Ole Springs Bottlers



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8-233-100

March 1, 2004

The Maharaja Dilemma

Teaching Note

Case Synopsis

In July 1991, the Maharaja Corporation, Sri Lanka’s largest privately-held company, entered into a joint venture agreement with PepsiCo International. Under the joint venture partnership, the Maharaja Corporation would commence production at its Olé Springs bottling plant and serve as the exclusive bottler and marketer of the Pepsi, Miranda and 7-UP brands.

Over the next three years, both Pepsi and the Maharaja Corporation made further equity investments into the joint venture. However, towards the end of 1996, the project was still highly undercapitalized and Pepsi’s management made it clear that it was no longer willing to make further capital investments. Thus, the case is set in January 1997, when Mano Wikramanayake, Group Director of the Maharaja Corporation ponders the fate of the joint venture. Mano had just returned from a grueling road-show in New York in search of a new third-party investor. But, at the time of the case, he had received only one proposal from Donaldson, Lufkin & Jenrette (DLJ). The proposed DLJ deal structure clearly reflects the concerns of any potential investor considering this investment decision in Sri Lanka. As such, the case naturally stimulates the instructor and students to analyze the investment proposal from both sides of the negotiating table. What should the cash flows and discount rate look like from the third-party investor’s perspective? Are there other ways for the Maharaja Corporation to mitigate specific risks and address DLJ’s concerns?

Pedagogical Objectives

The case is designed to take on a multi-disciplinary approach, and to illustrate how in addition to rigorous financial analysis, emerging market investment decisions encompass much needed strategic, marketing, socio-political and cultural analysis.

Finance - The case aims to illustrate the appropriateness and accuracy of various valuation methodologies including Multiples and Discounted Cash Flow (DCF) approaches. In particular, the case is designed to demonstrate the use of various models that capture project risk in emerging markets.

Marketing - From a strategic marketing perspective, this case is an excellent example of how a unique competitive landscape can lead to surprising market share results. In particular, the break-out of carbonated versus non-carbonated segments is a key component of the case analysis and must not be overlooked.

Socio-Political – Given Sri Lanka’s tumultuous history of civil war, it is imperative that any case analysis involve a deeper examination of the country’s political environment. In particular, the case is designed to illustrate how the existence of a peace agreement and promising economic indicators are highly fragile and unpredictable factors when making investment decisions in Sri Lanka.

Assignment Questions for Students

• Calculate the cost of capital for this project

• Evaluate the risks involved in this project

• Value the “put option”

Classroom Questions

• What are the principal risks involved?

• What would a foreign investor insist on in order to invest?

• Is the option really a “put”?

• How can we model a crisis?

Define the Issues

SWOT Analysis

Before embarking on a quantitative analysis of the project investment, the instructor should engage in a detailed analysis of the project from an outside investor’s perspective. The instructor should employ a SWOT Analysis (Internal Strengths & Weaknesses combined with External Opportunities & Threats) to highlight the key issues that would immediately jump out at any third-party investor. See Exhibit TN 1. In particular, the instructor should encourage students to consider the reasons why Pepsi opted not to make any further capital investments in this joint venture. Does Pepsi’s management team really believe that Olé is a viable and sustainable business that can capture significant market share in Sri Lanka? Does Pepsi simply want to check off another country box in the global expansion war against Coca Cola? These are the types of questions that students should be discussing and mulling over before determining Pepsi’s exact role in the venture. Moreover, it is important for students to understand that irrespective of the joint venture’s free cash flows, the project still remains profitable for Pepsi because of the sale of Pepsi concentrate to Olé.

Despite Pepsi’s world-renowned marketing savvy it is clear from the case that in many instances, local knowledge of the market was not applied. The instructor should pick clear holes in the way Pepsi handled the Sri Lankan launch and the continued marketing of its products. Again, it appears that Pepsi may not have been truly committed to the project from its initial inception. Students should be encouraged to take on the role of the outside investor and to seriously analyze and consider Pepsi’s motivations and actions.

