IPO Pricing for Boston Beer Company Inc.

Case Summary

We address the following key questions regarding Boston Beer Company (BBC) to explore the issues surrounding its Initial Public Offering. First of all, we determine the fair value of BBC to be $211 million based on a DCF valuation of projected future cash flows and explain our key assumptions and potential problems arising from those assumptions. Second, we find BBC’s fair value to be $314 million by relative valuation and discuss how differences in operating strategies might translate into differences in financial ratios. Third, we determine BBC’s IPO price to be $15 per share. Finally, we look at the craft brewer industry as a whole and we find that it may be overvalued by the market.

PART I: DCF Valuation

In our intrinsic valuation approach, Boston Beer Company’s future free cash flows of the next ten years are projected in the spreadsheet. Present value of the company at the end of 1995 is calculated by discounting ten year’s free cash flows and terminal value by weighted average cost of capital. As we can see from the spreadsheet, the company fair value is $210.78 million. Subtracting the debt level of $1.95 million, the equity value is therefore $208.83 million.

Appendix 1 includes the full valuation model we used. The key assumptions we made and the calculation methods we used are listed as follows:

BBC’s annual sales growth rates from 1992 to 1994 are 63.55%, 60.14% and 48.84% respectively. The unaudited income statement suggests that sales growth may slow down further. Hence, although the market growth is positive in the near future, it is expected that BBC’s net sales will slow down and eventually reach a “mature stage”, where the company maintains GDP growth rate going forward. In our financial projection, we assume that BBC’s sales growth will decline linearly from 45% to 5% in ten