Assumptions Sparking would become a wholly owned subsidiary of Charging. Revenues will continue to grow to 4.3% for the next five years and will level off at 4% thereafter. 1) The cost of goods sold will represent 95% of revenue going forward. iv) Sales-force layoff will reduce Sales, general and Administration (SG&A) expenses to 322 million next year, with a 2% growth rate going forward v) These layoff and other restructuring charges are expected to result in expensed restructuring charges of $30 million, $15 million, and 35 million (respectively) over the three years period. Noncash expenses are expected to remain around $7 million going forward. vii) Interest expense are expected to remain around $11.5 million going forward viii) A tax rate of 31% is assumed going forward ix) Charging's cost of equity is 12% Sparking's current market capitalization is 3250 million xi) Charging will offer Sparking a takeover premium of 20% over current market capitalization QUESTIONS a) Make your recommendation about whether or not the acquisition should be pursued. (7 marks) b) If Charging has 30 million shares outstanding that are currently trading at $60.00, then how many shares should Charging offer for every share of Sparking? (3 marks) The Case Charging Corporation and Sparking Electrical Company are competitors in the business of electrical components distribution. Sparking is the smaller fimm and has attracted the attention of the management of Charging, for Sparking has taken away market share from the larger firm by increasing its sales force over the past few years. Charging is considering a takeover offer for Sparking and asked you to serve on the acquisition valuation team that will turn into due diligence team if an offer is made and accepted. Given the financial information and proposal assumptions that follows, how would you respond to (a) and (b)2 2006 Sparking Electrical Company Condensed Income Statement Previous five years (in 9 million) 2009 2008 2007 1.626.50 1614.10 1485.20 1.488.10 1490.90 1359.50 138.40 123 20 125.70 411 36.8 412 1380.50 1271.40 109.10 35 2005 1373.40 1268.00 105.40 361 73 71 6.6 Revenues - Cost of goods sold Gross profits SG&A expenses Neocash expense (depreciation & amortization) Less: Operating expense Operating income -Interest expense Earings before taxes (EBT) Less Taxes paid (31%) Net Income 48.4 90.00 115 43.5 79.70 12 67.70 20.8 46.90 48.3 77.40 12 65.40 19.9 45.50 41.6 67.50 12 55.50 16.8 38.70 42.5 62.90 12 50.90 153 35.60 78.5 24.3 54.2 Sparking Electrical Company Condensed Balance Sheet Previous Year (5 million) Item Current Asset Fixed Asset Total Asset Current liabilities Long Term debt Total Liabilities Shareholders' equity Total Liabilities and equity 2009 122 347.8 360 10.1 150 160.1 199.9 360 Assumptions Sparking would become a wholly owned subsidiary of Charging. Revenues will continue to grow to 4.3% for the next five years and will level off at 4% thereafter. 1) The cost of goods sold will represent 95% of revenue going forward. iv) Sales-force layoff will reduce Sales, general and Administration (SG&A) expenses to 322 million next year, with a 2% growth rate going forward v) These layoff and other restructuring charges are expected to result in expensed restructuring charges of $30 million, $15 million, and 35 million (respectively) over the three years period. Noncash expenses are expected to remain around $7 million going forward. vii) Interest expense are expected to remain around $11.5 million going forward viii) A tax rate of 31% is assumed going forward ix) Charging's cost of equity is 12% Sparking's current market capitalization is 3250 million xi) Charging will offer Sparking a takeover premium of 20% over current market capitalization QUESTIONS a) Make your recommendation about whether or not the acquisition should be pursued. (7 marks) b) If Charging has 30 million shares outstanding that are currently trading at $60.00, then how many shares should Charging offer for every share of Sparking? (3 marks) The Case Charging Corporation and Sparking Electrical Company are competitors in the business of electrical components distribution. Sparking is the smaller fimm and has attracted the attention of the management of Charging, for Sparking has taken away market share from the larger firm by increasing its sales force over the past few years. Charging is considering a takeover offer for Sparking and asked you to serve on the acquisition valuation team that will turn into due diligence team if an offer is made and accepted. Given the financial information and proposal assumptions that follows, how would you respond to (a) and (b)2 2006 Sparking Electrical Company Condensed Income Statement Previous five years (in 9 million) 2009 2008 2007 1.626.50 1614.10 1485.20 1.488.10 1490.90 1359.50 138.40 123 20 125.70 411 36.8 412 1380.50 1271.40 109.10 35 2005 1373.40 1268.00 105.40 361 73 71 6.6 Revenues - Cost of goods sold Gross profits SG&A expenses Neocash expense (depreciation & amortization) Less: Operating expense Operating income -Interest expense Earings before taxes (EBT) Less Taxes paid (31%) Net Income 48.4 90.00 115 43.5 79.70 12 67.70 20.8 46.90 48.3 77.40 12 65.40 19.9 45.50 41.6 67.50 12 55.50 16.8 38.70 42.5 62.90 12 50.90 153 35.60 78.5 24.3 54.2 Sparking Electrical Company Condensed Balance Sheet Previous Year (5 million) Item Current Asset Fixed Asset Total Asset Current liabilities Long Term debt Total Liabilities Shareholders' equity Total Liabilities and equity 2009 122 347.8 360 10.1 150 160.1 199.9 360