The directors of Kifaru plc are considering taking over Mpaka plc, a smaller business in the same industry as Kifaru plc. Currently, Kifaru plc’s shares are trading at £6.40/share and Mpaka plc’s shares are trading at £9.60/share. The financial press has given Kifaru plc’s PE ratio as 20 and Mpaka plc’s PE ratio as 8. The most recent financial statements of each business show that Kifaru plc made after-tax profits of £160 million and Mpaka plc made after-tax profits of £72 million.
It is estimated that the combined business (Kifaru and Mpaka) will be able to maintain the profits of the individual businesses, but would also be able to achieve after-tax annual savings of £38 million from operating and financial synergies. Kifaru plc’s chief financial officer estimates that the combined business’s PE ratio will fall to 16. Kifaru plc would like to finance the acquisition of Mpaka plc by offering five of its shares for three of Mpaka plc’s shares.

Required:

(a) Calculate the number of shares in each business and the number of shares in the combined business.

(b) Calculate the share price of the combined business and, based on this, calculate the percentage gain per share for each business’s shareholders.

(c) Discuss whether the shareholders of the two businesses would accept the offer made by the directors of Kifaru plc. Include any calculations you consider relevant to support your discussion.