% and NPV will be EUR1.49 million. The minimum acceptable IRR of this project was 10.0%, and the NPV at minimum acceptable IRR was EUR2.81 million. The project estimated NPV at Corp.WACC was less than the minimum expected value.

Expansion of a plant

This project tries to solve the full capacity for the plant, and keep from the production scheduling and deadline problems. The project resorts to highly automated facilities entire line of Euroland Foods' plant. Compare with the second project, this project will spend much less expenditure at only EUR15 million. Although the project IRR and NPV were 11.2% and EUR0.41 million which were a little less than the project two, it could put materials into production much more efficiency and rapidly, and will reduce the cost of employee.

Development and roll-out of snack foods

The project tries to develop a new product under the excess capacity situation. The benefit of this project is improving the productiveness by producing a line of dried fruits and snack foods. There are companies expanded into snack-food production successfully. Base on the market demand and the reputation of the Euroland Foods Company, this project has strong opportunity to increase revenue. The project IRR was 13.4% and NPV was EUR3.74 million which were larger than the minimum acceptable numbers. The equipment and investment costs were EUR27 million for this project.

Plant automation and conveyer systems

In this project, the plant automation and conveyer systems can improve throughput speed and reduce the injury chance by employees. The project could not create value directly but it can save more than EUR15000 cost per year. The total cost of project will beEUR21 million. The NPV was negative and the IRR was 8.7%

Effluent-water treatment at four plants

This project could not make any revenue, but it is the necessary cost. The Melun and Strasbourg plants of Euroland Foods send down the dirty water into the rivers. It is the responsibility for Euroland Foods Company to purify the pollution and add the water-treatment equipment. This project would cost EUR6 million.

Market expansions southward and eastward

Each alternative expansion had benefits and risks, if company expanded market to eastward, there are larger market and higher demand of frozen dairy products, but the company will faced fierce competition from the local ice-cream companies, and comparing with the south area, the purchasing power of the eastern consumers was a little lower. A southward market expansion has the opposite situations: less competition and higher purchasing power

...