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Valuation Mergers Buyouts And Restructuring 2nd Edition Enrique R. Arzac - Solutions

7. Attaching a floor increases the value of the Percs designed in Step 1 above the common stock price (why?). So, in order to decrease its value to the common stock price, you have to reduce the dividend and/or the cap. In designing a puttable Percs you have two degrees of freedom.Step 3: Attach a
6. Choose a floor and value it. Note that the floor is a European option. You have all the information necessary to value it.
in designing the traditional Percs you have only one degree of freedom.Step 2: Make the Percs puttable
4. Now you can solve for the cap X necessary to offset the higher Percs dividend. The cap is a European call for which all the data except X are already available including the value of the cap. Solve this equation for X using the call sheet of the Financial Options Calculator.Note that you should
3. Since you want to price the Percs at the common stock price, the increase in value of the Percs produced by the difference in the present value of (1) and (2) has to be offset by the Percs cap. Since the cap is a call, you first need to obtain the stock volatility. Solve for the implied
2. Value the common dividend foregone. In practice you will want to check the consensus EPS growth forecast and payout in order to forecast dividend growth. In June 1994 IBM was expected to keep its annual dividend of $1 for years to come. Obtain the present value of the dividend foregone. Use the
1. Choose a preferred dividend as of July 1, 1994, say 6% of the stock price and obtain its present value. Dividend dates are Sept. 10, Dec. 10, March 10, and June 10.
e. Summarize the shareholder value expected from BAT’s plan based upon your recommendations and estimates in (c) and (d). Rely on the low end of the analysts’ consensus as needed. Take into account that the combined effect of restructuring, share repurchase, and dividend increase can be
d. Consider the proposal for the sale of BAT’s retail business based upon the lowest value of the analysts’ consensus (except Argos, the UK catalog retailer, which analysts priced at 12× P/E). The tax basis of the equity in the retail business (except Argos) was £0.914 bn. Extraordinary
c. BAT decided that the appropriate response to Goldsmith was to abandon its diversification strategy and to focus on tobacco and financial services. Accordingly, it considered selling the U.S. retail business and using the proceeds to repurchase up to 10% of its shares and part of the tobacco cash
b. Examine Hoylake’s proposal from the point of view of BAT shareholders. What value would they expect to realize as per Hoylake’s offer?
a. Hoylake’s expenses were expected to be 1.5% of the total value of the acquisition and 3% of subsequent breakup proceeds. What return would the Hoylake group expect to realize assuming it would be able to exit the transaction via sales, spin-offs, and public offerings within a year? Disposals
On July 11, 1989, Sir James Goldsmith’s bidding vehicle Hoylake Investments Ltd.launched an offer of 850 pence per share for BAT Industries, the UK-based tobacco conglomerate.39 The initial bid was to be financed through a variety of securities including bank debt, junk bonds, and equity in Anglo
c. What other actions were available to Racal?
b. How feasible was his de-merger and buyout plan?
a. What do you make of the valuations of Racal’s units given above? How do you explain them? What do you think was Sir Ernest’s motivation?
Racal Electronics had 1.3 billion shares outstanding, which traded at 190 pence.Racal Telecom had 1 billion shares outstanding (including the 80% owned by Racal Electronics)and traded at 275 p. Analysts estimated the value of Racal Chubb Security in £400 million, before allocation of any debt. The
(2) Racal Chubb Security, the security business, and (3) the “rump” of Racal Electronics, the main business of which was defense electronics, data communications, and networks.Sir Ernest planned to distribute to Racal’s shareholders: (1) The 80% shares of Racal Telecom it still owned and (2)
15.4 On November 15, 1990, the Chairman and CEO of Racal Electronics, Sir Ernest Harrison announced a de-merger (breakup) plan for two of its three main business units. Sir Ernest’s purpose was not clear. One observer suggested that he might have been trying to avert a possible takeover directed
15.3 Value the “harvest” action toward WTT’s metal products division by discounting free cash flows.
15.2 Refer to Section 15.6 and value the “stop volume growth” action for the metal products division of WTT by discounting free cash flows. (Hint: You should get the same result as that obtained in Exhibit 15.4 using the EVA approach.)
15.1 Review Equations (5.1) and (5.2) of Chapter 5 and verify the calculation of continuation value added made for each unit in Exhibit 15.2.
7. Repurchase Wendy’s shares using the proceeds from refranchising, sale of ancillary brands, and monetization of real estate.
