Description

You are a profitable conglomerate thinking about getting into the gelati business by acquiring the firm Buono Gelati (BG).  Current info for you, BG and their similar comp is listed below. You estimate that, through your power in the marketplace, your plans would enable you to increase BG sales 40% immediately while only cannibalizing your own sales 6% vs the 10% you would lose without the acquisition.   Furthermore, you believe that you would get other synergies of 4% of your current sales.  COGS is always 30% for all business lines.  Also, operating costs not including depreciation are $35 million each year of your ten year horizon.  These figures would be flat for 10 years and then bottomline cash flows would grow at 2% per year after that in perpetuity.  In addition, this venture requires a $150 million investment after the acquisition is consummated.  This is to cover additional Net Working Capital reserves, (one-third of this investment), and capital expenditures.  All CAPX is straight-line depreciated over the ten year horizon of your analysis.  At the end of year 10, an additional CAPX of $10 million will need to be spent to allow the firm to grow from there on at the 2% rate per year.  In addition, you will need to use land that you purchased for $15 million last year in preparation for this deal.  This land is currently worth $20 million in the marketplace but is of no value to you outside of the acquisition. Your typical approach regarding overhead allocation is to assign 10% of sales to the business, but you believe that there are no general headquarter costs that need to be expended for this business other than expanding your accounting systems to monitor the business at a cost of $5 million per year. There are no other changes in revenues or costs.    These numbers are the expected figures for each year throughout the life of the project.

 Note:  The corporate tax rate is 20%.  Assume that all cash flows are year-end except for the up-front investment.  You will finance the project appropriately with 25% AAA debt. Assume beta of debt = 0.  Also assume that Good Gelati is also an excellent comp for the industry.

            You also have the following financial data pertaining to the market and to your publicly-traded competitors:

Treasury

Security                       Rate

3-month T-bill             3%

5-Year T-bond            4%

30-year T-bond           5%

AAA debt                   8%

Market Risk Premium over Treasury Bonds is 6%

                                                Your Firm             Good Gelati          Buono Gelati (BG)

Stock Price                                   $70                         $30                       $40

Total Book Capitalization       $600 Million        $800 Million            $800 Million

Leverage Ratio (Book)                20%                       20%                       25%

Shares Outstanding                 22 Million             20 Million               20 Million

Cash                                        $ 15 Million         $ 0 Million               $ 0 Million

Beta (Yahoo Finance)                   1.0                         0.9                         0.98

Total Sales                               $250 Million        $200 Million            $200 Million

Gelati Sales                             $0 Million            $200 Million            $190 Million

What is the breakeven bid per share for you to acquire BG?  [23 points]