Færdig

Table of Content

1 Introduction ............................................................................................................................ 1 1.1.1.1.1 1.1 Problem statement ................................................................................................................................2 1.1.1.1.2 1.2 Methodology ............................................................................................................................................2 1.1.1.1.3 1.3 Limitations ...............................................................................................................................................3 1.1.1.1.4 1.4 Company presentation .........................................................................................................................3

2 Market Definition ................................................................................................................... 4 1.1.1.1.5 2.1 Market Life Cycle ....................................................................................................................................5

3 Strategic Analysis ................................................................................................................... 6 1.1.1.1.6 3.1 External Analysis ....................................................................................................................................6

3.1.1 PESTEL ............................................................................................................................................................... 6 3.1.2 Porters Five Forces .................................................................................................................................... 11

1.1.1.1.7 3.2 Internal Analysis ................................................................................................................................. 15 3.2.1 Strategy of Carlsberg ................................................................................................................................. 15 3.2.2 Value Chain ................................................................................................................................................... 15 3.2.3 Competitive advantages .......................................................................................................................... 17

1.1.1.1.8 3.3 SWOT ....................................................................................................................................................... 19 4 Reorganizing the Financial Statements .............................................................................. 20

1.1.1.1.9 4.1 Invested Capital, NOPLAT and FCF ................................................................................................. 20 1.1.1.1.10 4.2 Historical Growth ................................................................................................................................ 21 1.1.1.1.11 4.3 Return On Invested Capital .............................................................................................................. 23 1.1.1.1.12 4.4 Capital Structure ................................................................................................................................. 24 1.1.1.1.13 4.5 Cost of Capital ....................................................................................................................................... 24 1.1.1.1.14 4.6 Cost of Equity ........................................................................................................................................ 25

4.6.1 Market Risk Premium ............................................................................................................................... 25 4.6.2 Beta ................................................................................................................................................................... 26

1.1.1.1.15 4.7 Cost of debt ............................................................................................................................................ 28 5 Valuation ............................................................................................................................... 29

1.1.1.1.16 5.1 Discounted cash flow analysis ........................................................................................................ 29 1.1.1.1.17 5.2 Valuation of Carlsberg ....................................................................................................................... 29

5.2.1 Short term period ....................................................................................................................................... 30 5.2.2 Medium term period ................................................................................................................................. 32 5.2.3 Continuing value period .......................................................................................................................... 32 5.2.4 Moving from Enterprise Value to Share Price ................................................................................ 32 5.2.5 Verifying the results .................................................................................................................................. 34

1.1.1.1.18 5.3 Scenarios ................................................................................................................................................ 35 5.3.1 Bear case scenario ...................................................................................................................................... 36 5.3.2 Bull case scenario ....................................................................................................................................... 37

1.1.1.1.19 5.4 Weighted share price ......................................................................................................................... 38 1.1.1.1.20 5.5 Multiples analysis ............................................................................................................................... 38 1.1.1.1.21 5.6 Sensitivity analysis ............................................................................................................................. 39

6 Negotiation day ..................................................................................................................... 40 7 Learning outcome ................................................................................................................. 41 8 Conclusion ............................................................................................................................. 41

Bibliography ................................................................................................................................ 43

Appendix

Page 1 of 45

1 INTRODUCTION

Carlsberg is one of Denmark’s biggest companies and the fourth largest brewery in the world.

Within recent years Carlsberg has undergone major changes and faced different challenges, result-

ing in a rather volatile share price (figure 1.1) – ranging from a min. of 151 DKK to a max of

621.57 DKK. These dramatic changes are caused by several things; the acquisition of Scottish and

Newcastle, which Carlsberg financed by an IPO, doubling the amount of outstanding shares

(Carlsberg 2009) – this was done right before the collapse of the Lehman Brothers and the begin-

ning of the financial crisis.

The share price has also been greatly affected by the current financial uncertainties combined with

declining sales in N&W Europe. In order to manage the declining numbers, Carlsberg chose to

alter their strategy in 2009. This was done through efficiency improvements, which were initiated

by implementing the Excellence programs to secure earnings and improve cash flows. The latest

change is the re-launch of the Carlsberg brand in order to boost sales and double the profits by

2015. The most recent challenge facing Carlsberg is the increasing taxes on spirits in Russia im-

posed by the Russian government and Carlsberg expects further restrictions on this market in

2012.

Figure 1.1 Historical stock price of Carlsberg B 1973-2010 compared to OMX

Source: Datastream

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Page 2 of 45

1.1 PROBLEM STATEMENT

As a result of the volatile share price, this report seeks to determine the current value of Carlsberg

A/S, thus:

What is the fair value of a Carlsberg A/S B-share?

1.2 METHODOLOGY

The valuation of Carlsberg is done using the Discounted Cash Flow model (DCF). This model

discounts all future cash flows by the weighted average cost of capital (WACC). As this model

exclusively relies on the future cash flows in and out of the company rather than accounting-based

earnings, it continues to be a favorite among academics and practitioners (Koller, Goedhart &

Wessels 2011).

The forecast will be divided into three time periods: an explicit forecast is performed in detail for

2011-2015, a medium term period, 2016-2025, in which only the key value drivers are forecasted

and from 2026 and onwards a continuing value is forecasted, as it is expected that Carlsberg

reaches a steady state in terms of investment rates and revenue growth. The DCF model can be

calculated as follows, where the second term is the continuing value formula:

(Koller, Goedhart & Wessels 2011)

The future cash flows are estimated using the historical free cash flows combined with future stra-

tegic prospects. The latter is a comprehensive strategic analysis, performed in order to understand

external and internal conditions combined with future prospects. The historical free cash flow is

found through the financial analysis. The DCF model will furthermore be applied in three scenari-

os, which will lead to a valuation of Carlsberg. In addition to this a multiple analysis is performed;

comparing Carlsberg’s multiples with those of similar companies. This will help testing the plau-

sibility of the forecasted cash flows. Finally, a sensitivity analysis will be performed in order to

test how Carlsberg’s value responds to changes in key inputs.

n

tnt

it

t

WACC

gWACCRONIC

gNOPLAT

WACC

FCFValueOperating

)1(

)/()1(

)1(

1

1

Page 3 of 45

1.3 LIMITATIONS

The valuation of Carlsberg is done from an external angle, thus with the use of all public available

information. Thereby the internal part of the strategic analysis will be influenced by the fact that it

is primarily done with information from Carlsberg’s annual reports. For the financial statement

analysis, the annual reports from 2006 and onwards will be used.

The date of the valuation is set to be the 18th

of November 2011, and the estimated share price of

this report will therefore be compared to the price on that day, which was 393 DKK (Carlsberg).

This report will therefore be based upon information available up until the 18th

of November.

Though Carlsberg produces several brands and qualities of beer, we do not differentiate between

discount and premium brands of their products unless necessary. Determining growth perspectives

on every brand in their product portfolio is considered too extensive. The scope of the analysis will

be within the boundaries of Carlsberg’s regional countries, see appendix 13.

This report delimits from further future acquisitions, as no basis exist for which size and time can

be estimated. Furthermore limitations will be done continuingly through the report when found

relevant.

1.4 COMPANY PRESENTATION

Carlsberg A/S is a Danish brewery founded in 1847 by J. C. Jacobsen. Today Carlsberg is one of

the leading breweries in the world with a market share of approximately 5.5% in terms of beer

volume on the global market 2010. The company sells its 500 brands in more than 150 countries

across the world, and the company is registered at the Copenhagen Stock Exchange (Euromonitor

2011). The majority shareholder is the Carlsberg Foundation, and together with their A and B-

shares it is made sure that the Carlsberg Foundation holds at least 51% of the voting rights, and

thereby protects Carlsberg from hostile takeovers (Carlsberg).

Carlsberg operates in three geographic segments: N&W Europe, Eastern Europe and Asia. The

beverage activities are segmented according to the different regions, and within these the brand of

the company varies significantly. The core business of Carlsberg is to produce beer with its inter-

national premium brands such as Carlsberg, Tuborg, Baltika and Kronenbourg 1664. Though the

company also engages in the production of other beverages such as soft drinks, cider and water,

which varies within the different markets (Datamonitor 2011). Carlsberg’s ambition is; to be the

Page 4 of 45

fastest growing global beer company – since the establishment, the company has grown through

several mergers and acquisitions. One of the major acquisitions was in 2008, when they together

with Heineken purchased Scottish and Newcastle (S&N). The latter deal brought Carlsberg in full

control of the largest Russian brewery, Baltic Beverage Holdings (BBH), and they more than dou-

bled their share of global alcoholic drinks sales. Hereby Carlsberg gained the position as the fourth

largest brewery in the world (Euromonitor 2011).

2 MARKET DEFINITION

Carlsberg operates in the beverage industry, but to be more specific the brewing industry. Histori-

cally beer brewing has been a local industry, where only a few companies have gained an interna-

tional position by export, licensing or joint ventures. However, in the past years, consolidation in

established mature beer markets like North America and Western Europe have translated into a

few huge national players in their respective markets. This has resulted in significant changes in

the relative and absolute size of the biggest breweries and diversified their activities to new mar-

kets. In addition, the breweries in the established beer markets also acquire regional breweries in

potentially high growth markets in Asia.

Carlsberg have divided their markets into 3 major regions as stated in the introduction (Datamoni-

tor 2011, Carlsberg 2011a). Below figure 2.1 illustrates the contribution to revenue and the market

share in the different regions. Section 2.1 will analyze the market life cycle of each region.

Page 5 of 45

Figure 2.1 Contribution to Revenue and Market Share of Carlsberg:

Source: Own creation with data from Carlsberg 2010 Annual Report

2.1 MARKET LIFE CYCLE

Total global beer consumption experienced growth of 2% in 2010, after a downturn in 2009,

caused by the global economic recession. The global beer category has maintained an average

CAGR of 3.3% over the last 5 years. However, as emerging markets grew at an average CAGR of

5.7% where the main growth came from China, Africa and South America, mature markets like

Western Europe and USA, actually declined by 1.7% (SABMiller).

The life cycle phase of Carlsberg’s 3 major regions can be confirmed by the level of operating-

margin, which is expected to by higher for growth markets relative to mature markets.

The N&W Europe is characterized by being a mature market with saturated or declining volume

growth. However, the region also consists of expected growing markets such as Poland and other

Baltic countries. The region has delivered a modest contribution to operating margin ranging from

10-14% and a CAGR in market share of 4% from 2005-2010, cr. appendix 1.