Students should also be encouraged to consider the benefits and drawbacks of the Maharaja Corporation as the exclusive bottler, marketer and distributor of Pepsi products in Sri Lanka. Is it the right company for this project? It is true that the Maharaja’s have a great deal of power and business clout in the country, but the extent of their diversification could be both a current and future source of weakness and inefficiency.

The instructor should continue to explore the role of the Maharaja Corporation from a strategic marketing perspective. It would appear that the Maharaja’s have found the perfect blend of a “pull” versus “push” distribution strategy. The company uses its extensive distribution network to push Pepsi products in retail stores around the country. At the same time it uses its ownership of prime broadcast and radio outlets to reach the mass-market, gain brand awareness and ultimately pull customers into a retail outlet selling Pepsi products.

However, amidst strong Pepsi brand-name recognition, and the distribution prowess of the Maharaja Corporation, it is important for students not to loose sight of the competitive landscape in Sri Lanka. Specifically, the instructor should lead students to think about the break-out of carbonated versus non-carbonated brands in the soft drink market. Although Sri Lanka does indeed have a high per-capita soft drink consumption as compared to other countries in the region, it is important to note that much of this consumption involves non-carbonated soft-drinks. In fact, Sri Lanka is one of the few countries in the world where Coca Cola and Pepsi are the number two and three players behind a local bottler. In terms of consumer preferences, Cola products are not as popular as fruit-based juices and soft-drinks, such as those produced by the local Elephant House brand. In the end, this insight could prove to be one of the defining factors in the success or failure of the Olé venture.

Risk Analysis

When analyzing the risks of an emerging market investment, students often double count project risks in both the discount rate and the cash flows. In this particular analysis, the instructor should use the opportunity to outline the sovereign, operating and financial risks of the project and demonstrate how most of these risks can be captured in the adjusted project discount rate. One recommended method is to Campbell Harvey’s Institutional Investor’s Country Credit Rating Calculator (IICCRC) to calculate Sri Lanka’s country risk premium.

Once the country risk premium has been determined, the instructor should translate the qualitative risk analysis into weighted adjustments for the specific project at hand as compared to an average project in Sri Lanka. To stimulate further analysis, the instructor should engage in discussion surrounding the evolving nature of project risk and how in the future, it can be more or less of a factor. This time varying risk component should be folded into the IICCRC and the cost of equity calculation.

When discussing the cost of equity and cost of debt for the project, the instructor should not only emphasize the evolving nature of risk factors but also the changing capital structure of the project. This analysis should lead to the use the Adjusted Present Value (APV) method when using the discounting the project cash flows and arriving at a Net Present Value (NPV).

Exhibit TN 2 provides a comprehensive guide to Olé Spring Bottlers risks from the perspective of an outside third-party investor. In particular, the instructor should focus on the four key project risks.

Currency Risk:

Continued currency depreciation and high inflation rates will have a huge impact on the risk of the project. The instructor should highlight the fact that there is no natural hedge built into the project. In short, the project’s main input – Pepsi Concentrate is paid for in U.S. Dollars while revenue cash flows are received in Sri Lankan Rupees.

Political Risk:

Political instability and turmoil is a clear risk when assessing any project in Sri Lanka. However, the instructor should encourage students to think specifically about how the presence of a major international partner in the Olé venture could lead to the bottling plant becoming a prime target for any Tamil separatist bombing attack.

Creeping Expropriation Risk:

Given that the Maharaja Corporation is the largest privately-held corporation in Sri Lanka, the instructor should emphasize how the Sri Lankan government is beginning to clamp down and enforce new measures to collect taxes from those companies that are not listed on the Sri Lankan stock exchange. As such, any third-party investor should be aware of the creeping expropriation risks that will face the joint venture moving forward.

