Question C3 Carey Ltd has launched a bid for Zhou Ltd and you have been appointed by Carey Ltd to advise on the bid. You have collected the following background information on Carey Ltd and Zhou Ltd which was collected four weeks prior to the announcement of the bid. Carey Ltd Zhou Ltd Share price $50 $20 10 million 8 million Number of shares on issue O Synergies from the deal: Revenue synergies of $6,000,000 per annum (at year end) for the next 10 years o Cost savings of $8,000,000 per annum (at year end) for the next 5 years The relevant discount rate for all estimates is 10% per annum. (a) Estimate the value of the gain from the acquisition. (b) Calculate the wealth impact for Carey Ltd shareholders if they make a cash offer at a premium of 25% to the current share price. (C) The board of Zhou Ltd has come back to Carey Ltd and suggested that they might be willing to recommend acceptance of the bid if they can change one thing. They would like a share-offer to be made as many of the shareholders wish to avoid triggering a capital gains tax event by selling their shares for cash and the ATO has agreed, in principle, to granting CGT relief for a share offer. The board of Zhou Ltd suggest that 1 for 2 offer would be economically equivalent to their shareholders to the cash offer on the table. Advise Carey Ltd on the economic equivalence of these two alternatively structured bids. Both parties decide to stick to the cash deal as outlined above. The deal is just about to go unconditional when you learn that one of the hundreds of contracts that Zhou has with its customers has a clause that no-one, including the market, was previously aware of. The contract was originally thought to lock in the customer to a deal that generated $2m per annum at the end of the next 10 years. If there is a change in ownership of the company then the customer will have the right to exit the deal in one year's time if they can find a better price from a supplier on the market. If they don't choose to exit in one year's time they are locked in the current deal for the remaining nine years. You believe that there is a 30% chance that at the end of the first year they will find a better supplier. (d) What is the value of the real option described above to Carey Ltd? What impact will this have on the NPV of the deal to Carey Ltd? Question C3 Carey Ltd has launched a bid for Zhou Ltd and you have been appointed by Carey Ltd to advise on the bid. You have collected the following background information on Carey Ltd and Zhou Ltd which was collected four weeks prior to the announcement of the bid. Carey Ltd Zhou Ltd Share price $50 $20 10 million 8 million Number of shares on issue O Synergies from the deal: Revenue synergies of $6,000,000 per annum (at year end) for the next 10 years o Cost savings of $8,000,000 per annum (at year end) for the next 5 years The relevant discount rate for all estimates is 10% per annum. (a) Estimate the value of the gain from the acquisition. (b) Calculate the wealth impact for Carey Ltd shareholders if they make a cash offer at a premium of 25% to the current share price. (C) The board of Zhou Ltd has come back to Carey Ltd and suggested that they might be willing to recommend acceptance of the bid if they can change one thing. They would like a share-offer to be made as many of the shareholders wish to avoid triggering a capital gains tax event by selling their shares for cash and the ATO has agreed, in principle, to granting CGT relief for a share offer. The board of Zhou Ltd suggest that 1 for 2 offer would be economically equivalent to their shareholders to the cash offer on the table. Advise Carey Ltd on the economic equivalence of these two alternatively structured bids. Both parties decide to stick to the cash deal as outlined above. The deal is just about to go unconditional when you learn that one of the hundreds of contracts that Zhou has with its customers has a clause that no-one, including the market, was previously aware of. The contract was originally thought to lock in the customer to a deal that generated $2m per annum at the end of the next 10 years. If there is a change in ownership of the company then the customer will have the right to exit the deal in one year's time if they can find a better price from a supplier on the market. If they don't choose to exit in one year's time they are locked in the current deal for the remaining nine years. You believe that there is a 30% chance that at the end of the first year they will find a better supplier. (d) What is the value of the real option described above to Carey Ltd? What impact will this have on the NPV of the deal to Carey Ltd