6. Monetize real-estate holdings by selling approximately 200 real-estate sites in Wendy’s franchisees’ stores.
5. Close 40 to 45 non-performing stores.
4. Refranchise a significant portion of Wendy’s-operated restaurants.
3. Reduce costs at Wendy’s stand-alone stores by $200 million.
2. Sell Wendy’s Developing Brands (Baja Fresh, Cafe Express, and minority stake Pasta Pomodoro).
1. Spin-off Tim Horton’s as a stand-alone publicly traded company.
14.7 In 1994 Euro Disney S.C.A. issued 290 million 10-year warrants to bond-holders and equity-holders, with three warrants giving the right to purchase one share at the exercise price of ¤6.098. Note that if these warrants end up in the money, the management stock options described in Section
14.6 As of July 1, 1994, Euro Disney S.C.A. had 25.7 million convertible bonds outstanding, each with a par value of ¤21.3343 plus 10% premium due at maturity, and convertible into 1.361 shares, maturing on 9/30/2001. The bonds were valued as part of the net debt in Section 14.7 ignoring their
d. How would you value (i) the new senior notes, (ii) the subordinated notes and the equity participation received by the subordinated holders, and (iii) the equity retained by the original equity-holders. Just explain the procedure to follow without carrying out numerical calculations.
c. What determines the bargaining power of the several parties?
. In your opinion, what should be the response of each class of creditors (senior- and subordinated-holders) to the proposed exchange?
a. Is the proposed recapitalization plan feasible? Change Exhibit B as per the terms of the proposed exchange and complete the columns for years 2 through 5.
14.5 The assets of Super Mart, Inc. were acquired by SM-Holdings Corp. in an LBO transaction for $1,300 million financed with $1,150 million debt of which $650 million were 12% senior notes and $500 million were 15% subordinated notes. The senior notes were to be repaid in
You, a recapitalization specialist at the newly established Sour Deals department of First Morningside Corp., have been retained by the senior lenders to propose a recapitalization plan for the subordinated debt that would assure repayment of all senior notes in 5 years and as much of the
Soon after the LBO took place, SMP learned that the initial projections were unduly optimistic. In fact, at the present time, which is the end of the first year of the LBO, EBIT is down to $200 million and REFC is unable to fully service senior debt. Having fallen $113 million behind the minimum
14.4 A year ago, the assets of REFC, Inc. were purchased by SMP Partners in an LBO transaction for $1,250 million, financed with $1,100 million debt of which $550 were 12% senior notes and $550 were 14% subordinated notes. The senior notes were to be repaid in 3 years with a minimum annual
c. Under what conditions do you expect bond-holders to tender their shares at a discount from par?
b. Do you expect bond-holders to balk at the offer? Why?
a. Why would reset notes such as Ingersoll’s trade at a discount in spite of an imminent rate reset that would bring them to par?
To assure buyers of protection of their investments, reset debt promises to adjust the interest rate periodically so that the debt trades around face value.
14.3 In March 1990, Ingersoll Publications, Inc. offered to buy back some of its high-yield(junk) bonds at sharp discounts from face value. The company offered to purchase as much as 80% of its $125 million of 13% reset notes issued by Ingersoll’s Community Newspapers, Inc. unit for 55% of
14.2 Estimate the debt capacity of Southland using the Debt Capacity Calculator with the data in Exhibits 14.2 and 14.3.
14.1 Refer to Section 14.2 and use the Debt Capacity Calculator to verify that the debt capacity of the company falls to 4.1.314 Recapitalization of Troubled Companies
b. Suppose that in order to reduce your equity requirement you are offered a guarantee in the form of a put for your common equity. Under the alternative arrangement, your equity would be puttable to the company at an equity valuation of $35 million at the end of the 5th year. You estimate that the
a. What equity participation (percent ownership) would you demand if you require 17%expected return from the joint proceeds of the subordinated note and the equity and you assume exit in year 5 at an EBITDA multiple equal to 6×? HTF is not expected to make cash distributions during this period.