Management Risk:

The instructor should reiterate the fact that management risk translates Maharaja’s immense diversification into a source of weakness and inefficiency. This is certainly a viable concern from the point-of-view of an outside investor who must gather insights into Maharaja’s management capabilities. In analyzing this particular risk factor, students should be instructed to weigh the benefits of Maharaja’s extensive distribution and marketing network against the negative pull of having too many generalist managers who lack specific experience in the bottling industry.

Case Analysis – Project Valuation

Cost of Equity Calculation:

The cost of equity was calculated using a time-varying discount rate methodology using Institutional Investor Country Credit Ratings (ICCRG). Exhibit TN-5 shows the entire calculation. This methodology takes a constant risk-free US return of 6.33% based on the average yield of a 5 year treasury note. It also assumes a US equity risk premium of 3.5%. From a regression between the ICCRG ratings and sovereign yields, we determine the country risk premium of around 17.9%. An adjustment is made for the industry beta in the US.

Risks are categorized between Sovereign, Operating and Financial and allocated weights according to importance. In this case highest weight values were given to Currency Fluctuation (~20%), Direct Expropriation (~10%), Political Risk and Uncertainty (~25%), Management Risk (~6%) and access to capital markets (~15%). Because risks change over time, these weights also change over time. We assumed that currency and political risks would remain relatively constant. We assumed expropriation risk would lower over time as would management risk. We assumed that the importance of gaining access to capital markets would however increase significantly over time. Our rationale for this is that over time, further expansion may be necessary especially in response to competitive threats. While the market may conceivably hold three players, the ability to raise finance to compete effectively would become more important as the market becomes saturated.

Each risk is given a score between 10 and -10. A positive weight indicates that the risk has not been mitigated in terms of the current deal structure. A negative weight means that the risk has been mitigated to the extent indicated by the value of the score. For example, in this case the risk of currency had not been entirely mitigated since cashflows would be potentially paid in US$ to DLJ while revenues were being generated in SLR. Consequently a score of -3 was given to this risk. Note that these scores are arbitrary and students may score risks differently as long as they have a justification for doing so.

Finally, we introduced some stochastic variables to simulate the probability that certain events would occur to change the riskiness of the venture. In particular a binary variable to denote “crisis” was introduced. This variable had a 10% chance of occurring (again the probability may be different) but when it did, the values of the scores attached to each weight changed dramatically. For instance, if “crisis” occurred, the currency risk changed from a score of -3 to -10 reflecting the fact that a sharp depreciation of the currency would occur making payments to the third party in US$ a more likely outcome. This in turn would affect other factors such as risk of default etc. Without the stochastic variation of the crisis factor, an equity cost of capital of around 24% was returned.

Cost of Debt:

The cost of debt was calculated by taking the interest expense as a percentage of interest bearing debt. Although currently the company has a high interest cost and would in the future look to restructure its debt, given the high interest rate and inflationary environment in Sri Lanka we find it advisable to continuing using the current interest cost.

Free Cash Flows:

The two major considerations in projecting the free cash flows for Olé are capital expenditure and depreciation. We know from the industry analysis that bottling operations are highly capital intensive. However this holds true only in the initial period when manufacturing and distribution infrastructure is being set up. Once the operations begin, volumes increments would require a lower marginal investment in capital equipment. Hence gradually the nature of capital expenditure becomes more like maintenance capital expenditure. It will hold true in the case of Olé which implies that its capital expenditure as a percentage of revenues would fall. In our pro forma cash flow statement we assumed that capex as a percentage of revenues falls from 17.8% in 1997 to 10.6% in 2006. Using similar logic, depreciation as a percentage of revenues would also decrease. Our pro forma assumes depreciation decreases from 14.4% of revenues in 1997 to 9.9% of revenues in 2006. Further this implies that by 2006 the company achieves a near steady state and its capital expenditures incurred correspond closely to the depreciation it claims on assets.

