5 Cheek Products Ltd was founded 53 years ago by Joe Cheek, and originally sold snack foods such as crisps and biscuits. Through acquisitions, the company has grown into a conglomerate with major divisions in the snack food industry, home security systems, cosmetics and plastics. Additionally, the company has several smaller divisions. In recent years the company has been underperforming, but its management does not seem to be aggressively pursuing opportunities to improve operations (and the share price).

Meg Whalen is a financial analyst specializing in identifying potential buyout targets. She believes that two major changes are needed at Cheek Products. First, she thinks that the company would be better off if it sold several divisions and concentrated on its core competencies in snack foods and home security systems. Second, the company is financed entirely with equity. Because the cash flows of the company are relatively steady, Meg thinks the company’s debt–equity ratio should be at least 0.25. She believes these changes would significantly enhance shareholder wealth, but she also believes that the existing board and company management are unlikely to take the necessary actions. As a result, Meg thinks the company is a good candidate for a leveraged buyout.

A leveraged buyout (LBO) is the acquisition by a small group of equity investors of a public or private company. Generally, an LBO is financed primarily with debt. The new shareholders service the heavy interest and principal payments with cash from operations and/or asset sales. Shareholders generally hope to reverse the LBO within three to seven years by way of a public offering or sale of the company to another firm. A buyout is therefore likely to be successful only if the firm generates enough cash to serve the debt in the early years and if the company is attractive to other buyers a few years down the road.

Meg has suggested the potential LBO to her partners, Ben Feller and Brenton Flynn. Ben and Brenton have asked Meg to provide projections of the cash flows for the company. Meg has provided the following estimates (in millions):

2021 (£) 2022 (£) 2023 (£) 2024 (£) 2025 (£)

Sales 1,627 1,824 1,965 2,012 2,106 Costs 432 568 597 645 680 Depreciation 287 305 318 334 340 EBT 908 951 1,050 1,033 1,086 Capital expenditures 165 143 180 182 195 Change in NWC (72) (110) 60 56 64 Asset sales 840 610 At the end of five years, Meg estimates that the growth rate in cash flows will be 3.5 per cent per year. The capital expenditures are for new projects and the replacement of equipment that wears out.

Additionally, the company would realize cash flow from the sale of several divisions. Even though the company will sell these divisions, overall sales should increase because of a more concentrated effort by the remaining divisions.

After ploughing through the company’s financials and various pro forma scenarios, Ben and Brenton feel that, in five years, they will be able to sell the company to another party or take it public again. They are also aware that they will have to borrow a considerable amount of the purchase price. The interest payments on the debt for each of the next five years if the LBO is undertaken will be these (in millions):

2021 2022 2023 2024 2025 Interest payments (£) 1,140 1,100 1,180 1,150 1,190 The company currently has a required return on assets of 14 per cent. Because of the high debt level, the debt will carry a yield to maturity of 12.5 per cent for the next five years. When the debt is refinanced in five years, they believe the new yield to maturity will be 8 per cent.

Check Products Ltd currently has 104 million shares of equity outstanding that sell for £53 per share.

The corporate tax rate is 28 per cent. If Meg, Ben and Brenton decide to undertake the LBO, what is the most they should offer per share?