Chestnut Foods Case Study

       The case describes a company which had small begging but ended up becoming a conglomerate. The company started as a bakery, grew into a distribution company and finally a conglomerate with many companies. Chestnut Foods is facing a dilemma which many companies are facing today where and how to grow. Which division should be backed, and which division should be left alone is the question? The management is finding it hard to solve this issue as an activist investor has joined the management who brings his own goals for the company.

      The divisions in question are the food products division and the instrument division. The Food products division includes various business such as fresh foods, prepacked cooked food and food supplied to institutional buyers. One of the key products of this division is the ready to bake frozen dough. These breads were the company’s major drivers. All surveys conducted over the years said these breads are better than the competitor’s products. For a long time, they have been the Cash Cow business for the company. The division shows a growth rate of 2% and with net profit of 88 million dollars with the assets of 1.4 billion dollars.

      The instruments division is in the business of providing deliveries of systems and specialized equipment used for preparing and packing food. This division provides the company with the latest automation services. This division provides services all over the world. This department has a lot of potential to grow in the global market, but it requires high amount of investments in research and development. The instruments division provides 60% of the company’s revenue. The sales in 2013 increased by 30 %, the net profit from this division was 46 million dollars and the total asset value was 600 million dollars.  

      Over the years even after having successful returns the company has failed to meet the expectations of the investors. The CFO announced her plans to change this, by acquiring investments of 1 billion for the instruments division. As per her the instruments division will be more profitable at the same time investor activist Van Muur who owns 10% of the company wants the company to concentrate on the food division.

      The hurdle rate is set at 7%, The food division is at 6.3% and the instruments division is at 7.7% based on these figures the CFO suggested growing the instrument division would be more profitable. The CFO has considered various hurdle rates and by using risk adjusted hurdle rates she has understood it would be better if there is a need for multiple hurdle rates. The company is facing one more challenge whether or not to change the capital structure of the firm.