Discounted Cash Flow Valuation:

• APV Approach

The preferred method to discount cash flows for Olé is using the APV approach. (Exhibit TN-4) The instructor should highlight to students that in Olé’s case the firm’s debt/equity ratio fluctuates constantly over time and that the APV approach helps to account for those changes in capital structure by varying the interest tax shields benefits accruing to the firm. The WACC approach on the other hand assumes a constant debt/equity ratio and is likely to either under- or over-estimation of the tax benefits.

• Exchange Rate

In discounting Olé’s cash flows which are in the nominal Sri Lankan currency, we also need to express those cash flows in US dollars terms. This is also necessary since we are evaluating the Olé investment from the perspective of an overseas investor who invests in US dollars and would measure his return also in US dollars. The instructor should draw the student’s attention to the persistently high inflation rate in Sri Lanka vis-à-vis the United States. Using that data, one can conclude that the Sri Lankan Rupee’s devaluation is primarily a result of the different in inflation rates between Sri Lanka and United States. Further one can generalize that this trend will likely continue over our forecast horizon since we are dealing with long-term average inflation rates. Using PPP, one can arrive at estimates for future currency conversion rates. Sri Lanka’s historic inflation rate which hovers around 11% and the US inflation rate at 2.3% can be used as inputs to project how currency rates would play out over our forecast horizon. We estimated the 1997 exchange rate to be SLR 56.82 for each US dollar increasing to SLR 118.45 for each US dollar by the end of 2006. The instructor should reiterate the importance of exchange rate risk as crucial for this case as the investment is made in US Dollars and the investor’s returns should also be looked at in the same currency. A further complication is that Olé is susceptible to exchange rate risks in its cost structure as the soft drink concentrate purchases from Pepsi are in US$ while all revenues on cola drinks accrue in SL Rupees.

• Terminal Value & Perpetual Growth Rate

The terminal value calculation is always a difficult task but in emerging markets it becomes more difficult given the unpredictability associated with making predictions on long-term political and economic conditions. Instead of using a terminal value multiple for which finding a proxy is difficult, we would recommend using the final year pro forma free cash flow forecast with a perpetuity formula to come up with the terminal value. The challenge then is to come up with a fair assumption for the perpetual growth rate on which the terminal value is highly sensitive. The instructor should point out to students that an educated assumption can be made using the context for each circumstance in which the valuation is carried out. In this case, we are predicting cash flow growth in nominal terms and thus given the inflation rates in Sri Lanka any growth rate that is close to the expected long-term inflation rate is a fair assumption. However the end result should be verified using a sensitivity analysis and separately by factoring the contribution of the terminal value in the overall value arrived at for the firm. Our valuation exercise uses a perpetual growth rate of 9% which our sensitivity analysis shows as reasonable estimate since it does not cause large variations in the firm’s valuation. Similarly the percentage of overall value coming from the terminal value is an acceptable 38%.

• Results

The results of our DCF valuation yield a significantly positive NPV in Sri Lanka Rupee terms and a slightly positive NPV in US Dollar terms. This difference can be accounted for by the change in exchange rates over the course of our cash flow projection period. At this stage, the instructor could position the project as a feasible investment even for an overseas investor. However the analysis so far has not taken into account drastic events such as terrorist attacks, political instability etc. which Sri Lanka has been prone to in the past. After such events one can assume that the required cost of capital is likely to spike up in the near term. How can one account for this? This could be an interesting question for the instructor to pose to students. Is there a way to factor this into the DCF analysis? Surely increasing the cost of capital over the entire DCF period would be unduly unjust for evaluating this project and would result in a negative NPV. The method we propose, instead, is for the instructor to have students introduce the Monte Carlo simulation to their cost of capital calculation. If we can arrive at our best estimate for the probability that such incidents will occur and how they would affect the cost of capital, we can model this probability using a Binomial distribution for our cost of capital calculation. Our analysis used a 10% probability of a destabilizing event occurring in any given year. The result painted a different picture of the firm’s valuation, the firm continues to remain an attractive investment in SL Rupee terms with a NPV of Rs.16.80 on a par value of Rs.10. However the return in US Dollar was now negative with a DCF value of $0.17 on a par value investment of $0.176 per share. Moreover, the probability that the value will be below $0.17 was over 66% indicating that the option was more likely to be exercised than not. The instructor can use this as an example of how marginally positive valuation should be closely scrutinized because as in this case these valuation can become negative if addition levels of complexity like negative random events are modeled into the analysis.

