Kohler Co. (A) – Case Solution

Case study questions answered in the first solution:

1. Please value Kohler Co. based on Discounted Cash Flows (perpetuity growth and exit multiple) as well as comparable companies’ methods, taking into account any discounts due to liquidity or control.
2. Consider the motives of the key players:
   1. a) Why does Herbert Kohler want to do the recap? Why does he want to buy the minority shareholders out? Is Herbert Kohler correct in that private is better?
   2. b) What do the minority shareholders want? In other words, why are they bothering Herbert Kohler?
3. Obtain value for the firm and the minority shares:
   1. What are the value of Kohler Co. and the value of each minority share based on the discounted cash flow (DCF) method using forecasted FCF until 2002 and a perpetual growth rate of 4% thereafter, a WACC of 11%, and net investment equal to depreciation and amortization after 2002 (e.g., net Capex = depreciation)?
   2. Is the WACC of 11% reasonable? Provide alternative estimates of the WACC and the resulting value for each minority share.
   3. What is the value of the firm and the value of each minority share based on the comparable companies’ method? Note that more than multiple values are possible here.
   4. Briefly compare your calculations and provide conclusions about the value of the minority shares.
4. Assess the values estimated by Herbert Kohler ($55,400) and the dissenting shareholders ($273,000). Can these values be justified based on your calculations under question 2? – When assessing Herbert Kohler’s relatively low value, note that minority shareholders are in a different position than a family shareholder, i.e., Herbert Kohler. As the case describes, minority shareholders do not have voting rights. Nonvoting shares are clearly less valuable than voting shares. Thus, their shares might be worth less than the valuation under question 2 indicates because a ‘minority discount,’ also called ‘lack of control discount,’ might apply. Furthermore, the shares are infrequently traded, and shareholders of Kohler Co. might, therefore, not be able to sell their shares or not be able to sell their shares without loss of value. This might lead to a ‘marketability discount,’ which reflects the lower value of illiquid shares. Could Herbert Kohler use these discounts to defend his valuation? How? What about the dissenting shareholders? How can they defend their relatively high estimate of the value?

Case study questions answered in the second solution:

1. Why does Herbert Kohler want to do the recap? Why does he want to buy the minority shareholders out? Is Herbert Kohler correct in that private is better?
2. What do the minority shareholders want? In other words, why are they bothering Herbert Kohler?
3. Obtain a value for the firm and the minority shares: What is the value of the firm and the value of each minority share based on the discounted cash flow (DCF) method using forecasted FCF until 2002 and a perpetual growth rate of 4% thereafter, a WACC of 11%, and net investment equal to depreciation and amortization after 2002 (e.g., net Capex = depreciation).
4. Is the WACC of 11% reasonable? Provide alternative estimates of the WACC and the resulting value for each minority share.
5. What is the value of the firm and the value of each minority share based on the comparable companies’ method? Note that more than multiple values are possible here.
6. Briefly compare your calculations and provide conclusions about the value of the minority shares.
7. Assess the values estimated by Herbert Kohler ($55,400) and the dissenting shareholders ($273,000). Can these values be justified based on your calculations under question 2?

Case study questions are answered in the third solution:

1. Why did Kohler undertake the 1998 recapitalization? What are some of the costs and benefits of multiple-share structures? Consider the perspective of both family and non-family shareholders.
2. What is the total value of Kohler Co. using a discounted cash flow approach? What is the total value using a multiples (market value of comparable companies) approach? What is the value of a share held by a minority shareholder in Kohler Co. that is implied by your valuations?
3. What assumptions can you use to arrive approximately at the share price of $55,400 that was estimated by Kohler Co.? Show how these assumptions impact your valuation.
4. What assumptions can you use to arrive at approximately the share price of $273,000 that was estimated by the dissenting shareholders? Show how these assumptions impact your valuation.
5. What is the maximum share price at which Herbert Kohler should be willing to settle with the dissenting shareholders in order to stop the trial on April 11, 2000? Assume that: (i) if the trial proceeds, it is expected to last less than a month and to result in one of two possible outcomes in terms of the price per share established in court: the $273,000 being claimed by the plaintiffs, or the $55,400 being defended by Herbert Kohler; (ii) Kohler estimates the probabilities of these two outcomes at 30% and 70%, respectively.
6. How would your answer to (5) change if you also assume that: (i) the inheritance tax owed on Frederic Kohler’s estate was 50.2% of his holdings in Kohler Co. (equivalent to 489 shares out of the 975 he owned); (ii) the taxes paid by the estate amounted to $27 million (489 shares at $55,400 each); (iii) were the settlement or the trial to result in a revised share price in excess of $55,400, the IRS would likely demand a similar valuation for its claim on Frederic’s estate, and (iv) Herbert Kohler estimates the probability of the IRS’s demand at 100% if he proceeds to trial, and 50% if he settles.

* Note: For the last two questions, assume that (i) legal fees can be ignored and (ii) Herbert Kohler, the dissenters, and the IRS all have the same cost of capital—i.e., that any interest charges are offset by the value for Herbert Kohler of paying late.

Case study questions answered in the fourth solution:

1. Why does Herbert Kohler want to do the proposed recap? What are, from his perspective, the pros and cons of doing this recapitalization? Does it impact shareholder value in general? Who captures the gains (or losses) of the proposed transaction?
2. Why aren’t minority shareholders happy with the proposed transaction? (You may use results from other questions below to highlight your points.)
3. Produce an independent valuation of the total Enterprise Value and price per share of Kohler. Use both DCF and multiple techniques. Highlight your main assumptions and discuss the sensitivity of results to the main assumptions made.
4. Should privately-held companies be valued less than comparable publicly-listed firms? Should a liquidity discount be applied in these valuations?
5. Are all shares equal, or should we assume that there is a value associated with the controlling stake? Thus, do you think minority shareholders’ shares should be priced below those of the majority ones (minority discount)?
6. What assumptions could be used to arrive at the valuation of $55,400 per share that was reached by Kohler?
7. What assumptions could be used to arrive at the valuation of $273,000 per share that was reached by the dissenter’s group? What is your recommendation to Herbert Kohler? Should he settle an agreement with the dissenters? How much should he offer them to avoid long and costly litigation?