QUESTION 4

Navidale, a listed engineering company, manufactures large scale plant and machinery for industrial companies. Until ten years ago, Navidale Limited pursued a strategy of organic growth. Since then, it has followed an aggressive policy of acquiring smaller engineering companies, which it feels have developed new technologies and methods, which could be used in its manufacturing processes. However, it is estimated that only between 30% and 40% of the acquisitions made in the last ten years have successfully increased the company's shareholder value.

Navidale Limited is currently considering acquiring Lochinvar, an unlisted company, which has three departments. Department A manufactures machinery for industrial companies, Department B produces electrical goods for the retail market, and the smaller Department C operates in the construction industry. Upon acquisition, Department A will become part of Navidale, as it contains the new technologies which Navidale is seeking, but Departments B and C will be unbundled, with the assets attached to Department C sold and Department B being spun off into a new company called Ndege Co.

Given below are extracts of financial information for the two companies for the year ended 30 April 2014.

Navidale Co Lochinvar Co $ million $ million Sales revenue 790-2 124-6 Profit before depreciation, interest and tax (PBDIT) 244-4 37-4 Interest 13-8 4-3 Depreciation 72-4 10-1 Pre-tax profit 158-2 23-0 Navidale Co Lonchivar Co $ million $ million Non-current assets 723-9 98-2 Current assets 142-6 46-5 7% unsecured bond 40-0 Other non-current and current liabilities 212-4 20-2 Share capital (50c/share) 190-0 20-0 Reserves 464-1 64-5