At the end of 2020, you are considering acquiring the troubled publishing company Wordsworth Ltd. You believe that you can turn the company around by growing sales, improving distribution, reducing costs, and gradually reducing the inventory (all other current assets and current liabilities remain unchanged). This plan will take three years to implement, after which you expect cash flows to grow at the industry growth rate of 5% per year in perpetuity.

Wordsworth is a company with a lot of heritage having been founded in 1800 and is also a well-known British brand, respected around the world for its traditional roots (their original press is in a gothic church in the English countryside). You founded your company 10 years ago with two passionate friends and grew it with money from angel investors by focusing mainly on digital solutions.

Wordsworth and you both own a book printing plant in Europe. The secular digital migration trend and changing consumer habits mean that the expectation is that 40% less physical books will be sold in the next three years. As of 2020 Wordsworth’s plant has a maximum production capacity of 35,000,000 books a year, while your plant has a maximum capacity of 15,000,000 books a year. Both you and Wordsworth currently sell 10,000,000 printed books each a year.

Furthermore, Wordsworth covers mainly the UK market: 80% of sales UK, 15% of sales rest of Europe, 5% rest of the world; whilst you sell more abroad: 50% UK, 35% rest of Europe, 15% rest of the world.

The corporate tax rate is 40%. To value the investment you scribble some projections on the back of an envelope. These three-year projections are given below. Note that the interest payments are based on Wordsworth’s historical debt level of $160m and the risk-free rate of 5%.

Exhibit 1- Wordsworth’s Financial Projections

Item / Year	2021	2022	2023
Sales	100	120	140
COGS	80	60	70
SG&A	110	10	10
Depreciation	10	10	10
CAPX	10	10	10
Inventory reduction	0	6	5
Interest Payment	8	8	8

Note: All values in £M.

Exhibit 2- Plant and distribution channel costs for 2020.

Item	Wordsworth	You
Plant fixed costs	30	20
Plant labour	60	60
Distribution channel	10	10

Note: All values in £M.

Wordsworth currently has $160 million of long-term risk-free debt on its balance sheet and it has maintained this amount historically. However, after the acquisition, you plan to change the capital structure to maintain a constant debt to value ratio of 1/3. (This means that D/D+E = 33%. You may use either 33% or 1/3, and don’t worry about minor errors from this difference). The debt you issue is risk-free.

QUESTIONS:

4. Which method do you think is the most appropriate and easier to implement to perform the valuation of Wordsworth? Why?
5. What is the enterprise value of the company both as a stand-alone and including the synergies?

6. Wordsworth has 100 million shares outstanding. What is the maximum price per share you would be willing to pay? What is the value of all the equity of Wordsworth?

7. Do you have any concerns with the valuation you performed? How could you address them?
8. 
   
9. How would you categorize the merger (and its implications) between you and Wordsworth?

9. Do you see any potential problems in the post-merger integration of the two companies? If so, which ones?

10. If Wordsworth had been a public (listed) company instead of a private one, list and briefly explain three kind of takeover defense strategies it could have mounted?