Lanes plc, the retail butchers, is considering the purchase of ten shops from Roberts plc, the conglomerate. The information gathered on the ten shops trading as a separate subsidiary company is as follows:

• Balance sheet

m

Fixed assets 2

Current assets

Cash 0.1

Stock 0.6

Debtors 0.1

0.8

Current liabilities (0.5)

Long-term loan (1.0)

Net assets 1.3

• Trading history

Year Earnings (m)

Last year 1.4

1 year ago 1.3

2 years ago 1.1

3 years ago 1.2

4 years ago 1.0

5 years ago 1.0

If the shops remain part of Roberts, earnings growth is expected to continue at the average historical rate to infinity. The rate of return required on a business of this risk class is 13% per annum.

Required

1. Calculate the value of the shops to Roberts shareholders.
2. Lanes management believes that the ten shops will be a perfect fit with its own. There are no towns in which they both trade, and economies of scale can be obtained. Suppliers will grant quantity discounts which will save 1m per annum. Combined transportation costs will fall by 200,000 per year and administration costs can be cut by 150,000 per year. These savings will remain constant for all future years. In addition, the distribution depot used by the ten shops could be closed and sold for 1.8m with no adverse impact on trading. Calculate the value of the ten shops to Lanes shareholders on the assumption that the required return remains at 13% and underlying growth continues at its past rate.