Hostile Bid for Red October

1
Hostile Bid for Red October

• February 2, 2006

2
Sources of Value to Acquirer

• Cash .70 per share
• Land 9.44 per share
• Brand name Red October
• Lack of national distribution
• Lack of growth
• Cost efficiencies
• Rising costs, falling profits projected
• Rising SGA (management comfort?)

3
Valuation Analysis
4
Using Comparables

• Differences in multiples
• Currencies
• Risks
• Product and brand names (Red October)
• Marketing strategies (global versus regional)
• Russian stock market conditions
• Low multiples
• Thin markets, low liquidity

5
Sources of Value

• Cash flows
• Why no growth in production
• Effect of translation to dollars (ruble inflation
  in 1993 900, 1994 210
• What happed to 12 million and why future planned
  capital expenditures with flat sales
• Discount rate
• Dollar rate versus ruble rate
• Problems with beta estimate (index used)

6
White Knight and Defense

• Realizing value from Red October assets
• Foreigners may be limited due to political
  questions, e.g. use of land
• Management and cost structure definitely
  threatened if foreign acquirer to realize value
• Brand is national and that is probably important
• Poison pill and white knight strategies work in
  highly developed markets

7
Outcome

• Less than 10 of shares tendered
• Red October offered Menatep two seats on the
  board and they called off bid
• Company sales still around 50 to 60 million in
  2000, dropped in 1998 crisis, steadily losing
  market share, production cuts planned in 2001
• Share prices traded 2.65-5.25 in 2000 in very
  illiquid market