Multiples Valuation Approach:

The instructor is encouraged to lead students into a discussion surrounding the appropriateness of a multiples approach to value the venture. In conducting this analysis we recommend that students use outside sources to gain better knowledge and understanding of the soft drink market and the key players on both a global and local level. Given the lack of competitors listed on the Sri Lankan stock exchange, we focus our analysis on two comparable companies - Ceylon Cold Stores and Maskeliya Plantations. Although the latter is a tea-based company, we feel that its asset base and size provide a reasonable proxy of Olé’s risk.

Given the limited data, we chose to analyze our comparable firms based on the Price/Earnings metric. The furthest forward looking EPS estimate that was consistently available was for the Year 1998. As such, we used a 1998 weighted EPS (60% Ceylon Cold Stores & 40% Maskeliya) to calculate a Price-Earnings multiple for Olé.

Exhibit TN-3 illustrates how purchasing power parity was used to convert Olé‘s revenues in Sri Lankan Rupees into U.S. Dollars using the forecasted inflation rates for both countries. Nonetheless, it is extremely important to note that instructors and students alike should remain deeply critical and cautious of this and other multiples valuation approaches in this emerging market setting where they is a lack of obvious and appropriate comparable companies.

Further Analysis

■ Value of the Put Option

DLJ hold an option to be paid a guaranteed 10% US$ return after 3 years and then again after 4 years if they didn’t exercise the option before. This “put option” can be viewed as a portfolio of equivalent securities. Exhibit TN-6 describes the option payoff. Essentially, the option describes the payoff for a convertible bond with two conversion periods. The payoff diagram is more akin to a “call” option than a “put”. Therefore, we value this instrument using straight zero bonds with a call option at 3 and 4 years. The first conversion option occurs at 3 years. The option holder will only elect to convert the bond to equity via the call option if the equity value delivers more than a 10% annualized dollar value return. Otherwise the option holder will elect to take the bond return. The option holder again has the same choice a year later. Hence we value the instrument by replicating a straight 3 year zero with a call option at strike price $0.227 and a one year zero (three years out) and a call option at $0.249. The calls are European in nature since they are only exercisable at a point in time. Although this “point” is one month long, a minimum of one month’s notice has to be given before exercise and hence no extra value is derived from having a one month period.

In our calculations we estimate that DLJ are incented to invest in a zeros with a 2% premium to equivalent US zeros with the same risk. This means there are two components to our calculation. First the “extra” value over and above the “normal” return expected from an alternative use of funds and second the value of the call option. We value the call option using the standard Black-Scholes-Merton model. For this we assumed the volatility of the underlying stock is 30% and the risk free rate is 6%. In Exhibit TN-7 we also show the sensitivity of the option price to changes in these parameters. Another way we could have valued this instrument would be take equity and puts. Students electing to value this way would arrive at the same answer through put-call parity.

Exhibit TN-7 shows the valuation of the 17,460,000 options held by DLJ. We assume an initial exchange rate of Rs58.75: $1. The initial value invested is Rs174,600,000 or $2,971,915.

This exhibit also shows the difference in valuation of a straight 4 year zero with call option at $0.249 (that is assuming the 3 year option would never be exercised). The difference between that and the original price is the value of the 3 year optionality. Additionally, we included a liquidity discount of 50% since a hedge with the underlying security cannot easily be formed. This is because there is no liquid traded security, nor an exchange traded option. Based on these assumptions, we value the security at $387k. The bulk of the value derives from the option valuation. This scenario will change if students elect to increase or decrease the premium incentive for the zero bond investment.