In the Eastern European region, the overall growth is expected to increase. However, in Carls-

berg’s biggest market, Russia, legislative turmoil has caused dismal growth rates, which will be

elaborated on in section 3.1.1. The region is expected to grow annually with 4.9% in terms of real

GDP, cr. Appendix 2. Furthermore, historical operating profits ranges from 21-27% and a CAGR

in market share from 2005-2010 of 34%, cr. appendix 1 and (Carlsberg 2011a).

The Asian region is comprised of both mature markets like Singapore and Malaysia, and growth

markets like China, Vietnam and India. The growth countries are characterized by being fast grow-

60%

30%

9%

2010 contribution to revenue

N&W Europe

EasternEurope

Asia0%

5%

10%

15%

20%

25%

30%

EasternEurope

N&WEurope

AsiaPacific

2010 Market Share

Eastern Europe

N&W Europe

Asia Pacific

Page 6 of 45

ing economies, along with increasing disposable income, but a relatively low consumption of beer

per capita (Carlsberg 2011a). For instance, China recorded volume growth of 6% and despite infla-

tionary pressures an increase in volumes (SABMiller). As a consequence of these factors, the

Asian region has contributed with a slightly higher operating margin of 14-18.5%, relative to

N&W Europe and shown a CAGR in market share of 7% from 2005-2010, cr. appendix 1 (Carls-

berg 2011a).

An in-depth growth analysis of each region will further elaborated in section 4.2

3 STRATEGIC ANALYSIS

3.1 EXTERNAL ANALYSIS

An external analysis is now conducted to examine external factors outside Carlsberg’s control and

how they impact key value drivers, ROIC and growth. The PESTEL analysis is chosen for the

macro-analysis and for the industry specific factors, a Porters Five Forces analysis is used.

3.1.1 PESTEL

3.1.1.1 Political

The political environment often attempts to impose legislative laws that increase taxes on alcohol-

ic beverages. It is Carlsberg’s policy to add any tax increase on the current price of their product.

Several of Carlsberg’s markets are under this political pressure to lower the consumption of alco-

hol per capita due to its unhealthy nature. These factors will cause a decrease in demand and

thereby a decline in growth (Carlsberg 2011a). The political factors Carlsberg deals with in each

region will now be discussed in depth.

N&W Europe. This region is characterized by having a fairly stable political environment, and

threats only involve the current governments view on alcoholic beverages and how it should be

taxed. For example, the new Danish government is ready to impose taxes on canned beer, which

moves Carlsberg’s focus to increasing the cross-border sales in Germany (Jørgensen, Carlsberg

2011a, SABMiller, Damodaran).

Page 7 of 45

Eastern Europe. In terms of revenue, the Russian market dominates this region and the political

climate is here characterized as a major threat. Russian politicians try to battle the high alcohol

consumption by the Russian people by imposing high tax increases and legislation against alcohol-

ic beverages. As of January 2010, the imposition of a 200% excise duty on alcoholic beverages in

the Russian market shows how the political factors can negatively affect Carlsberg’s growth rates

and profitability. In addition to the excise duty, an expansion of marketing restrictions will be ini-

tiated from July 2012 with noteworthy restrictions such as no advertising of alcoholic products in

TV and a ban to sell alcoholic beverages from kiosks (Ritzau Finans). Moreover, these political

factors caused Russian consumers to choose cheaper low-end substitutes instead of Carlsberg’s

high-end premium beers. The overall market share in Russia has therefore decreased since 2010

and the future growth prospects of one of Carlsberg key markets are very uncertain and rather

gloomy in the short-term (Kragballe 2011, Nymark). However, it is assumed that once the Rus-

sians adjust to the price increase, there is possibility for long-term growth.

Asia. The political environment differs heavily from each country in this region. Especially com-

munist China offers political challenges that can hurt expansion strategies and key value drivers.

Carlsberg’s main penetration strategy is through FDI’s. As an example, Carlsberg has penetrated

the Chinese market by a joint venture in Chongqing Breweries, which comprises the operation of

twelve breweries in China. (Ritzau Finans, Carlsberg).

The outlook in Asia is advantageous after the removal of trade barriers. Now it is possible for

Carlsberg to import their products from South Asia-based breweries across national borders, due to

the advantageous custom regulations within AFTA. This enforces Carlsberg’s stronghold in Asia

improving distribution and cost efficiency (Kragballe).

3.1.1.2 Economical

Due to Carlsberg’s international profile they are exposed to systematic risk such as volatility in

raw materials, currency and interest rates.

Price volatility on raw materials is a factor that might negatively affect the growth opportunities

and ROIC of Carlsberg, as an increase in raw materials will increase input costs and lower profita-

bility (Carlsberg 2011a). Adversely, the outlook in the short-term is increasing prices on raw mate-

rials such as grain and aluminum for packaging (Datamonitor 2011).

Page 8 of 45

Currency volatility also plays an essential part of Carlsberg’s economic factors. Around 90 % of

Carlsberg’s long-term debt is denominated in foreign currencies. Therefore, a devaluation of the

Danish krone against foreign currencies such as the Pound, will result in an increase in debt pay-

ments and decreasing profitability from sales (Morningstar analysts 17 Aug. 2011). Carlsberg is

also especially vulnerable to fluctuation in the Russian Ruble, as they do not hedge this currency

because of the associated costs. The Russian Ruble has recently weakened against the Euro and

future prospects are very uncertain which can damage Carlsberg’s financial results when translat-

ing sales back (Ritzau Finans).

Finally, the economic crisis and the ongoing debate of whether it has ended or not, has caused

great uncertainty in many of Carlsberg’s main markets causing the actual consumption to drop

below expected and forced Carlsberg to close several breweries (Nymark, Fraende). However,

GDP from each region is expected to increase over the next five years with Asia and Eastern Eu-

rope constituting the largest increase of 6.6% and 4.9% so the outlook is rather positive. The GDP

growth in Europe is only expected to be 2.3% (Appendix 2). In addition, a credit crisis has

emerged in Southern Europe, forcing Carlsberg to look at cost cutting strategies since most of its

business stems from Europe. The effects of the European debt crisis are still unknown but it can

prove to have increasing effect on Carlsberg’s cost of debt. Carlsberg is not currently under severe

financial constraints and it is estimated that they are able to raise 30-50 bn. DKK for any needed

acquisition in the future, which positively impacts future growth rates (Kragballe 2011).

3.1.1.3 Socio-cultural

The alcohol culture and traditions in the various markets are very dissimilar which can explain the

differing degree of consumption per capita. The Western European market is a mature market with

a strong beer culture but has been slightly decreasing over the last five years. Wealth increase in

purchasing power and the influence of Western European culture have helped spur the fast devel-

oping beer culture in Eastern Europe and Asia (appendix 3). The Asian people are however accus-

tomed to a much lower liter per capita consumption, but it can be concluded that the Asian beer

market can be one of Carlsberg’s key future investments and with possibility to enhance the value

drivers (Euromonitor 2011).

Increasing alcohol-related social problems like underage drinking and drunk driving in addition to

negative health concerns like alcohol abuse and obesity, can discredit Carlsberg in the eyes of the

Page 9 of 45

consumer and increase regulation against the brewing industry which can severely decrease Carls-

berg’s financial performance. Especially, the Western European countries have increasing focus

on the general health of the society and beer is not a part of the daily recommendation.

The beer segment also experience strong competition from other types of beverage. The introduc-

tion of the Somersby cider and Eve into the market is an example of the change in consumer pref-

erences, as especially female consumers drift to alcoholic beverages other than beer. Appendix 4

shows how consumption of the cider is growing in the Western European market while beer con-

sumption per capita is decreasing. With Carlsberg’s strong presence in this segment the drift to-

wards ciders will positively affect the value drivers.

3.1.1.4 Technology

The technological factors are those changes in the technology that changes the competitive outlook

of the industry. The brewing industry has existed for many years, but besides updated brewing

techniques and a variety of the beer, the industry is basically build on the same mature technology.

However, if wanting to compete as a global player, it is crucial to keep being innovative with the

current products to match customer needs and continuously minimize brewing, production and

distribution costs, which will have a direct positive effect on the value drivers.

3.1.1.5 Environment

Environmental factors are a very uncertain variable when Carlsberg and the other industry compet-

itors have to determine future consumption and crop prices. Seasonal consumption and poor

weather conditions can alter the demand for Carlsberg’s products and cause dismal sales results.

Extreme low or high summer temperatures in key markets can cause temporary influence on con-

sumer demands as people choose alternative beverages to consume. For example, consumption

rises when the weather is hot as evidence points out in Russia, but in contrary it can negatively

affect the crops (Carlsberg 2011a).

3.1.1.6 Legislative

Carlsberg has obtained a significant market share in certain markets which has two main implica-

tions: first, local competition authorities can limit or even prohibit via antitrust laws, further ex-

pansion strategies, so Carlsberg is unable to obtain monopoly power. Secondly, local control

measures may, in the Scandinavian markets, force Carlsberg not to offer discounts to local restau-

Page 10 of 45

rants, although this is possible due to Carlsberg’s economies of scale on this market. However,

other local and smaller distributors may offer this service (Carlsberg 2008). Both these legislative

measures will negatively affect ROIC and growth.

3.1 Summarizing the PESTEL Analysis:

Factors Description Effect Value drivers

ROIC Growth

Political Increasing taxes on beer Decrease in demand -> decreas-

ing revenue

Pressure from authorities Decrease in demand -> decreas-

ing revenue

Marketing & sale restrictions Decreasing revenue and market

share

FDI in China New market opportunities plus

cost efficiency

Removal of trade barriers in

South-Asia

Cost efficiency

Economic Raw materials volatility Increasing input costs and lower

profitability levels

Currency volatility Vulnerable against Russian RUB

Economic crisis Lower consumption levels ->

lower revenue

European debt crisis Cost cutting strategies

Socio-cultural Alcohol culture Westernizing -> increase in reve-

nue

Health concerns Awareness of damaging effects ->

decreasing revenue

Cider Success in cider market -> in-

creasing revenue

Technology Cost efficiency Lowering cost -> improving

margins

Environmental

Extreme weather conditions Decreasing revenue

Legislative Antitrust legislation Limiting expansion strategies ->

growth potential

Local control measures disfavors

economies of scale

Decreasing revenue

Source: Own creation

Page 11 of 45

3.1.2 PORTERS FIVE FORCES

The figure below shows the effect of each of Porters five industry forces in the brewing industry

based on scale from 1 to 10.

