Question

In: Finance

Acquisition Case Study Company A's board of directors has agreed to a $12,7 billion buyout of...

Acquisition Case Study

Company A's board of directors has agreed to a $12,7 billion buyout of the company by two private equity firms, sources told the media on Monday. Comapny A has struck an agreement in principle for PE Fund 1 and Fund 2 to buy all 150 million outstanding shares of Company A for $85 a share in an all cash deal, the sources said.

Final details of the transaction are being hammered out, and the deal could be in place by the opening bell of the NYSE today, a source said. "The price was agreed upon last week," a source said. "The details of the transaction are holding this up. This is a very complicated transaction." Sources said issues such as timing of the stock purchase and dates for closing the transaction were some of the points holding up an announcement. The deal would have to be approved by regulators in the 13 states where Company A operates and has distribution centers, including California and New Jersey.

Representatives of Company A and the private equity firms would not confirm the existence of an agreement Monday. Company A spokesman Mr. Smith on Monday said he could not comment on "market speculation." The media reported the offer earlier Sunday. California's regulators are notified ahead of time by licensees of a potential change in ownership. As of Monday afternoon, members of the licensing committee had not received any word about the Comapny A deal being finalized.
At $12.7 billion, the potenitial deal would rank as the sixth-largest private equity buyout ever, media news said, and would be the largest such transaction for a distribution company.

A committee of Company A board members and representatives and the private equity firms negotiated the terms of the agreement over two days last week in New York. The sides met again Sunday in New York and were reportedly continuing to negotiate on Monda. When the MSNBC announced the news of the deal Monday, shares of Company A jumped on the New York Stock Exchange. By the end of trading, Company A stock price gained $2.68, 3.37 percent, to close at $72.18. Almost 15 million Company A shares were traded during the session, more than four times the average daily volume.

Company A runs distribution centers in 13 states under brands such as Axis, Bruno and Colosus. The company owns the other bottling rights and operates centers in Canada and Spain. Company A has development deals in such countries as Columbia and Slovenia and has a deal to buy United Kingdom distribution hubs London Center International.

In 2010, Company A reportedearnings of $430.3 million on revenue of $7.1 billion. It's projected to make $504 million next year. The company has a market capitalization of almost $10.8 billion. The private equity groups bid $76 a share on Oct. 2 for Company A, reportedly kicking up the offer to $78.50 a share about 10 days later. A special board committee, composed of the non-management board members, began considering the offer.

News of an impending deal for Company A was good for shares of another distribution centers. Company X, which had been bidding against the private equity groups for control of Company A, had its stock price climb $3.08, 8.1 percent, on the Nasdaq National Market to close at $31.24. Company X reportedly had submitted a cash and stock bid of $83.50 a share for Company A.

UBS analyst Adam, in a note to investors Monday, said he did not support the regional operator bidding on Company A. Company X has 16 distribution centers in 12 states. "We were not in favor of the company purchasing Company A given the steep price tag and the number of shares that would have to be issued by Company X to consummate the transaction," Adam said. "Through this process, we believe that Company X has obtained a head start on other companies that would be interested in acquiring some of Company A assets, which might be divested following the privatization." Adam would not rule out Company X operation a similarty styled centers. "Company X sent a powerful message to the investment community that it is prepared to become very active in further industry consolidation and is serious in its pursuit of a presence in California and New Jersey." Adam said. "Comapny X has reached its current size through prudent acquisitions, which have delivered value to shareholders."

Company X could be in the market for other similar companies that do not have shares concentrated in a single person or family, analysts said. That ruled out companies such as Company Y and Company Z. "We believe other small-cap companies could now become potential candidateds for acquisition by Company X." Adam said. "These companies include Company E, which we view as a smaller version of Company A and which has very little overlap with Company X."

PE Fund B founding partner Jack was the fomer co-head of corporate finance at now-defunct Total Finance Inc., the top underwriter of high-yield corporate debt before collapsing in 1980. Jack, 55, founded PE Fund B that year and has mede equity investments of more that $16 billion. PE Fund A created the nation's second-biggest buyout fund this year, raising $10 billion. The firm has raised more than $18 billion through six funds in the 12 years since it was founded by Dan, Joel and Bill. It has invested in about 75 companies.

At $85 a share, PE Fund A and PE Fund B would be paying less for Company A earnings than what Company Y's or Company Z's profits are worth on the stock market. Company A is being valued at 21.4 times projected 2011 earnings, based on the average estimate of 18 analysts surveyed by Bloomberg. That compares with a 24.6 ratio for Company Z and 50.7 for Company Y. At last week's stock market price, according to Bloomberg data.

QUESTIONS:
1. Background information of the deal
2. Potential opportunity
3. Potential issue
4. Your reasoning of why X made a bid for A
5. Your reasoning of why UBS is against X' bid of A

Solutions

Expert Solution

1. Background information on the deal: The deal is with regards to a $12.7 billion buyout of Company A by two private equity firms. The deal has been struck at a price of $85 per share and 100 percent equity will be sold to the PE firms. Company A has 150 million outstanding shares on its books.

