Assignment

Assignment

Project description
Questions for Sterling Household Products

There is no assignment template for this case. Use a Word file and the Excel file containing the case exhibits.

1. Appraise the business risk of the germicidal/sanitation/antiseptic products unit.
2. Determine the acquisition’s free cash flow from 2013-22, considering the 2022 terminal value, then, calculate its NPV.
3. Include the follow-up expansion free cash flows and terminal value with your results for Q2, and calculate its NPV.
4. What are the strategic issues associated with the proposed acquisition? What uncertainties or trends do you see that would make this acquisition more or less attractive, in both financial and strategic terms.
5. Explain why you would either make this acquisition or pass it up.

________________________________________________________________________________________________________________
HBS Professor William E. Fruhan and Babson
College Professor Craig Stephenson prepared
this case solely as a basis for class di
scussion and not
as an endorsement, a source of primary da
ta, or an illustration of effective or ine
ffective management. Although based on real
events and
despite occasional references to actual co
mpanies, this case is fictitio
us and any resemblance to ac
tual persons or entities is
coincidental.
Copyright © 2013 President and Fellows of Harvard College. To orde
r copies or request permission to reproduce materials, call
1-800-545-7685,
write Harvard Business Publishing, Boston, MA 02163, or go to
http://www.hbsp.harvard.edu
. This publication may not be digitized,
photocopied, or otherwise reproduced, posted, or transmitte
d, without the permission of Harvard Business School.
WILLIAM E. FRUHAN
CRAIG STEPHENSON
Sterling Household Products Company
January of 2013 brought a new year and an important new opportunity to the management team
of Sterling Household Products Company. Sterlin
g manufactured and marketed a wide line of
consumer goods, including laundry products, soap
s, cosmetics, toilet preparations, and cleaning,
disinfecting and sanitizing products, which were sold domestically and internationally, and were
used every day in millions of households around
the world. Sterling’s family of quality products
included many highly regarded brand names,
and the company had consistently delivered
impressive sales and profits to the investment community.
Sterling’s financial measures for all recent years showed that the company was successful, but a
time series analysis of these same financial measur
es quickly isolated Sterling’s current challenge:
growth rates for unit volume, sales, and profit
s were very low, and company management was
looking to expand into businesses and products with more potential for growth. Sterling had
identified health care as an industry with more grow
th potential, and a detailed search for health care
products which could fit well into the company’s
existing operations led to discussions between
Sterling and Montagne Medical Instruments Comp
any. Sterling was interested in acquiring
Montagne Medical’s germicidal, sanitation, and antiseptic products unit, and Montagne Medical was
willing to sell the unit for the right price. Nego
tiations had revealed that Montagne Medical believed
the right price was $265 million, so
Sterling had to determine if acquiring the unit at this price would
generate value for the company and its investors.
Sterling Household Products: Hist
ory, Finances, and a Strategic
Opportunity
Sterling was a leading manufacturer and market
er of consumer products, selling trusted and
recognized brand names through mass merchandisers,
grocery stores, and other retail outlets. When
Sterling was founded in the early 1920s it produced
and sold only laundry products, but success in
this narrow business line allowed the company to grow and expand the scale and scope of its
operations. Sterling invested internally as attrac
tive opportunities were identified, but with brand
development in consumer products being both a le
ngthy and expensive process, much of its growth
came from acquisitions of existing and successful brands. By the beginning of 2013 the company
9-913-556
APRIL 30, 2013
For the exclusive use of S. Alblawi
This document is authorized for use only by Sager Alblawi in Section 10: Cases in Financial Management and Investment Banking taught by Neil G Cohen George Washington University from
October 2014 to December 2014.
913-556
|
Sterling Household Products Company
2
BRIEFCASES
| HARVARD BUSINESS SCHOOL
manufactured a wide variety of consumer products in more than 20 countries and marketed these
products in more than 100 countries. As presented in
Exhibit 1
, Sterling’s well-regarded laundry
products, soaps, cosmetics, toilet preparations, an
d cleaning, disinfecting
and sanitizing products
combined to generate nearly $3.3 billion of sales
and $323 million of net income in 2012, producing a
net profit margin of 9.8% of sales. This high pr