Figure 3.2: Map of the of the Five Forces


3.1.2.1 Threat of new entrants

Competing with companies the size of Carlsberg demands many years of product development and

the modern production facilities to exploit economies of scale. In addition, it requires access to a

large distribution channel and years of marketing to create brand loyalty. It will therefore require

extensive initial capital investment, vertical integration and sunk cost if realizing this level of

competitiveness. Liquidity issues haunting the economy and government regulations on alcohol,

makes it even harder for a brewing company to secure the needed capital and legal permits to grow

the business. Therefore, the fastest way to grow is by acquisition, but acquiring breweries of

Carlsberg’s size to enjoy their tangible and intangible assets is not realistic for a start-up company.

These entry barriers are especially present in the mature established beer markets where only a few

large competitors share the market. Larger companies, such as Carlsberg, have created economies

of scale relative to the smaller breweries, which prevents the smaller breweries to equally compete

in the low and middle price segment. Therefore they have to operate in the premium beer segment

where margins are higher. However, with the current state of the economy, making the business

0123456789

10

Threat of newentrants

Buyer power

Supplier PowerThreat of

substitues

Rivalry amongcompetitors

Page 12 of 45

profitable even in the high-end segment for newly started microbreweries is very difficult. (Las-

sen).

It can be concluded that entry barriers are high for new competitors so this threat is inherently low

in the beer industry, which raises Carlsberg’s potential for sustainable profitability.

3.1.2.2 Supplier Power

The ingredients needed for brewing beer are hops, barley, malt, yeast and water. In addition to

this; Carlsberg needs aluminum, glass and to a lesser degree plastic bottles for packaging. The

prices of the raw materials are influenced by demand and supply on the world market. Naturally,

these homogeneous raw materials are an essential necessity in the beer production that cannot be

replaced, but these are raw materials that basically can be procured all over the world. However, as

the 2011 Q2 report indicated, adverse movement in input materials can negatively impact the

EBIT margin. With Carlsberg’s large geographical span, the company has the ability to make a

policy intended to reduce this risk of higher commodity prices by having numerous suppliers

around the world, where market forces drives down prices.

However, in certain areas, Carlsberg is dependent on key suppliers of packaging due to the suppli-

er’s market positions. To counter the increased supplier power in these areas, Carlsberg has cen-

tralized the procurement division of packaging (Carlsberg 2011a).

In conclusion, with Carlsberg’s sheer size and global profile, suppliers can be considered as having

a relatively low bargaining power. This will lower Carlsberg marginal cost per unit and enhance

ROIC and the ability to grow.

3.1.2.3 Buyer Power

The buyers are fragmented in both on- and off-trade sales. In 2008, no single buyer, contributed by

more than 5% of the total revenue and the five largest buyers only contributed to less than 15% of

the total revenue (Carlsberg 2008). However, in 2010 no single buyer contributed with more than

10% of total revenue. This shows effect of the increasing concentration ratio in the retail industry

over the last decade. This increases the buyers bargaining power along with the assumption that

switching costs to other brands are low. Smaller grocery stores possess a smaller threat, while ki-

osks basically have no saying based on their insignificant purchase volume.

Page 13 of 45

Off-trade distribution to retailers and wholesalers comprises the majority of the company’s total

revenue, whereas bars, restaurants etc. constitutes the on-trade distribution. Naturally, the margins

are higher on the on-trade distribution, but the current economic turmoil has coursed an increased

off-trade sale, as consumers opt out the higher prices on on-trade consumption (Carlsberg 2011a).

Based on the fact that Carlsberg is an integrated part of the on-trade buyer’s beverage selection

and their small purchased volume, it leaves little room for them to pressure Carlsberg on the price

of their products.

In mature beer markets, brand awareness increases Carlsberg’s leverage against the bargaining

power of the buyers as it assumable makes it more difficult to substitute the product. In conclu-

sion, the buyer power is moderate in the markets Carlsberg engages, but as the retailers grow and

perhaps consolidate further; these buyers will enjoy stronger bargaining power.

3.1.2.4 Threat of Substitutes

The closest substitutes for beer are assumed to be other alcoholic beverages such as wine, spirits,

RTDs (alcoholic soft drinks) and cider. Only when heavy regulation on alcohol happens, other

beverages such as soft drinks will be considered substitutes. Also total alcohol consumption has

been increasing over the last few years as appendix 5 shows, so if substitution happens it will be

within the spectrum of alcoholic beverages.

Beer comprises a major part of the total alcohol consumption in all of Carlsberg’s markets (Eu-

romonitor 2011). The alcoholic beverages that are substituted for beer, however varies from region

to region.

In Asia beer is on the rise as earlier discussed in the PESTEL analysis. They tend to choose beer

because of the influence of western culture and increase in disposable income. Substitute products

in this market are mainly from local products and cheap spirits. The same occurs in Eastern Eu-

rope as beer had started to substitute the use of stronger spirits like vodka. As earlier described, the

Russian government tries to reduce the high alcohol consumption per capita with legislation and

push people towards non-alcoholic beverages instead (The Star).

In Western Europe, the beer consumption is slightly decreasing, whereas there is an increase in

consumption of ciders and RTDs where Carlsberg is well represented (Carlsberg 2011a).

Page 14 of 45

Consumers have no switching cost between the substitutes so any regulation or change in consum-

er patterns of beers can have harmful effects on Carlsberg financials. The overall threat of substi-

tutes is therefore considered moderate to high in the industry.

3.1.2.5 Rivalry among competitors

In 2010 the top ten breweries made up about 60% measured in total volume. Carlsberg is the

fourth largest brewery in the world behind Heineken, SABMiller and Anheuser-Busch measured

in volume. These companies will be used throughout the valuation as the main peer group for

comparisons.

As described in section 5.1, the low growth level in N&W Europe causes intense competition for

market share. In Eastern Europe, Carlsberg has established an advantageous outlook for the com-

ing years by having a leading market position. China constitutes the world’s largest beer market,

and is experiencing high CAGRs, which is also why Carlsberg is expanding in to this region order

to gain a strong foothold and counteract the intense competition for market share in N&W Europe,

cr. appendix 1 and 5 (Aktiefokus).

Rivalry among competitors are high in the mature beer markets in the western world because of

the high industry concentration, which will cause stagnating growth rates in these markets accord-

ing to Euromonitor, cr. appendix 6. Therefore, the major breweries have started to focus on the

developing markets in Asia where market shares can be won.

Table 3.3 Summarization of the Five Forces Analysis:

Forces Description

Industry value drivers

Score ROIC Growth

Threats of new

entrants

High entry barriers due to economies of scale and few powerful

players 3

Supplier power Relatively low supplier power due to Carlsberg centralized pro-

curement strategy and world-wide accessibility to input materials 4

Threats of new

entrants

Consolidating retailers but brand loyalty from on-trade sales 5

Threat of substi-

tutes

Growth in substitute products for beer 8

Rivalry among

competitors

High industry concentration in mature markets and low switch-

ing costs causes increasing rivalry for market share 7

Source: own creation

Page 15 of 45

3.2 INTERNAL ANALYSIS

The internal analysis is executed in order to analyse the internal factors of Carlsberg that can affect

future performance. The profitability of Carlsberg is not only affected by the industry structure,

but also by how they chose to position themselves relative to their competitors, which will be ana-

lysed through their strategy, value chain and competitive advantages.

3.2.1 STRATEGY OF CARLSBERG

Carlsberg’s ambition is to be the fastest growing global beer company, measured in terms of aver-

age organic growth in net sales and growth in operating profit over a three-year period. Combined

with the beer market being characterised by strong competition they need a clear strategy in order

to gain sustainable competitive advantages by which they will be able to realize their ambition.

The strategy of Carlsberg, which is included in the annual report for 2010, can be seen in appendix

7.

According to Porter, the strategy of a company can be outlined through two dimensions following

one of his generic strategies (Lynch 2006). The Excellence programs launched in 2003, a strategy

with focus on margin improvements, could indicate that Carlsberg follows a cost-leader strategy.

However, the sub strategies within the 5 strategic priorities (appendix 7), clearly shows that Carls-

berg follows a differentiation strategy. An example is “the winning portfolio strategy” which indi-

cates that Carlsberg target a broad market, but also differentiation because of the premium brands

that differentiates themselves from cheaper low costs alternatives.

3.2.2 VALUE CHAIN

The value chain analysis created by Porter can help clarify how Carlsberg integrates its strategy.

The value chain consists of primary and secondary activities and can be useful in identifying core

competencies and competitive strengths (Lynch 2006). The value chain of Carlsberg is clearly

characterized by the mentioned Excellence programs, which shows in their major focus on effi-

ciency in each activity. These programs have been implemented through a systematic efficiency of

processes and workflows in all parts of the value chain. Furthermore, the trend of CSR has also

found its way into Carlsberg, and it plays an important role throughout their value chain and is

often linked together with efficiency.

Page 16 of 45

3.2.2.1 Primary activities

The inbound logistics does not seem to be one of the primary focus areas for Carlsberg. However,

through their Operational Excellence Program they set out to reduce the numbers of suppliers in

order to achieve a closer and more controlled collaboration, and thus be able to lower the price and

create better service (Carlsberg 2008).

The operations within Carlsberg have been improved through the Excellence programs, within

efficiency, streamlining the operations and reducing the overall complexity within the firm, espe-

cially in N&W Europe. These improvements are obtained through best practice between the dif-

ferent Carlsberg breweries (Carlsberg, Carlsberg 2008).

The outbound logistics is another example of how the Excellence programs and CSR are linked

together. To reduce the company’s environmental impact they have implemented route planning

tools, environment-friendly technologies related to truck engines and eco-driving. These initiatives

also facilitate general efficiency within logistics (Carlsberg 2011a).

Marketing and sales play an important role within Carlsberg. Despite Carlsberg’s well-established

brand, they are currently repositioning themselves across all their markets in order to increase their

sales (Madison Publications Ltd. April 2010). In resent years Carlsberg has increased their focus

on the unexploited consumer group; women. They only account for 20% of Carlsberg’s global

sales volume, even though they account for 50% of the world’s population and 80% of all con-

sumer purchases. To capture this unexploited market they have launched female-friendly products

such as Somersby, Eve and latest BEO (Euromonitor 2011, Carlsberg 2011a).

One of Carlsberg services is the outstanding commercial execution, which helps them maintain

their position as a premium brand. As an example Carlsberg provides the retailers with refrigera-

tors and Carlsberg is responsible for refilling, in order to make sure that the label face front (Carls-

berg 2011a).

