Luiggis Italian Inn, Inc. Luiggi's Italian Inn, Inc., operates a chain of Italian restaurants in five midwestern states. The company has been in business over 50 years and operates in mostly downtown locations in older facilities. Most of its clients are professionals working in the downtown area and come in during the lunch hour. The downtown locations were upscale offering white-linen covered tables. Ten years ago the chain opened a new restaurant in a suburban location with a more casual environment offering family meals. The new restaurant also offered catering services. The suburban location of Luiggi's was such a great success that Luiggi's began selling some of its older locations and opening more suburban stores. The cost of retail property in the suburbs was much less helping add to the excess buildup of cash for Luiggi's. At this point, there are fewer locations available for Luiggis to develop. Luiggi's management has decided to use the firm's excess cash to acquire a chain of other restaurants to use in its suburban expansion. Luiggi's is considering three fast casual restaurant chains that could present several opportunities for synergy. Barone's Italian Eatery is one of the chains being considered operating in Iowa with ten restaurants in the state. As an analyst and manager for Luiggi's you need to determine the value of Barone's and help develop a strategy for approaching Barone's (the target firm) and conducting the negotiations. You have already developed the following information for the end of the next four years for which you want to use for analysis for Barone's if it is acquired by Luiggi's. Also, you have the terminal information placed in the table. All information is incremental values to Luiggi's. Relevant Information for Barone's if Luiggi's Acquires Barone's There are several relevant pieces of information you are passing along to the analysis team. Since Barone's has unused debt capacity, the interest expense includes current interest expense on Barone's debt and the interest on new debt that could be issued to finance future expansion and the acquisition. Interest will be 4% on all debt. Currently Barone's has $5,000,000 in debt. The COGS for Barone's amounts to 65% of sales. Luiggi's will allow Barone's to have a 40% retention ratio to be reinvested back into the restaurant chain to finance its growth. The first year's change in net working capital you estimated for Barone's is $350,000. The return on equity for Barone's is 12.50%. The growth rate will apply to sales, net working capital change and the terminal value. Currently Barone's Italian Eatery finances its business with 40 percent debt-to-total capital. Its tax rate is 30% (federal plus state). You calculated its beta as 1.2. Being a smaller corporation, Barone's has 5 million shares of common stock outstanding which trade in the over-the-counter pink sheet market at $1.50 per share. Luiggis has 50,000,000 shares outstanding at $51.15 per share at the current time. If Luiggi's acquired Barone's, management would increase Barone's debt ratio to 50% with the issuance of new debt in years two and four (as shown in the table). The consolidation of the income from the two firms would change the tax rate to 40% (federal plus state). You have determined the appropriate risk-free T-bond rate is 1.85%. The current market risk premium is 6%. You need to conduct further calculations to analyze the proposed acquisition of Barone's by finding the enterprise value of Barone's by discounting the future expected free cash flows to equity AND free cash flows to the firm. You plan to calculate the actual free cash flow for the terminal value rather than use year four's value. Assume you decide to use the free cash flows to equity approach. Decide whether to proceed with the acquisition of Barone's and defend your decision. Include discussion of any synergy available. If you were to attempt to acquire Barone's, what would be your strategy in starting the negotiations? What would be the total bargaining price range and what would be the range you would stick to in a negotiation? Luiggis Italian Inn, Inc. Luiggi's Italian Inn, Inc., operates a chain of Italian restaurants in five midwestern states. The company has been in business over 50 years and operates in mostly downtown locations in older facilities. Most of its clients are professionals working in the downtown area and come in during the lunch hour. The downtown locations were upscale offering white-linen covered tables. Ten years ago the chain opened a new restaurant in a suburban location with a more casual environment offering family meals. The new restaurant also offered catering services. The suburban location of Luiggi's was such a great success that Luiggi's began selling some of its older locations and opening more suburban stores. The cost of retail property in the suburbs was much less helping add to the excess buildup of cash for Luiggi's. At this point, there are fewer locations available for Luiggis to develop. Luiggi's management has decided to use the firm's excess cash to acquire a chain of other restaurants to use in its suburban expansion. Luiggi's is considering three fast casual restaurant chains that could present several opportunities for synergy. Barone's Italian Eatery is one of the chains being considered operating in Iowa with ten restaurants in the state. As an analyst and manager for Luiggi's you need to determine the value of Barone's and help develop a strategy for approaching Barone's (the target firm) and conducting the negotiations. You have already developed the following information for the end of the next four years for which you want to use for analysis for Barone's if it is acquired by Luiggi's. Also, you have the terminal information placed in the table. All information is incremental values to Luiggi's. Relevant Information for Barone's if Luiggi's Acquires Barone's There are several relevant pieces of information you are passing along to the analysis team. Since Barone's has unused debt capacity, the interest expense includes current interest expense on Barone's debt and the interest on new debt that could be issued to finance future expansion and the acquisition. Interest will be 4% on all debt. Currently Barone's has $5,000,000 in debt. The COGS for Barone's amounts to 65% of sales. Luiggi's will allow Barone's to have a 40% retention ratio to be reinvested back into the restaurant chain to finance its growth. The first year's change in net working capital you estimated for Barone's is $350,000. The return on equity for Barone's is 12.50%. The growth rate will apply to sales, net working capital change and the terminal value. Currently Barone's Italian Eatery finances its business with 40 percent debt-to-total capital. Its tax rate is 30% (federal plus state). You calculated its beta as 1.2. Being a smaller corporation, Barone's has 5 million shares of common stock outstanding which trade in the over-the-counter pink sheet market at $1.50 per share. Luiggis has 50,000,000 shares outstanding at $51.15 per share at the current time. If Luiggi's acquired Barone's, management would increase Barone's debt ratio to 50% with the issuance of new debt in years two and four (as shown in the table). The consolidation of the income from the two firms would change the tax rate to 40% (federal plus state). You have determined the appropriate risk-free T-bond rate is 1.85%. The current market risk premium is 6%. You need to conduct further calculations to analyze the proposed acquisition of Barone's by finding the enterprise value of Barone's by discounting the future expected free cash flows to equity AND free cash flows to the firm. You plan to calculate the actual free cash flow for the terminal value rather than use year four's value. Assume you decide to use the free cash flows to equity approach. Decide whether to proceed with the acquisition of Barone's and defend your decision. Include discussion of any synergy available. If you were to attempt to acquire Barone's, what would be your strategy in starting the negotiations? What would be the total bargaining price range and what would be the range you would stick to in a negotiation