■ Monte Carlo DCF including skew

The DCF analysis using monte carlo simulation showed that “skew” is important to risk evaluation. In this case, the probability distribution of a “crisis” event occurring was such that it occurred 10% of the time. When it did occur it caused the discount rate to spike upwards. This spiking causes skew in the expected distribution of returns used to evaluate the project. Exhibit TN-8 shows the monte carlo results after including the “crisis” factor. The breakeven level for the project in SLR terms is Rs10. Exhibit TN-8 shows that even with skewness included, a positive NPV is likely in SLR terms. The mean is still 16.88 with a standard deviation of 1.84. This means even at 3 standard deviations, this project would still be valuable. Now look at the dollar return table in Exhibit TN-8. The breakeven level is $0.176. The mean here is $0.170 indicating a negative NPV return. Furthermore, the standard deviation is $0.020, meaning that a large loss will be more likely. Thus the instructor can use this case to show how skew matters when evaluating projects involving risk.

■ Real Options

Given that the option of taking the funding is negative, why would the Maharaja Group agree to the funding. A qualitative assessment of real options is relevant. They may include:

• Brand image – being associated with foreign companies allows an improvement to brand

• Easy to JV with other multi-nationals – with two well-known multinationals, others might be more inclined to do business.

• Other product launches through Pepsi – once one JV was operating profitably, Pepsi would naturally choose the Maharajas to distribute future products.

■ Inverted Term Structure of interest rates

Students may note that the term structure of interest rates is inverted around the time that this case is set. Harvey 1988 (?) shows that term structure inversions are good predictors of impending recession. However, students must be careful since this might equally mean a prediction of inflation.

What Happened?

■ Maharaja Accepted the Deal

■ The Put Option was exercised after 3 years.

■ Olé is currently self-sufficient

■ Maharaja is planning to retain due to large capital investments

■ However, willing to sell if receive a good offer

Key Takeaways /Learning Points

■ Exchange rate and skew are key

■ Important to model factors which skew the distribution of returns.

■ Without modeling spikes, you run the risk of evaluating the project too simplistically – especially if the probabilities of spike events occurring are low but the cost of consequences high.

■ Evaluating projects from only one exchange rate point of view may result in the wrong decision being taken. All views must be taken since exchange rate risk is important.

■ Uncertainty involves time varying risks

■ Recognise that risks vary over time in the same way that interest rates will vary too.

■ Model the pattern of risk variation to give more depth to a model and still retain an intuitive structure.

■ Option value underpins deal structure

■ Getting a deal put through often relies on delivering value in the right places.

■ In this case, DLJ walked away with $387k for virtually no risk. If the option value had been computed more precisely, the Maharajas may have been able to craft a deal that was cheaper and more effective at mitigating the key risks.

Exhibit TN-1 SWOT Analysis

|Strengths |Weaknesses |

|High brand awareness of Pepsi products |Over-reliance on Pepsi and its assumed marketing savvy |

|Established network of 45 distributors each supplying 1,100 retailers|Unable to maximize local consumer knowledge |

|Strong marketing track record |Lack of soft drink “know-how” as a result of diversified business units and |

|Heavy involvement in infrastructure ventures - $3 billion worth of |generalist managers |

|projects in the pipeline | |

|Opportunities |Threats |

|High per capita soft drink consumption – average of 22 servings |Non-carbonated substitutes, such as juices and tea brands are maintaining a |

|compared to 5 for India |strong foothold in the market |

|Opportunity to distribute Pepsi snack foods in the future |External threat of labor strikes and power outages |

| |Political instability and civil unrest |

Exhibit TN-2

|Risk |Rank |Description |

|Sovereign | | |

|Currency Risk |Very High |Currency depreciation and high inflation could lead to an increase in input prices for Pepsi |