3.2.2.2 Secondary activities

Within the secondary activities innovation and procurement are the primary value contributors.

Innovation underpins the history of Carlsberg and is still an important value creator in all the pri-

mary activities. The innovation is visible in both the production, the product-portfolio as well as in

marketing and CSR. Carlsberg has furthermore launched a Procurement Responsible Supplier

Page 17 of 45

Management-program, to improve the quality standards of the raw materials. The benefit is thus a

higher quality of the end-product, which contributes to premium brand. However, these standards

can also result in higher input-costs, hence degenerated profit margins. In addition to these two

value contributors Carlsberg has since 2010 increased its focus on the great value that rests within

committed employees. Carlsberg strive to recruit and sustain talented employees, which is one of

the five strategic priorities. Several initiatives have been made in order to enhance the performance

of the employees, and create a united corporate culture. (Carlsberg, Carlsberg 2011a)

The analysis of the value chain shows how the strategies will have a future impact on profit mar-

gins through implementation of standardization and possible synergy effects between CSR and

efficiency programs. Their continuous innovative focus and the repositioning of the brand are ex-

pected to have a positive impact on future sales. Furthermore, a constant product development

strategy including the resent female-focus will together with the fostering of employee engage-

ment drive future performance. All of these can be classified as long-term strategic value drivers,

whereas Carlsberg’s Excellence programs are short-term value drivers (Koller, Goedhart & Wes-

sels 2011).

3.2.3 COMPETITIVE ADVANTAGES

The competitive advantages of Carlsberg have a positive effect on their profitability. These ad-

vantages can be divided into two distinct parts; the ones that allow the company to charge a pre-

mium price for the product, and the ones that are related to cost and capital efficiency. Both of

these can have positive effects, and by improving one of these a company can improve its ROIC,

which shows in how ROIC can be calculated:

Though competitive advantages affect current profitability, only sustainable competitive ad-

vantages will be able to affect future profitability. To achieve this, the company must have the

capabilities needed to implement and sustain the chosen strategy and structure their value chain in

an appropriate manner (Koller, Goedhart & Wessels 2011). The VRIO Framework is a mechanism

for testing the competitive resources and capabilities of a company. In order for a competitive ad-

vantage to be sustainable it has to be: valuable, rare, costly to imitate and capable of being exploit-

)1(/

//T

unitcapitalInvested

unitCostunitPriceROIC

Page 18 of 45

ed by the company (Lynch 2006). The following competitive advantages of Carlsberg are found to

fulfil the above mentioned criteria, and is therefore characterized as being sustainable, thus affect

future performance positively.

Brand: Carlsberg has a strong and well-established brand, which serves as a basis for their sales.

Since 1973 the slogan of Carlsberg has been: “Probably the best beer in the world”. In the spring

of 2011 Carlsberg chose to expose their position by re-launching their brand under the new slogan:

“That calls for a Carlsberg”, as a part of a major repositioning. Their ambitions are to boost sales

and double their profits within 2015 (Isherwood 5 April 2011). Not only does Carlsberg have a

strong brand, they also benefit from a positive reputation. Richard Lynch argues that “Branding

may be limited, but reputation will be a key determinant of sustainable competitive advantages.”

(Lynch 2006). The key drivers for Carlsberg’s reputation are: the quality of their premium brands,

e.g. due to their best practice the quality of their beer in China exceeds the competitors (Carlsberg

2008). Furthermore, Carlsberg differentiates themselves from their competitors by their marketing

support, in which they focus on sponsoring different events. Among these is their renewed global

sponsorship of the UEFA European Championship, which includes sponsoring the forth coming

European Championship 2012. The championship is held in Eastern Europe, and is thus within

one of Carlsberg’s important growth markets. The international marketing director of Carlsberg

argues that: “The UEFA European Championship is considered the most successful marketing

activity for the Carlsberg brand on a global basis.” (Nelson 24 Maj 2010, Kragballe 13 Okt.

2011).

Innovative products: As mentioned in the value chain analysis, innovation and product develop-

ment plays a continuous important role within Carlsberg. Gradually as more of Carlsberg’s beer-

markets mature, innovation will become an even more dominant factor for the value growth (pro-

spect). This includes targeting both new markets and new segments (Euromonitor 2011). The re-

sent launch of Eve is to target the new segment of women. The launch has so far been a success,

especially in Russia, where the sales of Eve have contributed with a staggering 70% of the global

sales of women-beer (Nymark 15 Sep. 2010).

Production/Innovative business methods: The production within Carlsberg can be acknowl-

edged as a competitive advantage, as they through their Excellence programs and best practise

Page 19 of 45

have been able to obtain a high quality of beer, which as mentioned above contributes to an out-

standing reputation and loyal costumers. Another benefit is the improved efficiency, which drives

down costs, hence increase the profit margins. Moreover, the standardization offers a tool, which

can ease the start-up of new production facilities. This innovative business method can also serve

as an element in the pursued of economies of scale. Among things they have centralized their pro-

curement-centres, IT organisation and shared accounting centres (Carlsberg 2011a). Though

Carlsberg achieves some degree of economies of scale, it is however lower than the larger rivals

such as Anheuser Busch (Morningstar analysts 17 Aug. 2011) (Datamonitor 2011).

The above mentioned competitive advantages; brand, innovative products and their quality will

help Carlsberg sustain a price premium, whereas the innovative business methods will uphold cost

efficiency and the ability to sell products at lower costs than competitors (Koller, Goedhart &

Wessels 2011). They are summed up in Table 3.4.

Table 3.4 Summarizing the Internal Analysis:

Factors How its affecting Time horizon Value drivers

ROIC Growth

- Excellence program (best practice) Increasing efficiency Short-term

- Marketing women Increasing sales with this

segment

Long-term

- Innovation Increasing sales Long-term

- Procurement Price-levels increases Long-term

- Employee stability Long-term

- Brand

All three factors contribute

to a price premium

- Innovative production

- Quality - Relaunch of brand Boost sales Medium-term

- Innovative methods Efficency costs Long-term

Source: own creation

3.3 SWOT

The following section highlights the strengths, weaknesses, opportunities, and threats of Carlsberg.

This analysis summarizes the main findings of the external and internal analysis. The SWOT is

Page 20 of 45

used as a guideline to estimate whether Carlsberg possess the necessary requirements to exploit

future opportunities and minimize future threats.

Table 3.5 SWOT:

Strengths Weaknesses

- Centralized procurement strategy - Increasing input cost

- Main sponsor of the European Championship

dii2012 - Lack of economies of scale compared to peer group

- Brand

- Lack of global brand

- Innovation

- Excellence programs and best practice

Opportunities Threats

- Growth potential in Asia - Increasing taxes on alcoholic beverages

- Westernizing alcohol culture - Increasing raw material costs

- European cider market - European debt crisis

- Long-term growth in Eastern Europe - Depreciation of the Russian RUB

- Social health concerns related to alcohol consumption

- Antitrust limiting acquisition strategies

- Consolidation in the retail industry

- Stagnating growth in N&W Europe


4 REORGANIZING THE FINANCIAL STATEMENTS

This section entails an analysis of Carlsberg historical performance based on the financial state-

ments of Carlsberg. Thus, in order to assess operating performance and value, it is essential to re-

organize the items in the balance sheet, income statement and statement of cash flows into three

categories of components: operating, non-operating, and sources of financing. This is necessary in

calculating the ROIC, FCF and NOPLAT.

Throughout the section only the utmost important figures will be displayed, while peripheral fig-

ures will be dealt with in appendix 8.

4.1 INVESTED CAPITAL, NOPLAT AND FCF

Invested capital is the total investor capital required to fund operations, without considering how

the capital is financed. NOPLAT represents the total income available to investors, which is gen-

erated from operations. NOPLAT is therefore not influenced by the capital structure of the compa-

ny. Thus, this is also the case for the FCF, which is the cash flow available to all investors.

Page 21 of 45

Table 4.1 illustrates the development in Carlsberg’s invested capital, NOPLAT and FCF for the

period 2006-2010 (Appendix 8). Both the invested capital and NOPLAT have increased signifi-

cantly over the period. Much of this increase is due to the effect of the S&N acquisition in 2008,

which contributed to changes within PPE, intangibles, and sales. Furthermore, the Excellence pro-

grams have helped to reduce cost (Carlsberg 2011a). Though in the last years the increase has

slowed down, which should be seen in the light of the on-going financial crisis. The FCF has been

quite volatile during the period, which can be explained by the investments initiated by Carlsberg.

Since the acquisition in 2008 the FCF has increased significantly, and has been stable for the last

two years. This can be explained by the lack of investments, as the FCF is NOPLAT less invest-

ments.

Table 4.1 Carlsberg’s Invested Capital, NOPLAT and FCF:

2006 2007 2008 2009 2010

Invested Capital 51,117 54,445 127,224 119,333 126,151

NOPLAT 2,559 3,875 4,947 6,873 7,178

FCF (without goodwill) 1,485 -638 -83,108 15,149 14,744

Source: Own calculation

4.2 HISTORICAL GROWTH

By assuming that profits and reinvestments stabilize at steady rates over the long term, any long-

term growth in cash flows will be directly connected to long-term growth in revenue. In order to

assess the potential for growth in the future, historical revenue growth, WACC and ROIC is ana-

lyzed.

From 2006 through 2010, Carlsberg increased its revenues by 9.6% per year. Acquisitions have

added 7.3% per year. However, organic growth, consisting of volume, price increases and product

mix, has driven 5.5% per year of this growth. The remaining difference is due to currency effects,

accounting changes and factors unable to locate.

Page 22 of 45

Table 4.2: Revenue Growth Analysis

2006 2007 2008 2009 2010 CAGR '06-'10

Organic volume growth 6% 11% 3% -4% -2% 2.7%

Price increase/mix change 0% 11% 1% 4% -1% 2.9%

Organic growth at constant currency 6% 22% 4% 0% -3% 5.5%

Acquisitions: First-time consolidations 2% 2% 30% 6% -1% 7.3%

Currency movements 0% -3% -3% -7% 5% -1.7%

Accounting changes and other1 -1% -13% 3% 0% 2% -2.1%

Nominal revenue growth 8% 8% 34% -1% 2,5% 9.6%


By further decomposing the revenue growth by region it is possible to obtain a deeper understand-

ing of where Carlsberg creates value measured in organic growth.

