CASE STUDY All Numbers are in $ Canada...You do not have to translate into US $.

Question

CASE STUDY All Numbers are in $ Canada...You do not have to translate into US $. However, all principals of finance and accounting in the US are the same in Canada. Mr. Lube Canada Limited Partnership ("Mr. Lube") is a privately held company that manages a complete automotive maintenance services provider and Canada's largest quick lube brand. Founded in 1976, Mr. Lube pioneered the Canadian quick lube industry, a category of automotive servicing focused on convenience with no appointment necessary. Mr. Lube's network of 170 stores are operated by a national network of franchisees. Each store must be open a minimum of six (6) days a week. Some are open seven (7) days a week. The stores, on average, are open 338 days per year. Each store has approximately 10 appointments per day and each appointment produces, on average, 100 of revenue per customer per visit. Before the franchisees get to pay any of their bills, including employee salaries, they must pay 10% of gross revenue to the parent company, "Mr Lube", who is the franchisor In early 2015, our Corporate Finance Deals team was retained by Mr. Lube as its exclusive financial advisor to maximize value for the owners. After looking at the alternatives, including going public, we concluded that the company should sell control or the whole company to an acquirer Our approach We led all aspects of the deal process, which included: Pricing the enterprise identifying potential acquirers marketing the business advising on negotiations and structuring assisting with definitive agreements; and ultimately closing the transaction. How we add value Mr. Lube attracted significant interest from both local and international acquirers that we had identified and contacted. On August 19, 2015, Diversified Royalty Corp. acquired the trademarks and certain other intellectual property of Mr. Lube for approximately $138.9 million. This transaction, defined as an asset sale, in effect sold

Explanation / Answer

Answer 1

Total Revenue of Mr. Lube is

Number of stores * Number of Days Store Open * Average Number of customer * Owner's share in revenue per bill

= 170 * 338 * 10 * 10 = 57,46,000

So now we should calcuate rate of return, Where Present value = 138.9 million (deal price ) and annual payment = 57,46,000 till perpetuity

Rate of Return for perpetuity = Payment / Present Value

= 57,46,000 / 138,900,000

= 4.14 %

So IF this Rate of Return is greater than business return, than deal is good, else not.

Answer 2 :

Factors that may influence the deals

1.Should consider current Rate of interest and Rate of return on equity

2. Future prospect of business, it seems like busines has reached on its peak and no further growth is possible.

Answer 4 :

There is Credit Risk of 25 % debt remain to the Trust. However same is secured to Asset but in case of default, Asset price would also go down ,and Trust might not recover full amount.

There is Interest rate risk for 25 % debt. So interest rate can increase in future and so Trust has to lose this additinoal interest.

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