13.11 You are considering whether to invest $10 million in the 5-year subordinated notes of HTF, Inc. on October 1, 2007. The annual coupon of these notes is 8%, and its principal is due at the end of the fifth year. In order to obtain an acceptable return you demand equity participation. HTF’s
13.10 You are familiar with two approaches to the valuation of warrants. One approach uses present value analysis and exit values to price warrants given as equity kickers in leveraged capitalizations. The second approach uses option-pricing theory (a modified version of the Black-Scholes formula)
13.9 On February 25, 2002, the private placement department of Provident Mutual was evaluating a $10 million loan request from Fly-By-Dusk, Inc. The loan principal would be repayable in five annual installments of $2 million each. Provident would charge 14%per annum on this type of loan but
13.8 Good Ground wants to insert a safety covenant that provides that if Blindex’s stock price falls below $5 at any time during the life of the warrants, the warrants expire and Good Ground receives a $0.73 rebate per warrant. What is the value of this knockout warrant?What is the value of the
b. What is the all-inclusive cost of each financing alternative?
a. What is the dollar cost of the warrant sweetener to Blindex?
The warrants would expire in 8 years. Blindex has 10 million shares outstanding and has not issued convertibles or warrants in the past. Its stock is valued at $8 a share and the volatility of its stock return is estimated at 40% per year. Blindex is a fast-growth company and does not plan to pay
c. Compare the unit issue with the straight subordinated debenture alternative in terms of cost to CWI and other features you consider relevant.13.7 The Blindex Corp. is negotiating an 8-year subordinated loan with Good Ground Capital Partners as a first step toward going public the following year.
b. What is the value of the warrants?
a. What price would the $1bn 6.5% debentures trade for without the warrants?
13.5 Notsoblue Chip Corp. wants to issue $50 million of 10-year debt on March 3, 2007. The bonds will be issued at par with 8% annual coupon interest (50,000 bonds of $1,000 par value each, with principal to be repaid in year 10). Notsoblue is willing to attach warrants to the bonds to raise the
d. Estimate the expected returns to management and the sponsor.
c. Calculate the amount of warrants needed to achieve the target return on the mezzanine debt on the basis of a 5-year exit and possible refinancing of the mezzanine debt.
b. Develop pro-forma projections given the operating assumptions and the appropriate capital structure.
a. Design an appropriate capital structure for the leveraged recapitalization of Cap & Seal with consideration to the paydown requirements of the senior debt facility.
13.4 Project “Blue Snapper”: In April 2000, the board of directors of Cap & Seal agreed to give management an exclusive opportunity to acquire the company at a price determined by an independent appraisal. Cap & Seal held a dominant position in its core business, specialty injection molded
13.3 Refer to the end of Section 13.8 and compute the return to mezzanine investors and to the sponsor taking into account that the value management’s stock options is $7.56 per option.
13.2 Use the debt capacity Equation (7.4) with the average values of the projections for Peregrine Coatings made in Section 13.8 to compute the debt capacity of the company. Hint: You can use the Debt Capacity Calculator.
e. Prepare a table comparing the equity splits and the returns to the sponsor and to management when: (a) Gladstone gets 30% return; (b) Gladstone gets 25% return; and (c)the equity is split according to the value of the initial equity contributions of each party.
d. What annual rate of return can management expect to realize on their equity rollover?Problems 283
c. What share of the equity will Gladstone Capital Partners demand?
b. Prepare a statement of sources (financing tranches) and uses (total purchase cost) of funds for the LBO. What is the purchase EBITDA multiple?
a. Complete the provided income and cash-flow statements, and debt amortization and debt balance schedules for the LBO for the years 2008 to 2012.
12.7 Value Pet¨ofi by discounting nominal HUF cash flows.
12.6 Value Pet¨ofi by discounting U.S. dollar cash flows.
c. Pet¨ofi has 23.194 million shares outstanding and planned to issue 6.604 million shares in the private placement. Issue fees and expenses were expected to be 5.88% of gross proceeds. Estimate Pet¨ofi’s share price and net proceeds.
b. Estimate Pet¨ofi’s enterprise and equity values.
a. Estimate Pet¨ofi’s unlevered cost of capital as of December 1991.
c. The median EBITDA trailing multiple at the end of 1991 from six North American and UK publicly traded packaging companies was 7.9×, and the median EBITDA multiple from six international acquisitions of packaging companies during 1990–1991 was 7.3×.In addition, Pet¨ofi’s cost of capital
12.4 In 1991 Pet¨ofi Printing Company was the leading packaging company in Hungary.35 Since its privatization by the Hungarian State Property Agency in 1990, capital expenditures had been adequately funded by its internally generated cash flow. However, by the end of 1991, management had
d. Now you have to divide the value of equity by the number of shares. How many shares to use? Hope this problem offers no difficulty because from now on you are on your own!