Table 4.3: Organic Revenue Growth, ORG, contribution

2006

2007

2008

2009

2010

Share ORG

Share ORG

Share ORG

Share ORG

Share ORG

N&W Europe 66% 4%

61% 1%

62% 2%

61% -2%

59% -1%

BHH Group 18% 21%

23% 31%

Asia 6% 40%

6% 10%

6% 24%

7% 14%

9% 17%

Eastern Europe 10% 3%

10% 22%

32% 16%

31% 1%

30% -11%

Total beer ORG 9.16%

10.81%

7.80%

0.06%

-2.31%


Even though 2009 was a year of negative revenue growth, positive product price/mix in Eastern

Europe and Asia offset lower beer volumes. In 2010, all markets in Eastern Europe showed posi-

tive product price/mix except Russia. Again, this underlines Carlsberg’s dependency of Russia.

Lastly, Table 4.3 illustrates how strong the Asian market is contributing with positive organic rev-

enue growth, which is a key value driver.

Looking at each region it is assumed, that the revenue per hl (in millions) is decomposed to organ-

ic revenue growth only. This assumption is considered reasonable, since it is not obligatory, by

accounting standards, to disclose growth in regard to organic, acquisition, etc. Then, it is possible

to see that Asia is the only region with a continuing increase in revenue per hl (in millions) beer

sold. However, Asia has only contributed with 6-10% to total net revenue, but as Table 4.4 illus-

trate the Asian volume of total volume has been increasing significantly over the five-year period,

which is explained by the new distribution opportunities in South-Asia and expansion strategy in

1 The “accounting changes and other” are assumed to make up the difference in order to reach nominal revenue

growth

Page 23 of 45

China. In the recent years, N&W- and Eastern Europe has experienced a decreasing level of both

measurements illustrated in the table.

Table 4.4 Decomposing Revenue Growth by Region and Volume:

Net revenue per hl beer (in millions)

Volume / total volume

2006 2007 2008 2009 2010

2006 2007 2008 2009 2010

N&W Europe 2.9% 2.9% 7.0% 6.9% 6.9%

38.9% 34.7% 46.7% 43.2% 43.6%

BHH Group 6.9% 8.1%

32.2% 35.5%

Asia 2.6% 3.6% 3.9% 5.3% 5.9%

10.7% 11.7% 10.8% 12.8% 15.9%

Eastern Europe 5.1% 5.2% 11.3% 14.1% 11.9% 18.3% 18.1% 42.5% 43.9% 40.5%


As a conclusion, Carlsberg is seeking new markets in Asia and Eastern Europe, to compensate for

the existing maturing markets in the portfolio. Furthermore it is important to stress that growth

creates value only when combined with an ROIC greater than the cost of capital. Thus, in the fol-

lowing section ROIC will be discussed further.

4.3 RETURN ON INVESTED CAPITAL

The return on invested capital is calculated both with and without goodwill. ROIC with goodwill

shows Carlsberg’s ability to create value over the premium paid for acquisitions, while the ROIC

without goodwill represents the core operations of the business which can be used when compar-

ing the company to its peer group.

Table 4.5 Return On Invested Capital

2006 2007 2008 2009 2010

ROIC with goodwill 5.01% 7.12% 3.89% 5.76% 5.69%

ROIC without goodwill 8.93% 12.15% 12.00% 19.02% 19.82%


Carlsberg’s ROIC with goodwill is almost the same as 5 years ago, though it is evident that the

acquisitions of S&N in 2008 had a major impact on ROIC as it dropped approximately 4%. How-

ever it increased in the subsequent year, which shows that the acquisition generated value for the

investors.

Carlsberg’s ROIC without goodwill has doubled over the past 5 years, with a significant increase

after the acquisition in 2008. To analyse ROIC without goodwill the different elements are de-

composed in the ROIC-tree that illustrates how operational drivers influence ROIC (Appendix 9).

In the period 2006 to 2010, pre-tax ROIC has increased dramatically, which is due to increases in

operating margins and decreases in revenue/invested capital. The increases in operating margins

Page 24 of 45

can be explained by the Excellence programs which have improved gross margin and reduced

SGA, while the revenues has increased over the years. The decrease in revenues/invested capital is

mainly due to a significant improvement in reducing operating working capital.

4.4 CAPITAL STRUCTURE

So far the operating performance of Carlsberg has been analysed and their ability to create value.

In this final step of the historical analysis it is necessary to focus on how Carlsberg has financed it

operations. To determine the how robust the capital structure is and how the investments have im-

pacted Carlsberg, the liquidity is examined through the interest coverage, and leverage. Liquidity

measures Carlsberg’s ability to meet its short-term obligations such as interest expenses, and is

calculated as EBITA/net interest expense.

Table 4.6 Carlsberg’s financial gearing/interest coverage and Debt/Equity ratio:

2006 2007 2008 2009 2010 2011

Interest coverage 3.54 4.64 3.22 4.23 5.14

D/E - ratio (book) 1.01 0.99 0.74 0.6 0.47 0.5 (Q3)

Source: Carlsberg Annual Report 2010 and Carlsberg Q3 Report

Interest coverage has increased over the past years, with a decrease in 2008 due to their increase in

liabilities. Furthermore, the ratio is throughout the period above one, which means that Carlsberg

has sufficient liquidity to meet its short-term obligations.

In the past years, it has been of high priority for Carlsberg to reduce their level of debt (Carlsberg

2011a). It can be seen in Table 4.6 that they have succeeded in reducing their debt. In September

2011, D/E-ratio was 0.5 (Carlsberg 2011b) which implies that the debt-to-enterprise value ratio

was 33.3%. This is assessed to be a reasonable level for the future as Carlsberg has stated that the

debt reduction has so far been significant, and will therefore not be of such high priority in the

years to come. This can be an advantage as this might enhance and stable the future D/E-ratio,

which is required when using the WACC as discount rate.

Overall the financial health of Carlsberg is not considered to be an issue and will therefore not be

further commented on.

4.5 COST OF CAPITAL

In order to value Carlsberg using the DCF model, the forecasted future free cash flows will be dis-

counted by the weighted average cost of capital (WACC). The WACC is the total required ex-

pected return for both equity and debt holders after tax, it represents an opportunity cost that inves-

Page 25 of 45

tors face when investing in Carlsberg instead of other investments with similar risks (Koller,

Goedhart & Wessels 2011).

Where and are the target level of book based debt and equity to value. Though Koller et al.

2010 states that it should be market based and not book values, it is difficult to estimate the market

value of Carlsberg’s debt as it is not traded publicly, which is why book values are used. and

are respectively the required expected returns to the debt and equity holders. is the compa-

ny’s marginal income tax rate. In the following, the elements of WACC will be further elaborated.

4.6 COST OF EQUITY

The capital asset pricing model (CAPM) is chosen in order to determine the cost equity. CAPM

remains the most commonly used and preferred model for estimating the cost of equity when a

WACC is developed to use in the valuation. The equation below portrays the relationship of the

elements in CAPM:

Where E(ri) is the expected return of the security, rf is the risk-free rate, 𝛽𝑖 is the stocks sensitivity

to the market, and E(Rm) is the expected return of the market. The difference between E(Rm) and rf

is the market risk premium (Koller, Goedhart & Wessels 2011). The risk-free rate is estimated to

be 1.94% on November 18th

based on a 10-year German government bond and will be elaborated

in section 4.7.

4.6.1 MARKET RISK PREMIUM

Finding the market risk premium is a backward looking measure and it is assumed that the past

premia are unbiased predictors of future premia (Koller, Goedhart & Wessels 2011). The S&P

Euro Total Return Index is assessed to be the right proxy for the market return, because the majori-

ty of Carlsberg’s business is conducted in Europe.

D

V

E

V

kd

ke Tm

])([)~( fmifi rRErrE

Page 26 of 45

As proxy for the risk-free rate, a 10-year German Government bond will be used as described

above and to reduce estimation errors, the longest time period possible 1987-2011 is chosen

(Koller, Goedhart & Wessels 2011).

The market risk premium is found by deducting the German benchmark bond from the market

return, cr. the enclosed CD. In order to avoid asymmetry when the index fluctuates, log-returns are

calculated on the market return. Using arrhythmic average results in a market risk premium of

2.05% whereas a geometric average -1.16%. This estimate does not coincide with empirical find-

ings in Koller et al. and Dimson et al., that predicts risk premia between 4.5% and 5.5%. Based on

these empirical findings an arrhythmic average of 5% is chosen as risk premium for the valuation

(Dimson, Marsh & Staunton 2003).

4.6.2 BETA

Beta will be estimated by using the market model. Here ri is the return on the company stock

whereas rmt is the return of the market:

The S&P Euro Total Return Index is again used as a proxy. The beta of a company represents how

well the market and the company moves together, so to find the levered beta, Carlsberg returns are

regressed on the S&P Euro returns. There are various suggestions on what time interval and fre-

quency to use when estimating beta. Based on the literature of Koller et al., 5-year monthly return

data is preferred whereas Daves et al. suggest 3-year data with daily frequency. The 5-year month-

ly data has been chosen as this method yields the highest coefficient of determination (R2). A lev-

ered beta of 1.35 is calculated on November 18th

2011 cr. appendix 15 (Daves, Ehrhardt, Michael

C. & Kunkel, Robert A. 2000).

To estimate the validity and usability of the levered beta, rolling beta estimation is conducted in

figure 4.7 compared to peers in the industry.

imii rr ~~

Page 27 of 45

Figure 4.7 Carlsberg and Peer Group Rolling Beta

Source: Datastream

The levered beta of Carlsberg has historically been low in the range from 0.4 to 0.6 until 2008.

Since then, the levered beta have increased and surpassed its peers to the current beta estimate of

1.35. The levered beta in 2008 is caused by the gearing to acquire S&N. The beta has since then

remained at a high level, which can be accredited to the increased exposure to the Russian market

that has proven to be very volatile and has impacted Carlsberg’s risk profile negatively. It is as-

sumed that a beta of 1.35 excellently reflects both the present and future risk profile of Carlsberg,

and will therefore be used in the valuation.

A company’s levered beta is a function of the operating risk and the financial risk it takes, so to

compare companies with similar operating risk, the leverage factor has to be removed. Therefore

to find the unlevered beta the formula below is used (Koller, Goedhart & Wessels 2011):

βU = βE

1+ D/E

𝛽u is the unlevered beta, 𝛽E is the levered beta, and D/E is the debt/equity ratio. It is assumed that

beta debt βd is zero and that beta tax βtxa= βu.

