Gretsch Industries is considering acquiring Flueger Systems. Although Flueger has said it is not for sale, Gretsch is considering a hostile takeover by making a trade offer directly to Flueger’s shareholders. Meghan Doyle, a financial analyst with Gretsch has been assigned a task of estimating a fair acquisition price for the tender offer. Doyle plans to use three different valuation methods to estimate the acquisition price and has collected the necessary financial data for this purpose.

Flueger Systems has 20 million shares outstanding. Doyle has estimated that at the end of each of the next four years, Flueger will have free cash flow to equity (FCFE) (in millions) of $24, $27, $32 and $36. After the 4^th year Doyle expects Flueger’s FCFE to grow at a constant rate of 6% per year. She also determines that Flueger’s cost of equity 10.5% is the appropriate discount rate to use for the analysis.

Doyle has also found three companies that are the in the same industry as Flueger and has a similar capital structure – Behar Corporation, Walters Inc., and HauelBack Dynamics. In addition Doyle has identified data for three takeover transactions with characteristics Similar to Flueger-Bullseye, Dart industries, and Arrow Corp. Data for both sets of firms are shown in the following figure.

Company Statistics	Flueger Systems	Behar Corporation	Walters Inc.	HauelBlack Dynamics
Current stock Price ($)	$ 32.0	$54.00	$36.50	$108.20
Earnings per share (EPS) ($)	1.75	2.80	2.10	6.50
Book Value per Share ($)	9.75	17.25	12.10	35.75
Sales per share ($)	29.75	52.75	37.80	105.00

Company Statistic	Bullseye	Dart Industries	Arrow Corp
Stock Price pre take over	$18.25	$27.80	$43.00
Acquisition Stock Price	$22.00	$35.00	$52.00
Earnings per Share (EPS)( ($)	0.95	1.65	2.50
Bok value per share ($)	6.10	9.85	14.20
Sales Per share ($)	17.60	26.75	39.75

Lily Tyler, the CEO of Flueger Systems, was not happy when she heard the rumor that Gretsch industries may try to take over Flueger in a hostile takeover. Tyler asked two of her executives Vice presidents for suggestion on what her form could do. Jordan Collier said, “if the Gretsch does make a hostile takeover offer, we could implement a fair price amendment to make sure a fair price is offered to our shareholders. Another EVP,   Kyle bald Win stated, “One option is to use a white knight defense and sell a minority stake to a third party that could help block the Gretsch from making a deal.”

Requirements:

1. Calculate the stock price of Flueger Systems under the comparable company approach, assuming that all three relative value measures i.e. (EPS, Book value and sales) carry equal weights in the final stock price determination.
2. Estimate the mean takeover premium (in percentage form) on the basis of historical data related to recent M&A Transactions.
3. Calculate the estimated takeover price (including premium) for Fleuger on the basis of previously calculated value of its stock and the mean takeover premium.
4. Finally calculate the fair acquisition price for Flueger System using the comparable transaction approach and corroborate your previously estimated takeover price.