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1/28/2010

BUS 35201
Spring 2010
Week 3 Assignment – Mondavi Case

Questions for the written assignment


You have a handout describing a “grape harvest” plan under which Mondavi would
complete investments planned for FY1994-97, then run the company strictly to maximize
cash flow thereafter. A sxet of projections were included in the handout and are also
available in a spreadsheet on Chalk.1 According to Mondavi’s treasury staff, the
company’s estimated equity value under the grape harvest plan was ~$5 per share. The
family had expected a higher value – perhaps harvesting grapes was the wrong strategy.

As an alternative to the grape harvest plan, maybe the company should instead stick with
what it had been doing from the beginning and continue to invest in additional capacity,
acquisitions & other growth opportunities in the future. Come up with a methodology to
analyze and value such a growth alternative. According to your analysis, is the
company’s expected value under a growth alternative higher, the same, or actually lower
than the value of the grape harvest plan? Why?

Use comparable multiples to estimate a value per share for Mondavi as a publicly-traded
company. Lets assume that Goldman Sachs [the company’s banker] came up with the
same value you did. But suppose Goldman insisted that to sell stock in an IPO, the
company would have to give investors a 15% discount to that value! Why is a discount
jnecessary? Give me more than one reason. Who if anyone can take advantage of the
discount? Would you expect Mondavi to agree to the discount?

Food for thought


Think about the following questions in preparation for class discussion. Why did Robert
Mondavi want to take this company public? Why not simply borrow additional funds to
meet capital requirements, at least for a few more years? If you were Mondavi’s account
officer at Bank of America at the time, would you be pushing the bank’s commitments
committee to extend more credit to the company? If BofA decided to cut Mondavi off, is
there anywhere else the company could go to borrow additional funds? Should
prospective investors in the IPO care whether additional bank financing would have
been available to the company? Should investors care what Mondavi’s reasons for
going public were? Give these questions some thought in advance, but don’t answer
them as part of the written assignment.

1
Except for cash flow estimates for 1998 and beyond, the projections in the handout and on Chalk are the
same as projections in the Goldman analyst report in your CoursePack.
Information on Comparables
Canandaigua is a producer and marketer of wines, imported beer and distilled spirits.
The company is among the largest suppliers of table, dessert, kosher, and sparkling
wines, most of which are sold at relatively low price points. The company has grown
largely through acquisition.

Chalone is a small supplier of high-end Chardonnay, Pinot Noir, Cabernet Sauvignon and
other varietal wines, primarily from vineyards in California, all of which are sold at
relatively high price points. Les Domaines Barons de Rothschild is a large shareholder of
Chalone, and public shareholders with a minimum number of shares are given a limited
opportunity every year to buy some Chateau Lafite-Rothschild wine at a discount.

Both companies trade publicly. Following is certain summary information for 1993.