Two companies called Blur plc and Oasis plc are considering a merger. Financial data for the two companies are given below:

The two companies have estimated that, due to economies of scale, the newly merged company would generate cost savings of £200 000 per year.

(a) It is initially suggested that 100 per cent of Oasis’s shares should be exchanged for shares in Blur at a rate of one share in Blur for every three shares in Oasis.
What would be the expected dilution of EPS of the merger from the point of view of Blur’s shareholders?

(b) An alternative to this is for Blur’s shares to be valued at £7.20 and for the total share capital of Oasis to be valued at £10.5m for merger purposes. A certain percentage of Oasis’s shares would be exchanged for shares in Blur, while the remaining shares of Oasis would be exchanged for 6.5 per cent bonds (issued at £100 par value) in the new company. Given that the corporate tax rate is 30 per cent, how much would have to be raised from the bond issue as part of the purchase consideration in order for there to be no dilution of EPS from Blur’s existing shareholders’ point of view?

Transcribed Image Text:

Blur Oasis Number of shares issued 3m 6m Distributable earnings 1.8m 0.5m P/E ratio 12.0 10.3