On January 5, 2020, Arkansas Cooper Quarters Inc (ACQ) made an acquisition bid of $108 per share in cash for all of Texas American Refinery Corp (TAR)s equity.

Analysts forecast TARs income statement and balance sheet to be as follows. Year denotes the fiscal year ending 31st December.

Analysts forecast that starting from 2022, TARs free cash flow will settle to a growth rate of 3% per year indefinitely. They believe that TAR aims to keep the current debt ratio constant in the future. TAR has maintained an insignificant amount of cash in the balance sheet (assume cash equals zero throughout). The Weighted Average Cost of Capital (WACC) is the appropriate discount rate for TAR.

Analysts examine TARs current outstanding debt and price all debt into a comparable set of zero coupon bonds that mature in 10 years and sell for 61.027% of par value. The compounding frequency is semi-annual.

After estimating beta for TAR using recent historical data, analysts find that their estimate using this method is out of range of those by similar-risk firms in the industry. Therefore they decide to use beta of comparable firms in the same industry to estimate TARs beta. Analysts identify the three following firms that they believe to be appropriate comparable firms. Analysts conclude that they will rely on the median beta of these comparable firms to value TAR. They also assume that neither TAR nor these comparable firms have a significant amount of cash to be adjusted when calculating beta or firm value.

Analysts identify the following recent acquisitions that they believe to be appropriate to value the acquisition of TAR by ACQ. Analysts conclude that they will rely on the mean Enterprise Value / EBITDA to value TAR using the valuation multiple method, and on the mean Acquisition Premium using the comparable transaction method. Acquisition Premium is defined as the percentage difference between the offer price per common share outstanding and the target firms stock price four weeks before the acquisition announcement. Analysts also include all synergies in their cash flow forecast (presented in the above income statement and balance sheet) and valuation multiples (presented below).

Question 15

Value TAR using 3 methods: (1) the discounted cash flow method, (2) the valuation multiple method, and (3) the comparable transaction method. For each valuation method, calculate the valuation based on Enterprise value, Equity value, and value per share of common equity. Assess whether ACQs bid of $108 per share for TARs equity is a reasonable offer from ACQs perspective.

Question 16

Instead of offering $108 per share in cash for all of TARs equity, ACQ now uses a mixed payment that includes two components: (i) cash of $7.5 per share of TARs equity, and (ii) newly issued equity at an exchange ratio of 1 share of ACQ per 2 shares of TAR. This exchange ratio is determined from the share prices of TAR and ACQ on December 5, 2019. The synergies realized in the transaction are estimated to be $400 million. Assume that TARs debt before the acquisition is paid off by ACQ in both situations so that the combined firm has no debt. Is ACQ better off by making this new mixed payment offer compared to the all-cash offer? Calculate the offer value under the all-cash vs. the mixed method and draw your conclusion.

(in million $) Year Sales Costs Depreciation EBIT Interests and taxes Net income Actual 2019 2500 2000 80 420 60 360 Projected 2020 2021 3000 3600 2400 2800 100 150 500 650 70 80 430 570 Steady 2022 4300 3200 200 900 90 810 Current assets Net fixed assets Total assets 100 1500 1600 160 1600 1760 170 1700 1870 190 1900 2090 Current liabilities Long term debt Shareholders equity Total liabilities and equity 130 600 870 1600 120 660 980 1760 140 670 1060 1870 150 680 1260 2090 Other information for TAR and ACQ as of December 5, 2019 TAR ACQ Market value of debt $600 million $0 Common stock price $100 per share $200 per share Common shares outstanding 40 million shares 80 million shares Current debt rating A Marginal tax rate 40% 40% Company Genoxys Inc Lova Portal Inc Fanetrans Corp Beta (from Bloomberg) 1.56 1.52 1.72 Debt / Equity ratio 0.5 0.7 0.4 Marginal tax rate 40% 35% 38% Capital market information: Treasury Yield 1-year T-STRIPS Yield 2-year T-STRIPS Yield 10-year T-STRIPS Yield 0.11% 0.41% 2.46% Risk Premium Market 1-year T-STRIPS 7.35% Market 2-year T-STRIPS 7.05% Market 10-year T-STRIPS 5.00% Effective date Acquirer Dec 10, 2019 Sep 22, 2019 Aug 14, 2019 Mar 21, 2019 Feb 28, 2019 Northern Steel Argent Well Inc Grand Metals Bandini Nuevos Bronza Ind Target Ironmongers Co Rodent Ind Mountain Holes Tuiwaro Kaster Trail Expedition Enterprise Value/EBITDA 9.35 8.75 9.10 12.00 10.80 Acquisition Premium 12% 10% 11% 15% 12% (in million $) Year Sales Costs Depreciation EBIT Interests and taxes Net income Actual 2019 2500 2000 80 420 60 360 Projected 2020 2021 3000 3600 2400 2800 100 150 500 650 70 80 430 570 Steady 2022 4300 3200 200 900 90 810 Current assets Net fixed assets Total assets 100 1500 1600 160 1600 1760 170 1700 1870 190 1900 2090 Current liabilities Long term debt Shareholders equity Total liabilities and equity 130 600 870 1600 120 660 980 1760 140 670 1060 1870 150 680 1260 2090 Other information for TAR and ACQ as of December 5, 2019 TAR ACQ Market value of debt $600 million $0 Common stock price $100 per share $200 per share Common shares outstanding 40 million shares 80 million shares Current debt rating A Marginal tax rate 40% 40% Company Genoxys Inc Lova Portal Inc Fanetrans Corp Beta (from Bloomberg) 1.56 1.52 1.72 Debt / Equity ratio 0.5 0.7 0.4 Marginal tax rate 40% 35% 38% Capital market information: Treasury Yield 1-year T-STRIPS Yield 2-year T-STRIPS Yield 10-year T-STRIPS Yield 0.11% 0.41% 2.46% Risk Premium Market 1-year T-STRIPS 7.35% Market 2-year T-STRIPS 7.05% Market 10-year T-STRIPS 5.00% Effective date Acquirer Dec 10, 2019 Sep 22, 2019 Aug 14, 2019 Mar 21, 2019 Feb 28, 2019 Northern Steel Argent Well Inc Grand Metals Bandini Nuevos Bronza Ind Target Ironmongers Co Rodent Ind Mountain Holes Tuiwaro Kaster Trail Expedition Enterprise Value/EBITDA 9.35 8.75 9.10 12.00 10.80 Acquisition Premium 12% 10% 11% 15% 12%