Q2. PinkSky Entertainment Limited was interested in acquiring 100% shares of HolyBeach Limited on 1st January 2020 but was wondering whether the acquisition would be EPS accretive or dilutive. The standalone balance sheets of the two companies at the time of the acquisition were as follows: Summary Balance Sheets as on 1st Jan 2020 PinkSky HolyBeach Equity and Reserves: INR INR Equity share capital (shares of INR 10 each) 1250000 560000 Reserves and surplus 3750000 1600000 Total equity and Reserves 5000000 2160000 Current liabilities: Trade creditors 2750000 920000 Total capital and liabilities 7750000 3080000 2250000 1680000 Non-current assets: Property, plant and equipment Current assets: Receivables and inventory Cash Total assets 3375000 2125000 7750000 1120000 280000 3080000 Pro-Forma Standalone Profit and Loss statement for year ending December 2020 PinkSky HolyBeach INR INR Sales revenue 2940000 1560000 EBITDA 1470000 624000 Less: Depreciation 225000 210000 Interest Profit before taxation 1245000 414000 Income tax 25% 311250 103500 Net Profit for the year 933750 310500 Number of equity shares 125000 56000 Earnings per share 7.47 5.54 The following additional information is also available about the acquisition: 1. At the time of acquisition, the fixed assets of HolyBeach Ltd were revalued upward by INR 240,000. The fixed assets of HolyBeach Ltd had an estimated remaining useful life of 8 years. The fair value of other assets was the same as shown in the balance sheet 2. The current share prices of the two companies were as follows: PinkSky: INR 89.60, HolyBeach: INR 42.00. PinkSky would offer to buy HolyBeach shares at 20% premium on the market share price. 3. The management of PinkSky is confident of substantially scaling up the performance of HolyBeach and bringing in valuable synergies that would improve EBITDA margins. The expected post-acquisition sales of HolyBeach would be 70% higher with EBITDA margins equal to 50% of the sales. 4. The acquisition would be paid for partly in cash (50%) and remaining by issue of PinkSky shares at current share prices. The cash portion payable on acquisition would be raised by taking 8-year debt at 7.5% annual interest. 5. PinkSky would have to pay a deal-management fee of 5% of the total acquisition price to the investment bank arranging the acquisition. The fee paid on this account would be expensed and would not be capitalized. 6. Any Goodwill arising on acquisition would be amortized over an 8-year period. Required: a. Calculate the following: i. Total goodwill arising on acquisition and the annual goodwill amortization ii. Increase in annual depreciation, if any, due to the acquisition iii. Annual interest payable on loans, if any, caused by the acquisition [6 Marks] b. Prepare the Pro-Forma Profit & Loss account of PinkSky for Year-1 post-deal. [6 Marks] c. Compare PinkSky's Pre-and-Post deal EPS to show whether the acquisition would be EPS accretive or dilutive. Would you recommend PinkSky to go ahead with the acquisition? [3 Marks] +