ofit margin reflected the income statement success of
Sterling and its products, and with year-end 2012
total assets equal to nearly $2.7 billion (
Exhibit 2
),
the company produced a rate of return on assets of 12% in the most recent year. Sterling’s financial
results in the preceding years were just as ro
bust; by any financial measure the company was
successful year after year.
Analysis of Sterling’s income statements throug
h time, however, revealed the company’s biggest
challenge. Between 2010 and 2012 sales grew from $3.14 billion to $3.281 billion, a total increase of
4.5%, representing a compounded annual growth rate of only 2.2%. Although the company had
excellent products and was well-positioned in the
industry, growth opportunities were limited and
its business was under constant pressure. The company’s annual sales volume in units had increased
by just less than 1% per year, constrained by weak growth in overall demand and strong competition
with other products, giving end consumers a variety
of manufacturers and products to choose from.
In addition, Sterling’s largest retail
customer represented 26% of its ne
t sales, and its 10 largest retail
customers accounted for 55% of company sales. Thes
e powerful retailers regu
larly squeezed Sterling
and other consumer goods manufactur
ers, with respect to wholesale prices and volumes, as well as
encouraging end consumers to trade down to privat
e label products which generated more profit for
the retailer. The company’s operating expenses and
commodities costs were also rising faster than
the inflation rate, placing even more pre
ssure on Sterling’s profits, as shown in
Exhibit 1
. None of
these situations were expected to improve in the ne
ar future, so the company was attempting to shift
its product offerings into industries with more o
pportunities for growth and sustained profitability.
Sterling’s management team had
identified one segment of the health care industry as an
attractive investment opportunity. The compan
y had highly regarded and successful household
cleaning, disinfecting, and sanitizi
ng products, and justified public
health concerns about acquired
infections was driving demand for more effective products in health care settings. Acquired
infections in hospitals and acute ca
re nursing facilities were a significant and growing concern in the
health care industry, with the U.S. Department of Health and Human Services estimating that at any
time one in 20 hospital patients had a health-care-associated infection.
1
The entire health care
infection-control market was estimated to currently represent $2.5 billion of yearly sales; it was
growing rapidly and was also quite fragmented, with
no competitor holding more than a 7% market
share. Sterling’s management recognized that th
e market for effective germicidal, sanitation, and
antiseptic products for use on environmental surf
aces, medical equipment, and for skin infection
control was large and growing, and management
believed that this market was also a natural
extension of Sterling’s expertise in the household market.
Sterling had identified a possible investment
opportunity in Montag
ne Medical Instruments
Company, a large health care company which specialized in surgical and medical instruments, but
also owned a unit manufacturing and marketing ge
rmicidal, sanitation, and antiseptic products
which were U.S. Environmental Protection Agency (EPA) registered to kill numerous
microorganisms. Sterling
approached Montagne Medical about acquiring the unit, and the two firms
initiated formal discussions.
1
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For the exclusive use of S. Alblawi
This document is authorized for use only by Sager Alblawi in Section 10: Cases in Financial Management and Investment Banking taught by Neil G Cohen George Washington University from
October 2014 to December 2014.

Sterling Household Products Company

Exhibit 1  Income Statement for Sterling Household Products Company

($ in millions except per share amounts)    2010    2011    2012

Net sales    $3,140    $3,138    $3,281
Cost of goods sold    $1,742    $1,751    $1,860
Gross profit    $1,398    $1,387    $1,421

General, selling & administrative expenses    $726    $740    $769
Research & development expenses    $67    $72    $78
Income before interest and income taxes    $605    $575    $574

Interest expenses    $83    $70    $76
Income before income taxes    $522    $505    $498

Income taxes expenses    $178    $171    $175
Net income    $344    $334    $323

Weighted number of shares outstanding (in thousands)    84,160    81,520    79,508
Earnings per share    $4.09    $4.10    $4.06
Dividends per share    $2.44    $2.44    $2.44

Stock price at end of year    $58.79    $63.78    $65.46
Price/Earnings ratio    14.4    15.6    16.1
Equity beta coefficient            0.40

•Write clearly and concisely about government and not-for-profit accounting using proper writing mechanics.

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