. From the enterprise value, you have to subtract net debt to obtain the value of equity.However, the company had no debt at the beginning of 1994 and had cash and marketable securities for $16 million.
b. To compute EBITDA add depreciation to NOPAT. For example, EBITDA for 1994 is computed as follows: 3,883 + 3,324 = 7,207.
In the fall of 1993, Leucaida, the owner of Bolivian Power Co. was planning a secondary offering of shares in the U.S. market.33 Bolivian Power was in the business of generation, transmission, distribution, and sale of electricity in Bolivia. The company had operated since 1925, and its shares were
12.2 Verify the computation of the cost of capital for AixCorp’s valuation of APSSA.254 Acquisitions in Developed and Emerging Markets
12.1 Verify the calculation of future dollar/euro spot rates and the dollar cash flows made in Exhibit 12.1.
11.7 Refer to Example 2 of Section 11.2 and interpret Diageo’s clawback as a call spread. Show the payoff of the call spread and compute its value using the Asian call module of the Financial Options Calculator. Relate your result to the one shown in Example 2 using the put-call parity.
11.6 Some years ago, the Norton Simon Company was created from the merger of Canada Dry, McCall’s, and Hunt Foods. Later on, Norton Simon was acquired by Esmark, which in turn was acquired by Beatrice. The latter was eventually acquired by an LBO and broken up. Let us return to Norton Simon and
11.5 Consider the following terms contained in the merger agreement between Qwest and US West executed on July 18, 1999: US West shareholders were to receive common stock having a value of $69 so long as Qwest average stock price was between $28.26 and$39.90. Qwest average price was to be computed
11.4 Refer to Section 11.3 and provide two alternative interpretations to the simplified version of Borland’s collar offer in terms of European options. Use the put-call parity (see Appendix A)or a graph to show the equivalence of your representation to the one made in Section 11.3.
11.3 Value the following gold price guarantee provided by the seller to the buyer of a gold mine as of August 17, 2001: The contract would pay 5 million times the difference between Problems 237$265/ounce and the average price of gold over the trading days of the year ending August 16, 2002 if the
11.2 Compute the volatility General Mills’ stock as of July 16, 2000, using the data shown in the following table. This estimate is used in Section 11.3.Weekly Closing Prices of General Mills, July 12, 1999 to July 10, 2000 Closing Closing Closing Closing Week Price Week Price Week Price Week
11.1 Compute the volatility of Marion Laboratories’ stock as of July 14, 1989, based upon the previous 52-week closing prices and dividend payments given in the following table. This estimate is used in Section 11.2.236 Special Offer Structures: Price Guarantees and Collars Weekly Closing Prices
10.21 Refer to the previous question and consider the following alternative capitalization for DesignPlus: DesignPlus was capitalized with 12 million Series-A shares, owned by Georgetown, and 2.5 million stock options issued to management giving the right to acquire 2.5 million of Series-B shares
c. What would the IRR of Georgetown’s investment in DesignPlus be, assuming the IPO of NetServices takes place as planned? Georgetown expected to exit 6 months after the IPO. Assume that no appreciation of the shares takes place between the IPO and the exit.
b. Build another capitalization table showing the shares issued to Georgetown and Design-Plus management, as well as the percent ownership of all the parties after the acquisition of DesignPlus.
a. Build a capitalization table showing the distribution of the 25 million shares of Net-Services among Morningside, STL, and Letts.
NetServices proposed to acquire DesignPlus at 3 × 2000 pro-forma revenue, and pay $19 million cash plus an equity stake in NetServices for series-A shares. Management would get common shares in NetServices. The new shares to both Georgetown and Design-Plus’ management would be priced at the same
STL Consulting and Letts. STL was a system-integration firm with annual billing through July 31 of $20 million. In addition, Morningside had invested $75 million cash in NetServices for about 45% of the equity in common shares. The partners of STL received common shares in NetServices and were to
10.20 Georgetown Group was the 82.76% owner of DesignPlus.com, an Internet site-design firm. Management owned 17.24% of the company. DesignPlus was capitalized with 12 million series-A shares, owned by Georgetown, and 2.5 million series-B shares owned by management. Series-A shares had voting
c. Do you expect the call provision to be costly to TVL? Explain.
b. What determines the value of a call provision? How will the call provision affect the pricing of the issue?

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