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Acquisition Cost Assignment – Krispy Kreme Doughnuts by Dunkin Brands

Cost of debt financing in acquiring Krispy Kreme Doughnuts

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Cost of debt ( Kd) = nominal interest rate( 1-marginal tax)

= I ( 1-t)

Krispy Kreme has a total market value of = \$ 1.275 billions

Dunkin is in the 28% marginal tax bracket(t)

Dunkin can issue \$1.275bilion a 10 year 10.5% annual coupon rate bond to raise funds to acquire Krispy Kreme in which case, assuming there is no flotation costs:

Cost of the debt (Kd) = 10.5( 1-0.28)

= 7.56%

Cost of acquiring Krispy Kreme Doughnuts

Therefore:- Offer price = total market value – cost of debt

Thus:- \$ 1.275 billion – 7.56%

= 1.275 x 100 = 1.275 & 7.56 x 100 = 7.56

100 100

1.275 – 7.56 = -6.285

Therefore:- Offer price = -6.285 – 1.275

= \$-7.56 billion

Cost of Equity financing – using Gordon’s Model .i.e. constant growth model

Dunkin can alternatively issue new shares to the public to raise funds to acquire Krispy Kreme given that it is a rapidly growing enterprise and thus even though profitable, it may not have enough retained earnings to finance the acquisition in full as it would result in cash flow problems. New equity will have a higher cost than retained earnings due to floatation costs.

Cost of equity ( Ke) =

(g)

Where

refers to recent dividends per share received=\$0.27,

the current stock market price.

Given that Dunkin will incur floatation costs of 8% of the stock market price, and the stock market price is \$ 53.22, and the average growth in dividends is g is 17.90 %

Ke =

Ke=

= 0.005514+ 0.179

= 0.18451*100%

= 18.451%

Strategic Growth Plan and the Acquisition

The Dunkin Brands strategic plan will aim at ensuring further growth in earnings for sources where more revenue levels were realized while at the same time working towards uplifting the revenue levels in sources that registered considerately low sales. Considering the same-store sales that have been declining, Dunkin will focus on using technological capabilities to correct that by promoting strategic and consistent aggressive promotions and innovations both menu-wise and technologically.

In order to raise the revenue from licensing, online training fees, franchisee transfer fees as well as gains from the low 4% to a target 10%, the company will use low pricing strategies to attract and command more brand loyalty from new and existing customers.

The company will target to increase its rental income the 13% to an all-time high of 20% by focusing on having well-diversified and expanded franchise model properties from which the rental income accrues. Through innovative menus and delicacy reengineering, Dunkin will aim at magnifying its ice cream products sales to as much as 20 % through expansion of Baskin Robbins sores which accounts for an overall of 23% of the total revenue.

The low international sales of Dunkin are highly attributed to lack aggressive expansion efforts and consumer discretionary unlike its peers who have immensely capitalized on that to command huge international sales to be able to balance of with low local sales. Dunkin will thus invest more in an international market expansion plan to grow its market shares substantially in Asian, Australian, Latin American, European and Middle Eastern Markets.

The fact that it operate only two product brands but yet still has the largest markets means that if a keen consideration is given to brand diversification, it will definitely promote sales levels. Hence, Dunkin will focus on having unique brand autonomy to have an unshakable market power.

With the intentions to acquire Krispy Kreme , Dunkin may very well have its strategic goals achievable due to the expected market synergy that will be obtained through the acquisition, given that Krispy Kreme is Dunkin’s chief competitor.

The latest Forbes magazine data, as at June 2015, on the most suitable strategy for either Krispy Kreme or Dunkin Brands and their related performance, Dunkin Brands Group continued to realize stronger earnings more than expected revenue growth compared to its competitor Krispy Kreme.

Though they operate in the same line of trade in that they both deal in breakfast, selling donuts and coffee one clear difference still stands. Depending on what is comes first between coffee and donuts. Dunkin Brands focuses coffee –first strategy in attracting customers to its stores only to end up selling both coffee and donuts to the customers . In contrast, Krispy Kreme uses dozen-sold donuts to command sales from both coffee and the donuts.

The difference in focus strategy determines several crucial competitive decisions such as location of stores and interior arrangement as well as design .

Dunkin Brands stores are known to be small with a high sense of convenience due to strategic location, unlike the Krispy Kreme stores which are mostly larger and less conveniently located. This essentially means that more emphasize will be directed towards the donut production and sales activities though it has not been working well as such.

Exhibit data: Source: YHoo0%.finance.com

 Company Forward P/E Operating Margins Qtrly Revenue Growth (yoy) Qtrly Earnings Growth (yoy) Return On Assets (ROA) Krispy Kreme 21.15 8.73 15.90 -96.70 7.02 Dunkin Brands Group 21.64 38.45 6.2 196.20 19.64

The operating margins, the profit growth, and return on assets of the two competitors definitely indicate that the coffee first strategy is greater compared to the donut first strategy:

In the chilly morning coffee will be the first thing to be thought of as break first before what accompanies it is considered. Good coffee makers – those with fresh tasty coffee will be highly sought and command high sales as they may also do donuts too, and the more coffee is taken, so does donuts Given the health concerns related to donuts, they may not be sought by all unless for those who do physical energy demanding tasks though emotional intrigues may trigger purchase.

Dunkin will benefit from the acquisition as it is seeking to expand its store capacities and locations yet its target has lots of spare capacity which will ogre well with its strategic plan. Also, since they have more coffee sales, and the link between the coffee sales and donut sales is direct, they will also be able to realize more sales revenue even in the international market after acquiring Krispy Kreme which is also well spread out in the international markets.

In reference to brand diversification, Dunkin’s target, that is Krispy Kreme, has a number of donut brands, hence it will also promote effective implementation and achievement of its brand autonomy goals.

# References

Horne, G. (2002). Financial Management Policy (Twelfth ed.). Parparganj: First Indian Print.

Pandey, I. (2006). Financial Management (ninth ed.). New Delhi: Vikay Publishing House PVT Ltd.

Roney, C. (2004). Strategic Mangement Methodology: Generally Accepted Principles for Practitioners. Praeger.