1. Admiral Foods Corporation is a diversified food processing and distributing company that has shown excellent growth over the past 10 years as a result of a balanced program of acquisitions and internal growth.
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3. One segment of the food business in which Admiral has only recently begun to compete, however, is the fast-food business. The present top management of Admiral Foods feels that good future growth in the fast-food business is still possible, regardless of the rapid expansion of the last two decades. During the past year, members of the Admiral staff have examined and analyzed a number of independent fast-food firms. One company that the analysis indicated as potentially suitable for acquisition by Admiral is Favorite Food Systems Inc.
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5. Favorite Food Systems Inc. which was founded by John Favorite in 1994, is a West Coast chain with current annual sales of approximately $75 million. Favorite’s history can best be described as up and down, with the general trend up. The company survived several brief shaky periods during the late 1990s. In 2003, the company went public. (The Favorite family now controls about 57 percent of the common stock.) By 2006, Favorite Foods was recommended by two brokerage firms and was touted by one investment service as “another potential McDonald’s.” This and other predictions never came true. In fact, Favorite Food Systems’ growth rate has slowed appreciably during the past 5 years. One reason frequently given in the trade for Favorite’s growth slowdown is Mr. Favorite’s apparent indecision regarding expansion. As a result, the competition has increasingly gotten the jump on Favorite with the best locations in new residential growth areas.
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7. The following table shows last year’s balance sheets and income statements for both Admiral and Favorite.

  

      

  

      

  

Marie Harrington received her BBA degree in finance 3 years ago and went to work for Admiral Foods as a financial analyst in the corporate budget department. Recently, she became a senior financial analyst responsible for analyzing mergers and major capital expenditures. One of her first assignments is to prepare a financial analysis of the proposed Favorite acquisition. It is the conservative policy of Admiral Foods to analyze acquisitions assuming that no synergistic benefits will occur. Admiral Foods has found that the amount of synergy in a merger is relatively difficult to forecast. During Harrington’s discussions with her supervisor, they decided that the analysis should contain the following items:

  

    1. Calculate the exchange ratios, based on the common stock market value and earnings per share.

  

    2. Mr. Favorite has suggested an exchange ratio based on a 25 percent increase over Favorite’s current market price. Calculate this exchange ratio.

  

    3. What is the maximum exchange ratio Admiral Foods should agree to if one of its acquisition criteria specifies no initial dilution in earnings per share? What per share price for Favorite Food Systems does this exchange ratio represent?

  

    4. Even though Harrington’s assignment is primarily financial in nature, what other considerations are important in a merger such as this?

  

    5. Calculate the Admiral Foods postmerger earnings per share, assuming each share of Favorite stock is exchanged for 0.40 shares of Admiral stock.

  

    6. In discussions with Admiral, Mr. Favorite has stated that he would prefer to exchange his Favorite shares for either Admiral common stock or a convertible preferred rather than cash or debentures. Why?

  

    7. Based on the information given in the case and your analysis, what do you feel is a fair exchange ratio?
 

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Admiral Foods Corporation $225 307 Current assets Fixed assets, net Total assets Earnings before taxes Less: Taxes (40%) $532 Admiral Foods Corporation Income Statement (in Millions of Dollars) Sales Less: Expenses, excluding depreciation Less: Depreciation Earnings before interest and taxes Less: Interest Earnings after taxes Balance Sheet (in Millions of Dollars) Current liabilities Long-term debt Common equity (10,000,000 shares) Total liabilities and equity $101 106 325 $532 $1,261.0 1,118.2 36.0 $106.8 12.8 $94.0 37.6 $56.4 Admiral Foods Corporation $225 307 Current assets Fixed assets, net Total assets Earnings before taxes Less: Taxes (40%) $532 Admiral Foods Corporation Income Statement (in Millions of Dollars) Sales Less: Expenses, excluding depreciation Less: Depreciation Earnings before interest and taxes Less: Interest Earnings after taxes Balance Sheet (in Millions of Dollars) Current liabilities Long-term debt Common equity (10,000,000 shares) Total liabilities and equity $101 106 325 $532 $1,261.0 1,118.2 36.0 $106.8 12.8 $94.0 37.6 $56.4

Answer rating: 100% (QA)

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