Essential Coffee Group Australia: Valuation of a Potential Acquisition

In July 2020, the chief executive officer and board chair of Essential Coffee Group based on the Gold Coast, Australia, was perusing the company’s financials. After continuous company growth and a distressed coffee consumption industry due to the COVID-19 pandemic, it was the perfect time to explore inorganic growth opportunities. To continue to compete at a high level in the Australian coffee industry, Essential Coffee Group had to move fast by exploring opportunities to expand horizontally, such as acquiring the analogous coffee bean roasting company Coffee Time Pty Ltd. To determine the feasibility of the transaction, the Essential Coffee Group financial team would need to undertake comprehensive external, internal, and financial analyses. They would also have to complete a discounted cash flow valuation and a precedent transactions analysis to determine an appropriate offer price for the targeted firm.

This case is best suited to undergraduate- and postgraduate-level courses in mergers and acquisitions and to valuation units in international and corporate finance courses. Students will identify driving factors of the firm’s business and relate them to key industry success factors, opportunities, and risks in the Australian coffee industry. Students must rely on their discounted cash flow model to determine a value, which they then validate with relative valuation. The target firm valuation will depend on how students choose to integrate their quantitative and qualitative analyses using historical performance and future expectations. After completion of this case, students will be able to determine an appropriate offer price for a target firm by<ul><li>completing a comprehensive external, internal, and financial analysis;</li><li>applying knowledge of the capital asset pricing model to estimate the weighted average cost of capital;</li><li>undertaking an intrinsic valuation approach by developing a discounted cash flow model; and</li><li>using a relative valuation approach by selecting appropriate comparable firms and multiples.</li></ul>

• M&A, DCF, multiples