Question

There has been a rumor that Company Z may become a takeover target for another company in the industry, or even for a private equity fund in a leveraged buy-out (LBO). Here is the updated data on Company Z:

Current Capitalization (Millions of EUR)

Currency	Million EUR
Shares Price	$                                                             264.5
Shares Outstanding	195.0
Market Capitalization	51,581.8
- Cash & Short Term Investments	2,683.0
+ Total Debt	5,518.0
+ Pref. Equity	-
+ Total Minority Interest	268.0
=Total Enterprise Value (TEV)	54,684.8
Book Value of Common Equity	6,661.0
+ Pref. Equity	-
+ Total Minority Interest	268.0
+ Total Debt	5,518.0
Depreciation & Amort., Total	12,447.0

a)   Given the data above, what is your guess for the value of the offer that an acquirer would have to make in order to buy Company Z?

Offer = in Million Euros

b)   If the deal is paid in cash, how much debt would the acquirer have to take in order to complete this deal? Debt = in Million Euros

c)   How would you expect this deal to be financed? (5 points)

Answer 1

Answer(a).

The value of the offer that an acquirer would have to make in order to buy Company Z = 54,684.8 Million EUR, as the Total Enterprise Value reflects the True & Fair Value of the Company.

Answer(b).

If the deal is paid in cash, the debt that the acquirer would need to undertake =

(Total Enterprise Value – Total Debt) = (54,684.8 – 5,518.0) Million EUR

= 49,166.8 Million EUR

Answer(c).

This deal can be financed through a Leveraged Buyout (LBO) or most commonly known as “going-private”. A Leveraged Buyout (LBO) is the accession of another Company by utilizing a considerable amount of borrowed funds or the debt capital to meet its Cost of Acquisition. This will help the Acquirer Company to spend a lesser amount of its own money and thus revitalize its overall performance. However, the Acquirer Company should consider this option only as a short-term measure for upgrading its profit parameters, since it may end up paying more interest rates on the debt capital if held for long periods.

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