| | |Concentrate. Revenues in Rupees and Main Input in US Dollars |

|Expropriation Risk |Med |Medium risk of direct government seizure of assets. Government has history of seizing private |

|(Direct & Diversion) | |assets. |

|Expropriation Risk |High |High risk of the government targeting and collecting cash flows in the form of higher taxes |

|(Creeping) | |from privately-held companies |

|Commercial International |Low |Pepsi’s brand name and involvement in the joint venture sends a strong positive signal to other|

|Partners | |potential international investors and partners |

|Political Risk |Very High |Risk of political unrest in the form regime change and labor strikes. |

| | |Bottling plant may be the target of a Tamil separatist attack |

|Corruption Risk |Med/High |Immense political nepotism, bribery and threat of corruption. |

|Operating | | |

|Technology Risk |Low |Bottling Technology is unlikely to advance beyond the capabilities of the Olé Springs Plant. |

|Management Risk |Med/High |Given Maharaja’s immense business diversification, there is much uncertainty about Maharaja’s |

| | |ability to efficiently focus on the management of the bottling and distribution of Pepsi |

| | |products |

|Resource Risk |Low/Med |Aside from the Pepsi concentrate, there is significant reliance on production and supply-side |

| | |inputs from within Sri Lanka, including sugar, carbon dioxide and glass bottles. |

|Financial | | |

|Probability of Default |Low/Med |The Maharaja organization is well financed. Pepsi also underwrite the project and so default |

| | |is unlikely. |

|Access to Capital Markets |High |As a private company not listed on the Sri Lankan stock exchange, there is illiquidity risk and|

| | |a restriction on the ability to raise capital. |

Exhibit TN-3

Comparables Valuation |  |  |  |  |  |  |  |  | |  | | | | | | | |  | |  |Earnings 98E (US$ mn) | | | | | | |  | |Olé Springs Bottlers |0.452 | | | | | | |  | |  | | | | | | | |  | |  | | | | | | | |  | |Inflation (Sri Lanka) |11% | | | | | | |  | |Inflation (US) |2% | | | | | | |  | |Exchange Rate using PPP (R/US$) |59.24 |Average of 97 and 98 Exchange Rate | | | | | |  | |  | | | | | | | |  | |Comparables in Beverage Industry | | | | | | | |  | |  | | | | | | | |  | |  | |12-mth Price Range (Rs) |Price/Book Value (X) |Par Value (Rs) |Shares In Issue (mn) |Market Capitalization (US$ mn) |Earnings 98E (US$ mn) |EPS 98E | |Ceylon Cold Stores (soft drinks) | | 164.9 - 50.9 |0.8 |8 |10.8 |19 |3.61 |19.8 | |Maskeliya Plantations (tea) | |49 - 33.8 |2.4 |10 |20 |11.5 |4.56 |13.5 | |  | | |1771.2 | | | | |  | |  | | | | | | | |  | |  | | | | | | | |  | |  |2-year leading Market Cap/Earnings |Market Capitalization

(US$ mm) | | | | | |  | |Ceylon Cold Stores |5.26 | | | | | | |  | |Maskeliya Plantations |2.52 | | | | | | |  | |Olé Springs Bottlers | | | | | | | |  | |Ceylon Cold Stores (60%) | | $ 2.379 | | | | | |  | |Maskeliya Plantations (40%) | | $ 1.140 | | | | | |  | |Intrinsic Enterprise Value for Olé |  | $ 1.884 |  |  |  |  |  |  | |

Exhibit TN-4

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Exhibit TN-4 cont’d

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Exhibit TN-5

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Exhibit TN-6 – Option payoff

Exhibit TN-7 – Option valuation

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Exhibit TN- 8 – Including Skewness in return distribution

Table 1 – SLR Return

Table 2 – Dollar return

Skewness of distribution - (showing discount rate)

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