Dundee (Ltd) is a dairy company which is in the process of negotiating the acquisition of
Glencoe (Ltd). The management estimates that the acquisition will result in economies of scale
and the additional benefits will amount to R30 million. Dundee (Ltd) is prepared to make a cash
payment of R55 million for Glencoe (Ltd). The following information is available for the two
companies:
Dundee (LTD) Glencoe (Ltd)
Earnings per share R5.00 R4.00
Number of shares 5 million 3 million
Market value per share R15.00 R12.00
Required:
2.1 Calculate the value of the take-over. (4 marks)
2.2 Calculate the net present value of the proposed take-over. (3 marks
2.3 Calculate the take-over premium. (3 marks)
2.4 Determine the market price per share after the proposed take-over. (4 marks
Assume that the take-over (acquisition) was based on earnings per share.
2.5 Determine the exchange ratio based on earnings per share. (2 marks)
2.6 Calculate the post take-over earnings per share. (5 marks)
2.7 Calculate the benefits, if any, for both parties. (4 marks)
2.1 Value of the take-over:
Dundee (Ltd) market value = R15.00 * 5 million shares = R75 million
Glencoe (Ltd) market value = R12.00 * 3 million shares = R36 million
Total market value after acquisition = R75 million + R36 million = R111 million
Economies of scale benefits = R30 million
Value of the take-over = R111 million + R30 million - R55 million = R86 million
2.2 Net present value of the proposed take-over:
NPV = Value of the take-over - Cash payment
NPV = R86 million - R55 million = R31 million
2.3 Take-over premium:
Take-over premium = (Value of the take-over - Market value of Glencoe (Ltd)) / Market value of Glencoe (Ltd) * 100
Take-over premium = (R86 million - R36 million) / R36 million * 100 = 138.89%
2.4 Market price per share after the proposed take-over:
Total number of shares after acquisition = 5 million + 3 million = 8 million shares
Market price per share after take-over = R111 million / 8 million shares = R13.875
2.5 Exchange ratio based on earnings per share:
Exchange ratio = Earnings per share Dundee (Ltd) / Earnings per share Glencoe (Ltd)
Exchange ratio = R5.00 / R4.00 = 1.25
2.6 Post take-over earnings per share:
Total earnings after acquisition = Total earnings Dundee (Ltd) + Total earnings Glencoe (Ltd) = (R5.00 * 5 million) + (R4.00 * 3 million) = R35 million
Post take-over earnings per share = Total earnings after acquisition / Total number of shares after acquisition
Post take-over earnings per share = R35 million / 8 million shares = R4.375
2.7 Benefits for both parties:
- Glencoe (Ltd) benefits from being acquired by Dundee (Ltd) as they receive a premium on their market value and access to economies of scale.
- Dundee (Ltd) benefits from the acquisition by gaining a larger market share and potential cost savings from economies of scale.