BPP Rev.Kit – Implications of acquisition for Burcolene’s gearing and cost of capital

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  • Profile photo of accaforall
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    Burcolene intends to finance the acquisition via a bond issue (100%)
    the answer give the following explanations for the post acquisition implications.
    Market greaing:
    what effect this method of financing will have on market gearing is more difficult to estimate. A lot will depend on how much, if any, surplus sharehodler value is generated and how it is distributed. Market gearing is likely to increase if the majority of the benefits fall to PetroFrancais (target co) shareholders; the reverse will be the case if Burcolene’s shareloders enjoy the bulk of the benefits.

    Cost of capital
    the implications for the cost of capital will depend on the bid price and the way in whihc the acquisition value is distributed amongst the two groups of sharehoders

    Dear SIr, would you please elaborate the above explainations further like impact of the distribution of the benefits among the group shareholders for both cases abvoe.
    thanks in advance.

    Profile photo of John Moffat
    John Moffat
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    In respect to the first part (market gearing):

    There will be benefits resulting from the acquisition. If these benefits go to increase the share price of Burcolene, then this will reduce the gearing (more equity), but if the benefits go to PetroFrancais (by them getting more bonds) then this will increase the gearing.

    In respect of the cost of capital, then the same factors are going to be applicable (because certainly the weighting of equity and debt will be affected by what I have written above)

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