0

0,2

0,4

0,6

0,8

1

1,2

1,4

1,6

1,8

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Carlsberg

Heineken

AB InBev

SABMiller

Page 28 of 45

Table 4.8 Carlsberg and Peer Group Beta Estimation:

Raw Beta Std. Error R Squared D/E ratio Unlevered Beta

Carlsberg 1.35 0.19 48.41% 0.5(2)

0.92

Heineken 0.76 0.12 42.88% 0.94(3)

0.71

SABMiller 1.13 0.13 57.39% 0.37(3)

0.82

AB InBev 0.94 0.19 30.43% 1.24(4)

0.42

Damodoran(1)

0.92 n/a n/a 13.09% 0.81

Source: Datastream, (1)Damodoran website, (2){{ 46 Carlsberg 2011;}}, (3) Moneycentral, (4)DailyFinance

It is seen that after un-levering beta, Carlsberg’s estimates is closer to peers and the industry aver-

age. It would be possible to re-lever Carlsberg’s unlevered beta by using the company’s target D/E

ratio and Damodoran’s industry unlevered beta in order to calculate an industry- adjusted company

beta. However, it is assumed that the raw beta estimate will portray the best picture of Carlsberg’s

risk profile. When applying CAPM to the elements found above the cost of equity for Carlsberg is

8.69%.

4.7 COST OF DEBT

The cost of debt is estimated by finding the risk-free rate and adding a suitable yield spread in ac-

cordance to the rating of Carlsberg. In accordance with Koller et al. 2010 a 10-year state bond

should be used as the risk-free rate in the calculation of the required expected returns to debt hold-

ers. This is the best match with the cash flows from the company and it is furthermore short

enough to still be liquid. It is set to be the 10-year German government bond since this is the most

liquid euro dominated bond. The yield to maturity of the 10-year German government bond is

1.94%. This is a historically low risk-free rate, which is not expected to be constant in the long

run. The current credit spread is based on Moody’s credit rating of Carlsberg and is 2.92%. The

combination of these two, results in a historical low cost of debt. However, due to the current eco-

nomic situation in Europe described in the PESTEL, it is not estimated that this low cost of debt

will remain constant in the long run. Therefore the credit spread is adjusted upwards with 1.2% in

order to take the long run perspective into account. This adjustment results in a cost of debt of

6.06%, which is similar to previous years.

Page 29 of 45

5 VALUATION

The valuation of Carlsberg will be based on the previous strategic and financial analysis. These

will serve as a basis for the forecasting, and will provide a comprehensive insight into Carlsberg’s

performance, enabling the estimation of a fair value of Carlsberg. Furthermore, analyses will be

made in order to quantify the uncertainties around the estimate.

The DCF-model will be applied in order to value Carlsberg; this will be further supplemented by a

multiple analysis, as to obtain further insight. To quantify the uncertainties in the valuation a sce-

nario analysis will be performed. This will provide an overview; as to what would the value be

under very positive or negative conditions. Finally, the sensitivity to fluctuations in the key value

drivers will be evaluated.

5.1 DISCOUNTED CASH FLOW ANALYSIS

The forecasting is divided up into three time periods. The first five years, 2011-2015, are detailed

with forecasts of each financial-statement line item, such as revenue, CoGS, SGA expenses and so

forth. For the medium term, 2016-2025, a simplified forecast is performed, focusing on a few im-

portant variables, such as revenue growth, EBITA margin and capital turnover. From the year

2025 and beyond, it is not possible to forecast yearly numbers, and therefore a continuing value

formula is applied. The perpetuity formula is based on a steady-state performance, thus it is argued

that Carlsberg by 2025 reaches a steady-state performance. This implies that Carlsberg will grow

at a constant rate, done by reinvesting a proportion of their operating profits into the business eve-

ry year. A constant rate of return on existing capital and new capital invested is furthermore earned

(Koller, Goedhart & Wessels 2011).

The forecasting of revenue growth in the short-term period is based on the three markets classifi-

cations done by Carlsberg. The result of the valuation and the two scenarios can be found in ap-

pendix 10, furthermore the actual models are enclosed on CD.

5.2 VALUATION OF CARLSBERG

The following section contains the most realistic forecasts for Carlsberg, the base case, in which

the three time periods will be discussed. This base case scenario is expected to occur with a proba-

bility of 60%.

Page 30 of 45

Table 5.1 Base Case Growth Estimates: Figure 5.2 Base Case Scenario:

2011 2012 2013 2014 2015

Revenue 3.0% 2.9% -0.2% 1.9% 2,0%

CoGS 43.2% 42.7% 42.2% 41.7% 41.2%

SGA 33.6% 35.0% 33.6% 33.6% 33.6%

Net PPE 53.5% 53.5% 53.0% 53.0% 52.5%

EBITA mrg. 16.3% 18.0% 18.7% 19.2% 19.2%

ROIC 6.2% 7.0% 7.5% 8.0% 8.2%



5.2.1 SHORT TERM PERIOD

In N&W Europe the market is mature, thus the only contributors to growth are increase in market

share and price increases. Carlsberg is expected to slowly increase their market share due to their

re-launch of the brand. In the year 2012 this increase in market share is further boosted by their

sponsorship of the European Championship. However, the market in N&W Europe is overall ma-

ture, there are still some possibilities within the female segment. Due to Carlsberg’s female-

friendly products launched within recent years like the Somersby, it is reasonable to assume a

small growth and increase in market share. Furthermore, the forecasted growth of Carlsberg con-

tains expected price increases.

For the Eastern European region, Carlsberg has gained a strong position through BBH and its lead-

ing brand Baltika. Due to the recent political disturbances in Russia and a weakening Ruble,

Carlsberg has suffered from declining sales. Furthermore the forthcoming marketing restrictions in

2012 are expected to further affect sales negatively. Therefore, short-term prospects look rather

gloomy for the Eastern European segment. However in the long run once people adjust to the new

prices, it is expected that Russia again will become a potential growth market. With a market share

of 25.10% within the Eastern European region Carlsberg is a major player and for the coming

years they are despite Russia expected to further grow their market share, due to the above-

mentioned marketing strategy. The beer market in Eastern Europe has been growing in recent

years, and is expected to continue, especially for Carlsberg in 2012 since the football champion-

ship is held in this specific region.

0,00%

5,00%

10,00%

15,00%

20,00%

25,00%

0

20000

40000

60000

80000

100000

20

06

20

08

20

10

20

12

20

14

20

16

20

18

20

20

20

22

20

24

Revenue EBITA margin

ROIC

Page 31 of 45

Asia is expected to be one of the greatest drivers of revenue growth for Carlsberg in the future.

The Asian region is currently contributing with 9.21% to the revenue. This is for the coming years

expected to increase due to the emerging characteristics of the Asian market and Carlsberg’s ex-

pected ability to capture market share. Most of the revenue growth is anticipated to come from

increasing demand for beer as the Asian population in general is experiencing increasing purchas-

ing power and westernization. Therefore, the market share is forecasted to steadily increase in the

forthcoming years.

The forecasted market shares and growth rates can be seen in the table below. The Q3 report of

Carlsberg states a revenue growth on 4% (Carlsberg 2011b) and the expected growth for 2011 is

therefore set to be 3% which is found to be a conservative but realistic forecast for the year.

Table 5.3 Estimated Market Share and Growth Rates for Carlsberg 2011-2015:

2010 2011 2012 2013 2014 2015

Market share

N&W Europe 11.00% 11.10% 11.80% 11.65% 11.55% 11.55%

East. Europe 25.10% 25.30% 26.10% 25.50% 25.40% 25.40%

Asia 2.10% 2.60% 3.10% 3.60% 4.10% 4.60%

Growth

N&W Europe

1.50% -1.00% 1.00% 1.00%

East. Europe

3.00% -2.00% 1.00% 1.50%

Asia

12.00% 10.00% 9.00% 8.00%

Total growth 3.00% (Q3E) 2.94% -0.18% 1.90% 1.99%

Net revenue

N&W Europe

37,298.94 37,858.42 37,479.84 37,854.64 38,233.18

East. Europe

18,742.25 19,304.52 18,918.43 19,107.61 19,394.23

Asia 5,814.43 6,512.16 7,163.38 7,808.08 8,432.73

Total revenue 60,054.00 61,855.62 63,675.10 63,561.64 64,770.33 66,060.14


Taken the forecasted market shares into account, a growth rate is forecasted for each market.

Based on the forecasted growth rates, revenue for each region is calculated. It can be seen that

revenue is boosted in 2012 because of the sponsorship, and a small decrease is therefore anticipat-

ed for the following year. However from the 2013 and onwards Carlsberg is able to achieve posi-

tive revenue growth.

The short term forecasting of invested capital, NOPLAT and FCF can be found in appendix 11

together with a description of the essential variables.

Page 32 of 45

5.2.2 MEDIUM TERM PERIOD

For the medium term period, year 2016-2025, a streamlined model is used where only core value

drivers are forecasted, such as net revenue growth, adjusted EBITA and the ratios of revenue to the

invested capital (appendix 12). In year 2015, growth is forecasted to be 1.99%, as this is a fairly

conservative growth rate, the forecasted growth of Carlsberg in the medium term period is ex-

pected to be around 1.5%, Thereby is it assumed that Carlsberg already in the medium term reach-

es a steady state. Thus, continuing value could have been applied at this point, however a 10-year

forecast is made in order to give a more specific overview than for the continuing value period.

The 1.5% is based on the N&W European market experiencing declining sales, Eastern European

market once again experiencing growth and the Asian market is expected to sustain relative in-

creasing growth rates, that cancels out the decline in Europe.

The adjusted EBITA margin is held constant at a rate of 19.26% in year 2015 throughout the me-

dium term period. Furthermore operating cash taxes and invested capital are set at constant rates.

5.2.3 CONTINUING VALUE PERIOD

As mentioned earlier, growth is expected to be at a steady state of 1.5%. RONIC is calculated to

be 8.25%, which is higher than the WACC on 7.31%. The fact the RONIC is higher than the

WACC implies that Carlsberg, like any other branded consumer product companies, owns a brand

that enables them to earn profits, which exceeds their cost of capital. (Koller, Goedhart & Wessels

2011). The WACC of Carlsberg is forecasted to remain at 7.31% since it is not expected that the

capital structure of Carlsberg will change significantly. The continuing value can be seen in the

forecasting model, appendix 10.

5.2.4 MOVING FROM ENTERPRISE VALUE TO SHARE PRICE

The enterprise value represents the value of the entire company. When estimating the value per

share for Carlsberg, it is necessary to deduct the claims from others than the shareholders in order

to reach the equity value of Carlsberg. In the following Table 5.4 the calculations are shown, these

are all based on Koller et al. 2010.

