Chestnut Foods (B)

Abstract

After a period of poor stock-market performance, conglomerate Chestnut Foods (Chestnut) faces the acquisition of its stock by an activist investor. The new investor demands the sale of Chestnut's high-growth division, which contrasts with the CFO's turnaround plan to expand this same division. To disentangle the way forward for Chestnut, students are invited to grapple with the risk-adjusted performance of each division and the estimation of division-specific hurdle rates. Students learn to appreciate the importance of using risk-adjusted hurdle rates in establishing appropriate investment policy.This B case is typically taught after having discussed the A case (UVA-F-1736), but this is not necessary. At the Darden School of Business, they are taught in separate years, as independent cases, and the A case has a separate teaching note (UVA-F-1736TN).The B case is set one month after the A case and focuses on the performance of product groups within Chestnut's poorly performing Instruments division. The case is designed as an opportunity to hone skills in performance evaluation.

Excerpt

UVA-F-1974

May 3, 2021

Chestnut Foods (B)

In early March 2014, stock performance at Minneapolis-based Chestnut Foods (Chestnut) had failed to meet expectations for several years running (see Exhibit1), and now the company was facing the arrival to the board of Rollo van Muur, a high-profile activist investor. Just over a month before, van Muur had quietly and unexpectedly purchased 10% of the company and had asserted his right to two seats on the board.

CEO Moss Thornton was highly concerned about van Muur's arrival and his impact on the company's long-term viability. Over the past months, CFO Brenda Pedersen had advocated two strategic initiatives: a $1billion investment in company growth in the Instruments division and the adoption of a more progressive corporate identity. Van Muur had made it very public that he was strongly opposed to additional investment in the Instruments division and in fact had recommended that the Instruments division be sold off “to keep the focus where it belongs.”

Next week would be the board's first meeting with van Muur. In preparation for the meeting, Thornton had gathered select members of the executive team to solicit their perspectives on the future of the Instruments division, and the arguments to be made to save it.

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Keywords: activist investor, risk-adjusted performance evaluation, cost of capital, hurdle rate, ratio analysis, forecasting, financial analysis, benchmarks, weighted average cost of capital, WACC