The accretion or dilution to EPS

Company A is looking to acquire Company B at a 20% premium above Company B's current share price. You have been assigned to determine the accretion or dilution to Company A's earnings. One-third of the uses will be funded in debt. Company's B's net debt will be retired upon acquisition. Some additional key assumptions are noted next slide:

Key Market Data

Company A Company B

Price $12 $5

Shares 250MM 150MM

Options 15MM 50MM

@ Strike Price $15 $4

Balance Sheet Items:

Company A has $200MM LTD, $50MM STD, $0MM cash, and a book value of $1.5Bn.

Company B has $150MM LTD, $10MM STD, $5MM cash, and a book value of $800MM.

Income Statement Items:

Company A EBIT is expected to be $200MM.

Company B EBIT is expected to be $50MM.

Key Assumptions:

7% interest on LTD

5 % interest on STD

1 % interest income on investments

40% tax rate

1% of total EBIT cost savings

Intangible asset allocation is 25 '% and amortized over 15 years.

Fees 1% of purchase price

Show your work done and answer the following questions:

a) what is the purchase price?

b) how much Company A has to borrow to acquire Company B?

c) what is the company A interest expense?

d) What is the net income of company A?

e) what is the EPS of Company A?

f) what is the pro forma adj. synergies?

g) what is the pro forma adj. amortization?

h) what is the pro forma total interest expenses?

i) what is the pro forma net income?

j) what is the pro forma EPS?

Example questions with answer:

The accretion or dilution to EPS

Company A is looking to acquire Company B through a combination of cash and shares. You have been assigned to determine the accretion or dilution to Company A's earnings.

Company B is being acquired for $1 per share, and in addition each Company B share will be exchangeable for 0.5x Company A shares. In addition, Company A has no cash on hand; it will raise additional funds in debt to pay down Company B's obligations and to fund transaction fees upon acquisition.

Some key assumptions are noted next slide:

	Company A	Company B
Price	$12	$6
Shares	250 million	100 million
Options	10 million	20 million
@Strike Price	$15	$6
Balance Sheet Items:
Company A has $125 m debt, $0 m cash, and a book value of $500m
Company B has $175 m debt, $0 m cash, and a book value of $700m
Income Statement Items:
Company A EBIT is expected to be $100 million
Company B EBIT is expected to be $20 million
Key Assumptions:
7% interest on debt
40% tax rate
1% of total EBIT cost savings
Intangible asset allocation is 25% and amortized over 15 years
Fees 1% of purchase price

Purchase Price:

Purchase Price

Target Basic Shares 100,000,000 # given

Target Options 20,000,000 # given

Option Strike Price 6 $ given

Purchase Price

Options Exercised 120,000,000 $ = 20m x 6

Purchase Price per Share 7 $ = 1 + (0.5 x 12)

Shares Repurchased 17,142,857 # = 120m / 7

Diluted Shares 2,857,143 # = 20 - 17.14285 Total Diluted Shares 102,857,143 # = 100m + 2.857m $ = #TDS x $7

Purchase Price 720,000,000 $ = #TDS x $7

Sources and Uses
Uses
Purchase Price	720,000,000
Net Debt	175,000,000		=Retired upon acquisition
Transaction Fees	7,200,000		=1% of purchase price
Total Uses	902,200,000		=Sum
Sources
Debt	285,057,143		=(1x102,857,143)+175m+7,2m
Equity	617,142,857		=102,857,143 x 6
Cash	-		=no cash
Total Sources	902,200,000		=Sum

Company A Financials:
Income Statement	Company A		stand-alone
EBIT	100,000,000
Interest Exp	8,750,000		=7% x 125 m(A debt)
Interest Income	-
EBT	91,250,000
Tax	36,500,000
Net Income	54,750,000
Shares	250,000,000
EPS	0.22

Pro-Forma
EBIT	120,000,000		=100+20
Adj: Synergies	(1,200,000)		=1% of EBIT (ExpEBIT)
Adj: Amortization	333,333		=((720-700)x25%)/15
Interest Expense	8,750,000		=Company A interest
Interest Income	-
Adj: New Interest	19,954,000		=7%x285.057m new debt
EBT	92,162,667
Tax	36,865,067
Net Income	55,297,600
Pro-Forma
Shares	250,000,000		=Company A shares
Adj: New Shares	51,428,571		=617.142m / 12
Total Shares	301,428,571
New EPS	0.18		=55,297,600 / 301,428,571
Accretion/ (Dilution)	-16.23%