Page 33 of 45

Table 5.4 Calculation of Carlsberg Stock Price

Value pr. share

Operating value

139,562

Consolidated investments

2,028

Receivables from sale of goods/services 5,057

Financial assets

29

Other financial asset 5,086

Tax loss carry-forwards

1,955

Marketable securities -

Enterprise value

148,631

Contingent liabilities

18

Debt

32,743

Non-current provision

1,506

Present value of unfunded pension plans 1,456

Capitalized Operating Leases

3,436

Preferred stock

14,052.9

Minority interest

8,021

Employee stock options

211

Interest expense 2,165

Equity value

85,023

No. Of outstanding shares (in millions) 118,86

Value per share, DKK 715.32


The operating value of Carlsberg is the sum of the discounted cash flows from the short term, me-

dium term and continuing value. Though, this approach of discounting the cash flows assumes that

they occur ultimo each year, when they are actually occurring throughout the year. This would

undervalue Carlsberg, as the cash flows would be discounted over longer periods. In order to ad-

just for this problem the operating value is adjusted with a midyear factor.

Midyear adjustment factor = (1+WACC)1/2

The midyear adjustment factor is calculated to be 1.036, which is multiplied with the operating

value.

Page 34 of 45

In order to get from operating value to enterprise value all non-operating assets, such as noncon-

solidated investments, tax-loss carry forwards etc. are added to the value of core operations. It is

assumed that all cash is operating cash, therefore no excess cash is added. To convert this enter-

prise value into equity value all liabilities are subtracted, such as short-term and long-term debt,

non-current provisions etc. Among the liabilities; preferred stock is obtained by multiplying the

number of A-shares with its price of November 18th

, which was 417 DKK. Capitalized leases are

found using the formula of Koller et al. 2010. Furthermore, the market value of minority interest is

calculated as minority interest share of profit multiplied with a P/E ratio of 13.3 (Yahoo Finace).

Employee stock options can reduce the value of equity per share and is therefore also deducted

from the enterprise value. The value of these options are found using Black-Scholes. The full cal-

culations for the former can be found on the enclosed CD.

Based on an enterprise value of 148,631 DKK, the equity value is found to be 85,023 DKK, With

119 million shares outstanding, the estimated value per share is 715.32 DKK for the base case sce-

nario. The valuation of shares is very dependent on the WACC, thus very sensitive to changes. As

discussed in section 4.7 the credit spread when calculation cost of debt, was increased with 1.2%.

Without this increase, the share price would have been 775.47 DKK which is significantly higher

than the 715.32 DKK. As argued earlier in section 4.7 the adjusted credit spread is used.

5.2.5 VERIFYING THE RESULTS

In the table below the return on invested capital for Carlsberg is illustrated, ranging from historical

terms to short term forecast and medium term forecast. This is done in order to perform a sanity

check of the results reached so far.

Table 5.5 Carlsberg ROIC in percentage:

2006-2010 2011-2015 2016-2025

ROIC incl. Goodwill 5.32 6.96 8,21

ROIC excl. Goodwill 14.61 21.90 24.58


It reflects the expected future performance of Carlsberg, with the declining markets in N&W Eu-

rope, the, to some point, unstable markets of Russia, which inhibits the overall growth of the East-

ern European market, and finally the fast growing markets of Asia. In all this results in a steady

growing ROIC.

Page 35 of 45

The table below shows the development in the EBITA margin and capital turnover. Both of these

show a steady increase, which reflects the strategic analysis of Carlsberg in relation to the expecta-

tions of Carlsberg’s ability to increase efficiency due to the Excellence programs.

Table 5.6 Development in Carlsberg EBITA margin and Capital Turnover

2006-2010 2011-2015 2016-2025

Adjusted EBITA/Revenue 13.35 17.90 19.21

Revenue/invested capital excl. Goodwill 1.52 1.69 1.71


The continuing value of Carlsberg account for 40% of the operating value, and is in line with ex-

pectations, based on the subject of continuing value by Koller et al. 2010.

5.3 SCENARIOS

In order to illustrates how great the uncertainties are in the estimates, two scenarios are created – a

positive and a negative. This is done so a certain interval can be found in which it seems realistic

the share price will be. In the scenarios all is held constant, with the exception of growth and

CoGS, which will affect the EBITA and ROIC. Furthermore, concerning the growth for 2011, it

expected that the two scenarios can only deviate 1%, as the growth level for 2011 is based on the

Q3 report. For the rest of the years in the short-term period, the growth in the two scenarios is set

to deviate with +/- 1.5%. For the medium-term period, growth in the bear case is set to deviate

0.5%, as inflation and general price increases still affect revenue growth. For the bull case scenar-

io, growth in the medium-term period is set deviate 1.5% as for the short-term period. Assump-

tions for the terminal period are maintained for both scenarios.

Page 36 of 45

5.3.1 BEAR CASE SCENARIO

The bear case, which is a down scenario, results in a share price of 466.51 DKK, and is expected

to occur with a probability of 25%. The consequences of such a scenario can be seen in table 6.7

and figure 6.8 and further models can be found in appendix 10.

Table 5.7 Growth Estimates for Bear Case Figure 5.8 Bear Case Scenario:

2011 2012 2013 2014 2015

Revenue 2.0% 2.4% -1.7% 0.4% 0.5%

CoGS 43.7% 43.7% 43.7% 43.7% 43.7%

SGA 33.6% 35.0% 33.6% 33.6% 33.6%

Net PPE 54.0% 54.0% 54.0% 54.0% 54.0%

EBITA mrg. 15.2% 16.4% 16.5% 16.5% 16.5%

ROIC 5.7% 6.1% 6.3% 6.5% 6.7%



The bear case scenario estimates that the uncertainties Carlsberg is currently facing in Russia with

the increasing tax and restrictions on marketing will have major impacts on their sales. Further-

more, the already declining market in N&W Europe will be enhanced by the debt-crisis and over-

shadow the potentials in the female-friendly products. Concerning the markets in Asia, the pro-

spects are still positive; however, Carlsberg is not able to capture the full potential of the growing

markets. The re-launch of the brand fails to a certain extent, as it is not able to boost sales as

hooped by Carlsberg. The ongoing Excellence programs have outlived their potential, as most of

the effects from these are short-term. Therefore, Carlsberg will not be able to further decrease

CoGS. Compared to the base case, this will have negative effects on the EBITA margin and thus

ROIC, as it will lessen further growth of these. Furthermore, RONIC in this scenario is set equal to

the WACC as it is expected that the fierce competition in the industry will not allow for abnormal

profit in the long run. The fact that the RONIC is set equal to the WACC, does not mean that

Carlsberg is not able to gain abnormal profit, it implies that new projects launched by Carlsberg do

not create value, however their existing projects continue to perform at base-level (Koller,

Goedhart & Wessels 2011).

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40000

60000

80000

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06

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24


ROIC

Page 37 of 45

0,00%

5,00%

10,00%

15,00%

20,00%

25,00%

0

20000

40000

60000

80000

100000

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ROIC

5.3.2 BULL CASE SCENARIO

The bull case, which is an up scenario, results in a price of 997.40 DKK, and is expected to occur

with a probability of 15%. In Table 5.9 Growth Estimates for Bull Case:and figure 6.10 below, the

consequences of such a scenario can be seen, and the model for the forecast in this scenario can be

found in appendix 10.

Table 5.9 Growth Estimates for Bull Case: Figure 5.10 Bull Case Scenario:

2011 2012 2013 2014 2015

Revenue 4.0% 3.4% 1.3% 3.4% 3.5%

CoGS 42.9% 42.1% 41.3% 40.5% 39.7%

SGA 33.6% 35.0% 33.6% 33.6% 33.6%

Net PPE 54.0% 54.0% 54.0% 54.0% 54.0%

EBITA mrg. 16.9% 19.0% 19.9% 20.7% 20.7%

ROIC 6.5% 7.5% 8.2% 8.9% 9.1%



For this up scenario it is estimated that Carlsberg is able to overcome many of the obstacles they

are facing on the Russian market. The current increased taxation of hard spirits will lead to a shift

in demand towards beer as these are the cheaper substitute. Hereby Carlsberg will be able to elim-

inate the current stagnating market growth rates in the Eastern European market. As goes for the

mature N&W markets, these will experience a breathing hole, as the debt crisis is avoided and the

launch of products such as Somersby, Eve and BEO will be able to capture the female segment

and improve sales. In the Asian market Carlsberg continues to grow and are able to capture a lot of

the market share.

The re-launch of the Carlsberg brand works as intended, thus sales are boosted and revenue in-

creases. Furthermore, the Excellence programs are still in progress and Carlsberg is able to contin-

ually modify them in order to further increase efficiency. CoGS will therefore be effected positive-

ly, and the EBITA margin will consequently increase an approximately reach a level of 20.7% in

2015. This increase will have positive effects on NOPLAT and ROIC, and these will also increase

during the period. Furthermore, in this scenario, RONIC is calculated the same way as in the base

case, thus, due to the increase in revenue, RONIC equals 9.12%.

Page 38 of 45

5.4 WEIGHTED SHARE PRICE

In the former three scenarios, each was given a probability. The base case scenario is assigned a

probability of 60%, as this is assessed to be the most realistic scenario based on a present-day

point of view and the general market view. The bull and bear scenarios are the two extremes on

each side of the base case, and these are assigned a weight of respectively 15% and 25%, the dis-

tribution is based on the rather gloomy prospects in Europe. The weighted fair share price can be

seen in the table below.

Table 5.11 Carlsberg Share Price

Bear case Base case Bull case Total

Share price

466.51 715.32 997.40

Weighting

25% 60% 15% 100%

Weighted share price 116.63 429.19 149.61 695.43

Source: Own valuation

This result in a share price of 695.43 DDK, which is significantly higher than the price on the 18th

of November which was 393 DDK, thus, according to this valuation, the share price of Carlsberg

is currently undervalued.

5.5 MULTIPLES ANALYSIS

The multiples analysis will determine whether the share value found in the DCF valuation is real-

istic compared to similar companies in the industry from a market based point of view. To evalu-

ate whether Carlsberg over- or underperforms in the industry, a peer group is chosen containing

Anheuser Busch, Heineken and SABMiller. The multiples analysis is simple and flawed compared

to the DCF analysis, because it is assumed that many of the key value drivers and accounting be-

havior is equivalent in the peer group.

