Merger and Acquisition
...ent and quality of services provided. Third, it developed information system for its three operational regions. For instance, Oshawa developed Electronic Data Exchange (EDI) in its center western region. The use of new information technology increased the level of its supply chain management and as a result reduced operational costs. However, Oshawa had its weaknesses too. First, the increase of EBITDA margins at Oshawa is far below the industry average given their heavy concentration in the food service business. Also, store improvements in Oshawa had traditionally been low, which meant many stores were in very poor condition and required substantial investment. 3. Valuation of Oshawa Group According to the description in the case, we used two different discounted cash flow methods to find out the intrinsic value of Oshawa Group. The first one is based on Oshawa as a stand-alone entity with a specific cash flows forecast five years into the future. The second one is a separate discounted cash flows of the potential synergies with Empire. 3.1. “Stand Alone” Basis 3.1.1. Total Intrinsic Value of Oshawa Based on our calculation, the intrinsic value of Oshawa company is about $1.776 billion. We believe this is the maximum price that Empire could offer. This amount includes the value of both common shares and non-voting class A shares. 3.1.2. Value of Non-Voting Shares Until the Sep 8, 1998, the current stock price was $26, the highest price in six weeks was $29.25, and the average price over the last 20 trading days was $26.46). In order to give a pre-emptive offer, we decided to use the highest stock price ($29.25) in past six weeks to calculate the market value of public traded non-voting shares. The total value is $1.108 billion. 3.1.3. Value of Voting Shares Theoretically, given the condition that the stock price ($29.25) is a fair price, the intrinsic value of voting shares should be the difference between the intrinsic value ($1.776 billion) and the market value ($1.108 billion). However, the stock price could be under valued or over valued, thus the intrinsic value of voting shares could fluctuate around the difference (i.e. $0.676 billion). Due to such situation, we decided to use synergies assigning to find the offer price to voting shares. Therefore, we are going to decide the total synergy assigning percentage to Oshawa, then use the assigned synergies plus the market value of public traded class A shares minus the offer price (i.e. market price plus premium) for non-voting class A shares. The difference would be the offer price to voting shares. 3.2. Separated Value of Potential Synergies 3.2.1. Synergies from Margin Enhancements According to the information from the case, we figured out the annual synergies from now on, then discounted to the present value. Sum those numbers up, we calculated the total synergies from margin enhancements are about $0.623 billion. 3.2.2. Synergies from Cost Reductions Based on the specific cost reductions in each item and the possibility to realize them, we worked out the total synergies from cost reductions are about $0.491 billion. 3.2.3. Synergies Discount Given the up-front cost, we need to deduct that amount from the synergies. Since the up-front cost is tax deductible, we finally reduced $48 million up-front cost (40% tax rate applicable here). 3.2.4. Total Synergies Total Synergies = $0.623 billion + $0.491 billion - $48million = $1.066 billion 4. Bid Offer Due to the strategic planning for its food business, Empire doesn’t wants to make a pre-emptive offer and avoid a bidding war , we decided to assign 40% total synergies to Oshawa. 4.1. Synergies for Non-voting Shares According to the historical data from Exhibit 10 in the case , we calculated the average premium to 20 day average stock prices, which is 22.7% (from ten companies in the exhibit). In order to avoid a bid war, we decided to give a higher premium than the average of the historical data. A 30% premium could be a reasonable initial offer. According to such a premium, the stock price would be $38.03 and the new value of all non-voting shares would be $1.441 billion. The total premium for non-voting shares would be $0.333 billion. That is the 31.2% of total synergies ($1.066 billion). 4.2. Synergies for Voting Rights Since voting shares have the control of the company and Empire need to retain voting control over all its business , the offer must include premium for voting control. A 31.2% synergies has already been assigned to Oshawa’s non-voting shares, Empire should give the rest 8.8% synergies (i.e. $0.094 billion) to common shares holders who hold the control of Oshawa. Currently, Oshawa has 685,...