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Q2b Arnison
(b) Estimate the percentage gains to the Arnison Co and the Birks Co shareholders under each of the two offers?
1. A cash offer of $2.40 per share.
2. A share for share exchange, offering 4 shares in the combined company in
exchange for every 5 shares in Birks Co.My question is related how should we approach this question? Probably, to find the percentage change in pre and post acquisition MV of shares of both Arnison and the Birks shareholders?
For the share for share exchange my approach works. Just, some key highlights.
I find the MV per share of the combined company – 3.45$ per share (510m/148m shares). Post acquisition MV of target share 2.76$=3.45$*4/5. As a result, the calculated percentage gains are the same as with the examiner answer.However, in cash offer, this MV shares approach does not work.
The examiner’s approach is different. He calculates the synergy gain (which is understandable) and allocates it between Predator and Target shareholders (not very clear).Please clarify, what exactly we are doing in the cash offer scenario? It seems, that this is not MV of shares percentage change evaluation.
I agree and what the answer does is not really logical.
On the wording of the question it would be more sensible just to compare the amount of the cash offer with the current value of the shares, which gives a gain of 0.31 on an existing 2.09, so 14.8%. This would certainly have got the marks 🙂
Thank Mr. Moffat. For the Target company it’s clear.
But what about the percentage gain for the Predator’s shareholders?
Probably 1.75$/3.35$ per share= 52.3% percentage gain, where:
->1.75$ is the MV gain per share (difference between Predator’s post and pre-acqusition MV per share 5.10$-3.35$)
->3.35$ pre-acqusition MV of Predator’s share
I do not consider at all the cash payment in Predator’s case.Because the examiner’s answer is 9.3% percentage gain for Predator’s shareholders.
For the predator, you cannot ignore the cash payment.
The new value of the ‘combined company’ is $510.1m. However out of this is being paid 60m x 2.40 = $144m to the target shareholders.
This leaves the value for the predators shareholders as $366.1, which given there are 100m shares means a new share price of $3.66 per share.
So the gain to these shareholders is (3.66 – 3.35)/3.35 = 9.3%
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