2. Potential opportunity: The PE firms can leverage on the bottling rights of Company A to add value for the shareholders and increase the market capitalization of the company. The PE firms can use the distribution power of the company to reach new markets and find new growth trajectory.

3. Potential issue: With industry consolidation the potential of value accretion from the buyout of Company A can get diluted. The PE firms will also witness overlaps with other distribution companies in the future.

4. X made a bid for A due to the fact that it looks at inorganic growth for expansion. Company X currently has 16 distribution centers and its buyout of company A will give it ready access to more centers. Company X stands to gain from any industry consolidation that will take place in the future.

5. UBS is against X’s bid of A because it considers the price tag to be too steep. Moreover the number of shares that X will issue for the buyout is much higher than what UBS deems to be optimal. The high price tag will not allow X to deliver value to its shareholders.


Related Solutions

In 2008, the Board of Directors and shareholders of Anheuser Busch agreed to be acquired by a Belgian Brewer (InBev).
In 2008, the Board of Directors and shareholders of Anheuser Busch agreed to be acquired by a Belgian Brewer (InBev). Prior to the merger, InBev made many pledges to AB regarding how the company would operate after the merger, how its employees would be treated, and so on. With some stipulations, the U.S. Government agreed to allow the merger. Since the merger, InBev has laid off a significant number of Anheuser Busch employees, most of whom worked at the St....
You want a seat on the board of directors of Four Keys, Inc. The company has...
You want a seat on the board of directors of Four Keys, Inc. The company has 215,000 shares of stock outstanding and the stock sells for $72 per share. There are currently 4 seats up for election. If the company uses cumulative voting, how many shares do you need to guarantee that you will be elected to the board?
The board of directors for Southern Alberta Insurance Company has 8 members. (a) If a committee...
The board of directors for Southern Alberta Insurance Company has 8 members. (a) If a committee of 3 is formed by random selection, what is the probability that it consists of the 3 wealthiest members? (b) If the board must elect a chairperson, vice-chairperson, and a secretary, how many different slates of candidates are possible? If also, you could show your work, and help me understand why I would appreciate that too. Thank you!
There are 15 members on the board of directors for a Fortune 500 company. If they...
There are 15 members on the board of directors for a Fortune 500 company. If they must select a chairperson, a first vice chairperson, a second vice chairperson, and a secretary. (a) How many different ways the officers can be selected? Show work. (b) Please describe the method used and the reason why it is appropriate for answering the question. A researcher wants to conduct a clinical trial on a new medicine for a rare disease. She plans to randomly...
Case Incident 1 Jack Nelson’s Problem As a new member of the board of directors for...
Case Incident 1 Jack Nelson’s Problem As a new member of the board of directors for a local bank, Jack Nelson was being introduced to all the employees in the home office. When he was introduced to Ruth Johnson he was curious about her work and asked her what the machine she was using did. Johnson replied that she really did not know what the machine was called or what it did. She explained that she had only been working...
Gary Levin is the chief executive officer of Mountainbrook Trading Company. The board of directors has...
Gary Levin is the chief executive officer of Mountainbrook Trading Company. The board of directors has just granted Mr. Levin 50,000 at-the-money European call options on the company’s stock, which is currently trading at $30 per share. The stock pays no dividends. The options will expire in five years, and the standard deviation of the returns on the stock is 56 percent. Treasury bills that mature in five years currently yield a continuously compounded interest rate of 4.2 percent.   ...
Gary Levin is the chief executive officer of Mountainbrook Trading Company. The board of directors has...
Gary Levin is the chief executive officer of Mountainbrook Trading Company. The board of directors has just granted Mr. Levin 10,000 at-the-money European call options on the company’s stock, which is currently trading at $125 per share. The stock pays no dividends. The options will expire in five years and the standard deviation of the returns on the stock is 56 percent. Treasury bills that mature in five years currently yield a continuously compounded interest rate of 5 percent.   ...
At the most recent strategic planning meeting, the board of directors of your company has voted...
At the most recent strategic planning meeting, the board of directors of your company has voted to issue additional stock to raise capital for major expansions for the company in the next five years. The board is considering $5 billion. Take the most recent financial statements and prepare a set of projected financial statements based on the given assumptions. The CEO requests that you prepare a written report (including the financial statements) for her. The company is Starbucks. Generate a...
Gary Levin is the chief executive officer of Mountainbrook Trading Company. The board of directors has...
Gary Levin is the chief executive officer of Mountainbrook Trading Company. The board of directors has just granted Mr. Levin 40,000 at-the-money European call options on the company’s stock, which is currently trading at $55 per share. The stock pays no dividends. The options will expire in five years and the standard deviation of the returns on the stock is 56 percent. Treasury bills that mature in five years currently yield a continuously compounded interest rate of 7.4 percent. a....
Gary Levin is the chief executive officer of Mountainbrook Trading Company. The board of directors has...
Gary Levin is the chief executive officer of Mountainbrook Trading Company. The board of directors has just granted Mr. Levin 38,000 at-the-money European call options on the company’s stock, which is currently trading at $60 per share. The stock pays no dividends. The options will expire in five years and the standard deviation of the returns on the stock is 56 percent. Treasury bills that mature in five years currently yield a continuously compounded interest rate of 4.6 percent.   ...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT