To calculate the stock price, as you are asked to do in some questions, you need to know two things - how much of the
To calculate the stock price, as you are asked to do in some questions, you need to know two things - how much of the total firm value of Interco is financed by debt (instead of equity) and how many shares of stock Interco has outstanding. Value of equity = total firm value - net debt Stock price = value of equity / number shares outstanding Exhibit 9 (summary of takeover analysis) mentions that the net debt that Interco has is $318.5 million. Also, assume that Interco has 37.5 million shares outstanding.
As a member of Interco's board, you are presented a historical "Premiums Paid Analysis" in Exhibit 10. This "Premiums Paid Analysis" documents how large the takeover offer was relative to the target's stock price before the offer was announced for a sample of some other companies. As a member of Interco's board, you are also presented a "Comparable Transaction Analysis" in Exhibit 11. This MarketMultiples or Comparables Analysis presents various market multiples of competitors of Interco arranged by division (e.g., total firm value divided by sales).
QUESTIONS:
Premiums Paid analysis (Exhibit 10) Exhibit 10 Premiums Paid Analysis Average Premium Paid over Stock Price Deals One Day 4 Weeks 1Q 1988 19 62.3% 95.5% 2Q 1988 9 68.6% 91.3% 3Q 1988 12 36.5% 49.9% 1988 40 56.0% 80.9% Rales 17.9% 59. 1% Source: Interco Case StudyExhibit 11 (continued) Comparable Transaction Analysis b. Value Ranges by Business Segment Business 1988 Multiple Value Median Segment Sales Range Range Value Apparel $ 813.2 0.4 0.9 325.3 $ 731.9 $ 569.2 General retail 532.3 0.6 0.6 319.4 319.4 319.4 Footwear 890.4 0.5 2.1 445.2 1,869.8 1,335.6 Fumiture 1,105.6 0.8 2.1 884.5 S 1,974.4 $ $ 2,321.8 1,437.3 5,242.9 $ 3,661.5 Business 1988 Multiple Value Median Segment Operating Income Range Range Value Apparel 20.2 10.6 24.0 $ 214.1 $ 484.8 214.1 General retail 39.1 13.1 13.1 512.2 512.2 512.2 Footwear 92.2 13.0 26.0 1,198.6 2,397.2 2,268.1 Furniture 149.1 11.1 20.3 1,655.0 3,026.7 1,766.8 S 3,579.9 $ 6,420.9 $ 4,761.2 Business 1988 Segment Operating Multiple Value Median Cash Flow Range Range Value Apparel 32.7 9.2 13.7 $ 300.8 $ 448.0 300.8 General retail 48.8 9.2 9.2 448.9 448.9 448.9 Footwear 105.3 9.2 23.9 968.8 2,516.7 970.7 Fumiture 175.3 81 15.8 1.419.9 2,769.7 1,709.2 $ 3,138.4 $ 6,183.3 $ 3,429.6 Source: Interco Case StudyExhibit 11 Comparable Transaction Analysis a. Purchase Price Multiples by Business Segment Furniture Manufacturing Companies Purchase Price Multiples Announcement Acquiror/Target Aggregate Net Book Sales Operating Operating Date Price ($MM) Income Value Income Cash Flow 12/14/1987 La-Z-Boy/Kincaid $63.5 22.0x 2.1x 0.8x 11.7x 8.1x 11/17/1986 INTERCO/Lane 523.7 19.3 2.8 1.6 11.1 9.6 8/12/1986 Chicago Pacific/General Mills Furniture 89.3 14.1 1.8 1.0 12.0 9.9 6/3/1986 Masco/Henredon 260.9 31.6 2.6 2.1 20.3 15.8 8/8/1988 Rales Proposal $2,941.3 18.1x 2.2x 0.9x 11.4x 9.2x Exhibit 11 (continued) Comparable Transaction Analysis Apparel Companies Purchase Price Multiples Announcement Date Acquiror/Target Aggregate Net Book Operating Operating Price ($MM) Income Value Sales Income Cash Flow 4/28/1988 Wesray/William Carter $157.4 N.M. 1.6x 0.8x 24.0x 13.7x 2/2/1988 Salant/Manhattan Indus. 129.7 N.M. 1.4 0.4 N.M. N.M. 3/17/1986 W Acquisition/Warnco 504.7 21.0 2.5 0.9 10.6 9.2 11/4/1985 West Point Pepperall/Cluett, Peabody 551.9 19.6 1.5 0.6 10.6 9.2 8/8/1988 Rales Proposal $2,941.3 18.1x 2.2x 0.9x 11.4x 9.2x Source: Interco Case StudyInterco stock price estimates (Exhibit 12) Exhibit 12 Discounted Cash Flow Analysis Multiple of Cash Flow in Year 10 Terminal value ($ millions) 14.0x 15.0): 16.0x 4,748.0 5,085.0 5,424.0 Implied stock price Discount rate $84.00 $88.00 11.0% 74.00 77.00 81.00 12.0% 88.00 72.00 75.00 13.0% 63.00 88.00 69.00 Source: Interco Case Study Footwear Manufacturing Companies Purchase Price Multiples Announcement Acquiror/Target Aggregate Net Book Sales Operating Operating Date Price ($MM) Income Value Income Cash Flow 4/25/1988 NIKE/Cole Haan $95.0 36.2x N.M. 1.5x 14.1 12.2 6/3/1987 Moacq/Morse Shoe 312.5 2.5 1.8 0.5 13.0 9.2 3/10/1987 Reebok/AVIA 191.0 40.6 6.7 2.1 24.6 23.3 9/18/1986 Reebok/Rockport 146.1 30.7 N.M. 1.7 26.0 23.9 7/31/1986 INTERCO/Converse 202.7 37.1 1.8 0.9 24.7 18.2 8/8/1988 Rales Proposal $2,941.3 18.1x 2.2x 0.9x 11.4x 9.2x Source: Interco Case Study Central Hardware Division Purchase Price Multiples Announcement Date Acquiror/Target Aggregate Net Book Operating Operating Price ($MM) Income Value Sales Income Cash Flow 6/24/1988 Management Group/Payless Cashways $1, 189.4 22.0x 2.3x 0.6x 13.1x 9.2x 8/8/1988 Rales Proposal $2,941.3 18.1x 2.2x 0.9x 11.4x 9.2x Source: Interco Case Study