FINANCIAL MANAGEMENT 3D CASE STUDY

QUESTION ONE

(20 Marks)

Study the article below and answer the questions that follow:

Drug firm Adcock stays in SA hands

Johannesburg -Chile's CFR Pharmaceuticals said on Friday it would drop its $1.2bn bid for drugmaker Adcock Ingram [JSE:AIP] after being thwarted by Adcock's top shareholder.

"Shareholders are advised that Adcock Ingram and CFR have consulted and are of the common view that there is no prospect that the special resolutions to approve the scheme of arrangement proposed between the company and the holders of Adcock Ingram ordinary shares in relation to the offer from CFR will be approved by the necessary 75% majority," the firms announced in a joint statement.

CFR had offered R12.8bn for South Africa's second-largest drugmaker in a bid that required approval from shareholders with 75% of Adcock.

Adcock shareholder Bidvest Holdings, which has opposed CFR because it wants to take control of the company, recently raised its stake to 34.5%.

Adcock and CFR said there is no prospect the deal could be approved by the required 75%.

An analyst told Reuters last week that CFR Pharmaceuticals can either walk away or go hostile in a bid to take over Adcock after Bidvest raised its stake in the drugmaker.

"The CFR bid is not going to get approval. It has two options: walk away or go hostile," said Alec Abraham at Afrifocus Securities.

"But if CFR goes hostile, it would be difficult for it to bed down the deal and get synergies out when working with a hostile shareholder. So my guess is CFR will walk away."

Required:

Calculate the total number of shares to be acquired by CFR based on Adcocks market value of R70 per share. (5)

Assume CFR shares are currently trading at $65.60 per share. Determine the exchange ratio based on market values for the proposed acquisition. (Assume $1 = R10.67)

(5)

Recently Bidvest Holdings raised its stake to 34.5% in Adcock. Calculate the number of shares held by Bidvest Holdings in Adcock. (3)

In light of the above article, discuss the potential gains for the offeror from the proposed acquisition. (7)