Blue Ltd is an unlisted retailer and wishes to regain competitive advantage by acquiring a rival company,

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Question:

Blue Ltd is an unlisted retailer and wishes to regain competitive advantage by acquiring a rival company, Plum Ltd, in order to pursue economies of scale and scope. The objective of the new acquisition is to create shareholder value by generating synergistic cost savings.

The free cash flows to equity are:
Blue Ltd: £132.5m
Plum Ltd: £65.4m

Further information:
The value of the synergistic pre-tax cost savings is expected to be £12m per annum. The post-acquisition cost of equity is anticipated to be 13% and the combined company is forecast to grow at an annual rate of 4%.
Both companies pay corporation tax at an annual rate of 25% and this is expected to remain unchanged after acquisition.

Required:
a) Estimate the post-acquisition equity value.
(6 marks)

b) If the pre-acquisition value of Blue Ltd is £1420m, then what is the maximum that Blue Ltd should pay for Plum Ltd? Please provide a very brief comment on your maximum value estimate.
(4 marks)

c) Discuss the risks associated with Blue Ltd acquiring Plum Ltd and briefly consider how Blue Ltd’s board could mitigate those risks.
Word limit for discussion 250 words.