"Gold & Sheeran Group merges with BMT PLC

In July $2016,$ the leadership of BMT$,$ a British multinational financial services company based in London, and Gold & Sheeran Group, an investment bank also based in England, agreed to a merger. BMT merged with Gold & Sheeran through an exchange of stocks, facilitated by offering a $21\mathrm{.}6\%$ premium to Gold & Sheeran$$s existing shareholders. BMT paid $3\mathrm{.}6$ billion $($in the form of its own stock$)$ for all Gold & Sheeran$$s stock $($this includes the premium$).$ This was valued at $5\mathrm{.}23$ per stock, a pre$-$merger value agreed on by both parties. After the merger, BMT and Gold & Sheeran's shareholders were left with $50\mathrm{.}5\%$ and $49\mathrm{.}5\%$ stakes in the combined company, respectively."

"Transaction details

The merger was justified for several reasons, including the introduction of new systems, cost savings, new products, and BMT$$s strategic interests in Asia, where Gold & Sheeran had a strong presence. Compared to the two companies' individual pre$-$merger budgets, the merged company is expected to save a combined $360$ million per annum by Year $4$ following the acquisition. This estimated saving is attainable at a once$-$off pretax investment of $450$ million spread over $3$ years to achieve synergies $(340$ million in Year $1,70$ million in Year $2,$ and $40$ million in Year $3).$ The annual synergy savings over $3$ years are as follows: $130$ million in Year $1,270$ million in Year $2,$ and $360$ million in Year $3.$ The synergy savings are estimated to grow at a rate of $2\mathrm{.}5\%$ per annum after Year $3.$ Assume a corporate tax rate of $35\%$ and a cost of capital $($assumed to be the discount rate$)$ of $10\%,$ then answer the following questions:"

Question $1\mathrm{.}1$

What is the incremental monetary value to shareholders of the synergies projected in this merger?

Question $1\mathrm{.}2$

How will the value of the synergies be shared in the proposed transaction in terms of percentage holding, specifically for Gold & Sheeran?

Consider the premium stakes in the combined company after the merger of the two companies.

Question $1\mathrm{.}1$ Amounts $($ millions$)$

Year Implementation costs Synergy savings After$-$tax FCF Discount factor Present value

$1$

$2$

$3$

Sum

Terminal value

NPV $0$

Question $1\mathrm{.}2$

Amounts $($ billions$)$

BMT plc Gold & Sheeran

Acquisition premium received

Split of value creation $(50\mathrm{.}5$ BMT$,49\mathrm{.}5$ G&S$)$

Total

Synergy $\%$ for Gold & Sheeran