EV/EBITDA multiple is according to Koller et al. the most widely used because it is “early” in the

income statement and is therefore independent of the capital structure and tied to the core opera-

tions of the company. The forward multiples is found using DataStream/Reuters. Forward multi-

ples are used because they provide a more accurate prediction of value than historical multiples

(Koller, Goedhart & Wessels 2011). There is not enough information to conclude whether these

companies EBITDA has been re-adjusted, so the multiple has to be interpreted with reservations.

Page 39 of 45

The P/E multiple is not conducted because it is affected by a company’s capital structure and not

just operating performance. In addition, the P/E will contain lack of information concerning non-

operating items (Koller, Goedhart & Wessels 2011).

Table 5.12 Multiple analysis

Forward EV/EBITDA 2011 2012 Carlsberg 6.0x 6.8x AB InBev 8.6 9.1 SABMiller 9.9 9.3 Heineken 7.0 7.4 Peer group mean 8.5x 8.6x Share price 474.28 477.42

Source: DataStream and own creation (for calculations see appendix 14)

The above table shows that Carlsberg is below industry average and has the lowest multiple of the

selected peer group. According to market expectations Carlsberg is therefore valued less than its

closest competitors. In a perfect world where markets are completely efficient the four companies

should trade at the same multiple. However, it assumed that markets are not efficient due to

asymmetric information.

To find the share price of Carlsberg the peer average multiple is multiplied on our forecasted

EBITDA (appendix 14). The share price found is significantly below the share price found using

DCF analysis. As stated earlier, DCF analysis relies on fundamental valuation, whereas multiples

rely on market expectations. The differences can be caused by mismatches in the input elements

for the WACC calculation, forecast estimation, or that the peers are not perfectly comparable.

5.6 SENSITIVITY ANALYSIS

The sensitivity analysis will show how sensitive the share price of Carlsberg is to fluctuations in

key value drivers. The three key value drivers used are the WACC, the growth rate, and the

RONIC. These are chosen based on their significant alteration on the entire base-case forecast.

Below, table 5.13.1 and 5.143.2 both clearly illustrate that changes in the WACC has the greatest

impact on the share price. With the risk-free rate being historically low, it will result in a lower

WACC and a share price above a realistic value.

Page 40 of 45

Table 5.13.1 and 5.13.2 Sensitivity Analysis - ROIC, WACC & Growth

ROIC/WACC 6.50% 7.00% 7.31% 8.00% 8.50%

g/WACC 6.50% 7.00% 7.31% 8.00% 8.50%

7.25% 874.83 761.32 700.56 585.64 516.18

0.50% 863.24 759.03 702.21 592.84 525.56

7.75% 884.99 769.98 708.39 592.02 521.72

1.00% 877.39 767.69 708.38 595.19 526.16

8.25% 893.97 777.59 715.32 597.67 516.89

1.50% 893.92 777.54 715.32 597.63 526.6

8.75% 901.83 784.26 721.38 602.6 530.91

2.00% 913.65 788.97 723.12 600.19 526.85

9.25% 908.88 790.25 726.82 607.03 534.74

2.50% 937.8 802.51 732.2 602.91 526.89


The growth rate has very little impact on the share price, as the RONIC only slightly deviates from

the WACC. In result, even though Carlsberg grows, they are not able to create significant value.

Table 5.15 illustrates the importance of increasing the ROIC beyond the cost of capital in order to

create value for shareholders.

Figure 5.15 Sensitivity Analysis Growth and RONIC

g/RONIC 1.0% 5.0% 8.3% 12.0% 15.0%

0.50% 482.14 682.48 702.21 711.69 715.87

1.00% 233.37 665.79 708.38 728.86 737.86

1.50% N/A 645.9 715.32 748.63 763.31

2.00% N/A 621.9 723.12 771.78 793.19

2.50% N/A 623.38 732.2 773.25 794.66


6 NEGOTIATION DAY

Negotiation day was held on the 26th

of November. Prior to this day we were assigned the role as

buyer, and we chose to represent the Swedish company Cevian Capital. Cevian Capital is an inter-

national investment firm, which acquires significant ownership positions in undervalued European

public companies. According to our valuation of Carlsberg, they are currently undervalued, when

comparing our share price with the market price. Thus, we argued that Cevian Capital would have

the experience and capabilities to create value in Carlsberg through active ownership. Our goal

was to acquire approximately 33% of the B-shares and furthermore a seat on the board of direc-

tors.

As our share price is 695.43 DKK, we decided not to go above 650 DKK per share. Due to the

currently low market price of a Carlsberg share, we started out with a bid of 405 DKK – providing

plenty of space for negotiations. For the first round of negotiations we talked a lot about future

strategy for Carlsberg and the current situation in Russia. The sellers turned down our first offer,

Page 41 of 45

as they valued it at approximately 800 DKK. For the second round of negotiations the discussion

was primarily about the valuation – WACC, growth rates and interest rates. We argued back and

forth, and the sellers changed their demand price to 675 DKK, however we had agreed not to go

above the price of 650 DKK. At the end of the negotiation the sellers agreed to sell at a price of

650 DKK. Thus, we ended up fulfilling our goal – acquiring 33% of the B-shares and in addition a

seat in the board of directors.

7 LEARNING OUTCOME

We all chose the elective Corporate Valuation, as we find it to be essential for students of MSc

Finance and International Business. The process of acquiring or selling companies, which requires

valuation of these, has great practical value. Many of the elements of the elective are estimated to

be applicable in real life business.

It was challenging to combine the strategic analysis and the historical financial performance into a

valid forecast. Furthermore, as we chose to create our own valuation model, we experienced many

obstacles and the great importance of linking correctly within excel. However, by designing our

own model, we were forced to understand the process of the valuation. Finally, we learned the

importance of the size of the WACC and how much it is able to change the valuation.

8 CONCLUSION

The goal of this report has been to estimate the fair value of Carlsberg A/S B-shares on November

18th

2011. To conduct the valuation, both strategic and fundamental analysis has been performed

in order to forecast the future prospects and cash flows of the company.

The most important findings of the external analysis are that Carlsberg is currently facing political

challenges in Russia, which decreases the demand for high-end beers. The rest of Eastern Europe

is still experiencing growth. Declining sales characterizes the N&W European market, though po-

tential within the female-segment is being captured. Asia is considered a growth market, especially

driven by China. From the internal analysis it can be concluded that Carlsberg has been able to

improve efficiency and cut cost within their value chain, as a result of the Excellence programs

and best practice. Furthermore, the re-launch of the brand combined with the sponsorship of the

Page 42 of 45

European Championship are expected to boost sales in Europe. Innovation continuous to be a

competitive advantage and is expected to create future growth.

Throughout the historical financial analysis the S&N acquisition in 2008 has had major impacts,

for instance ROIC (with goodwill) dropped 4%. However, it has increased since, which shows that

the acquisition is creating value. The current debt-crisis in Southern Europe is causing historically

low borrowing rates in Germany. In order to adjust for this estimated short term condition, the

credit spread is adjusted upwards by 1.2%. This results in a WACC of 7.31%.

In the valuation of Carlsberg, the DCF-model is used. Based on the strategic analysis and the his-

torical financial analysis, value drivers for Carlsberg are forecasted. In the short-term period

Carlsberg is forecasted to grow approximately 2% per year, 1.5% for the medium-term and termi-

nal period. The estimated weighted share price of Carlsberg is 695.43 DKK. This is significantly

higher than the price of 474.28 DKK based on the multiples analysis and the actual share price on

the 18th

November of 393 DKK. The difference in price estimates can be explained by a mismatch

between future market expectations and the estimates of this report. Thus, according to this valua-

tion the Carlsberg share is currently undervalued.

Page 43 of 45

BIBLIOGRAPHY

Annual reports

CARLSBERG, 2011a. Annual report 2010.

CARLSBERG, 2011b. Carlsberg quarterly report, Q2.

CARLSBERG, 2011c. Carlsberg quarterly report, Q3.

CARLSBERG, 2010. Annual report 2009.


CARLSBERG, 2008a. Annual report 2007.


CARLSBERG, 2008. Prospekt.

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Aktiefokus , Danmarks musik-øl lanceres i Kina:

http://epn.dk/brancher/foedevarer/bryg/article2599544.ece.

Carlsberg a, , Carlsberg: Selskabsmeddelelse: http://npinvestor.dk/boersmeddelelser/carlsberg-a-s-

udvidelse-af-carlsberg-gruppens-aktiviteter-i-kina-2-442485.aspx [2011, .

Daves, P.R. & Ehrhardt, Michael C. & Kunkel, Robert A. 2000, " Estimating systematic risk: The

choice of return interval and estimation period.", Journal of financial and strategic decisions,

vol. Vol. 13, no. Iss. 1, pp. pp. 7-13.

Dimson, E., Marsh, P. & Staunton, M. 2003, "Global Evidence on the Equity Risk Premium",

Journal of Applied Corporate Finance, vol. 15, no. 4, pp. 27-38.

Fraende, M. , Brewing jobs in front line of euro debt crisis. Available:

http://www.reuters.com/article/2011/11/18/us-brewers-europe-idUSTRE7AH1AM20111118.

Isherwood, J. 5 April 2011, "Perhaps the best ... calls for a Carlsberg", Politiken.dk, [Online], .

Available from: fi-

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or%20a%20Carlsberg%20-%20Politiken_dk.htm.

http://epn.dk/brancher/foedevarer/bryg/article2599544.ece

http://npinvestor.dk/boersmeddelelser/carlsberg-a-s-udvidelse-af-carlsberg-gruppens-aktiviteter-i-kina-2-442485.aspx

http://npinvestor.dk/boersmeddelelser/carlsberg-a-s-udvidelse-af-carlsberg-gruppens-aktiviteter-i-kina-2-442485.aspx

http://www.reuters.com/article/2011/11/18/us-brewers-europe-idUSTRE7AH1AM20111118

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Jørgensen, J.K. , Carlsberg satser på dåser i Fredericia . Available:

http://epn.dk/brancher/foedevarer/bryg/article2609286.ece [2011, .

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Datastream, Thompsen Finance

Euromonitor

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Carlsberg Group: http://www.carlsberggroup.com/Company/Strategy/Pages/Facts.aspx.

DailyFinance: www.DailyFinance.com

Damodaran: http://pages.stern.nyu.edu/

Gecodia: http://www.gecodia.com/Germany-Government-10Y-Yields_a1307.html

MoneyCentral: www.moneycentral.com

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Yahoo Finance: http://www.yahoo.com

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http://www.yahoo.com/

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