Mergers and Acquisitions

The directors of England plc, a food retailer with 20 superstores, are proposing to make a takeover bid for Scotland plc, a company with six superstores in the north of England. England will offer four of its ordinary shares for every three ordinary shares of Scotland. The bid has not yet been made public.

Summarized Accounts
Statement of Financial Position as at 31 March

England Scotland
Plc Plc
(£mn) (£mn)
Land and buildings (net) 483 42.3
Fixed assets (net) 150 17.0
663 59.3

Current asset
Stock 328 51.4
Debtors 12 6.3
Cash 44 384 5.3 63.0

Creditors: amounts falling due in less than 1 year
Creditors 447 46.1
Dividend 12 2.0
Taxation 22 481 2.0 (50.1)
(97) 12.9

Creditors: amount falling due after more than 1 year

14% loan stock (200) –
Floating rank bank term loans (114) (17.5)
222 54.7

Shareholder’s funds
Ordinary shares (25 pence par) 75 Ordinary shares
(50 pence par) 20.0
Reserves 147 34.7
222 54.7

Income statement for the year ending 31 March

(£mn) (£mn)
Turnover 1130 181

Earnings before interest and tax 115 14
Net interest (40) (2)
75 12
Profit before tax
Taxation (25) (4) Available shareholders
50 8

Dividend (24) (5)
26 3

The current share price of England is 232 pence, and of Scotland plc 295 pence. The current loan stock price of England plc is £125.

Recent annual growth trends:
England plc Scotland plc
Dividends 7% 8%
EPS 7% 10%

Rationalisation following the acquisition will involve the following transactions (all net of tax effects):
(i) Sale of surplus warehouse facilities for £6.8 million.
(ii) Redundancy payments costing £9.0 million.
(iii) Wage savings of £2.7 million per year for at least five years.

England’s cost of equity is estimated to be 14.5% and weighted average cost of capital 12%. Scotland’s cost of equity is estimated to be 13%.

Required:
Discuss and evaluate whether or not the bid is likely to be viewed favourably by the shareholders of both England plc and Scotland plc.
Include discussion of the factors that are likely to influence the views of the shareholders. All relevant calculations must be shown.