Question

Harrods PLC has a market value of $310 million and 11 million shares. Selefridge Department Store has a market value $121 million and 6 million shares. Harrods is considering acquiring Selfridge. Post-acquisition, the combined value of Harrods is expected to be $475 million including the synergy. Harrods is considering both a cash offer and an exchange of share approach. Selfridge can be acquired at a premium of $13 million over its market value. Alternatively, Harrods is also considering making an exchange of share offer to acquire Selfridge.

a. What is the expected synergy of the cash offer to Harrods?

b. What is the stock price for Harrods post cash-acquisition?

c. What is the NPV of the acquisition?

d. What exchange ratio between the two stocks would make the value of the stock offer equivalent to the cash offer?

Answer 1

Answer :

PART A : Expected Synergy

Synergy is defined as the combined value of two or more firms is higher than their individual values.

V (AB) > V(A) + V (B)

Value of Harrods PLC V(A) = $310 million

Value of Selefridge Dept. V(B) = $121 million

The combined value of the companies V(AB) = $475 million

Therefore, Synergy = $475 - $310 - $121 = $44 million

PART B : Stock price of Harrods Post - acquisition

Market Value after acquisition No. of shares after acquisition

Market value of the firm after acquisition = $475

No. of shares after acquisition = 11 + 6 = 17 million shares outstanding

= $475 17 million shares

= $27.94 per share  

PART C : NPV Of the acquisition

NPV = Present value of Cash inflow + Present value of Selefridge - Present Value of Cash Outflows

The details of Discount rate, Expected Cash inflows, Number of years of Cash flow is missing. Hence, the same cannot be calculated without these details.

However, NPV can be determined by comparing the value of outflows under both the options i.e "Cash Offer" & "Exchange offer"

A) Value of Outflow in Cash offer = $121 + $13 = $134 million
B) Value of Outflow in Exchange offer :

Value per share of Harrods = $310 11 = $28.18

No. of shares to be given out = 6 x ( 28.1822.33)* = 7.57 million shares
Value of shares given out in exchange = 7.57 x $28.18 = $213.32
NPV of Cash offer is better as its value of outflow is lesser than the Exchange offer.

*Exchange ratio is calculated in Part D

PART D : Exchange Ratio

Market Value per share of Harrods PLC = Market Value No. of shares outstanding

= $310   11 = $ 28.18

Market Value per share of Selfridge including premium = Market Value No. of shares outstanding

= ($121 + $13) 6 = $ 22.33

Exchange Ratio = 22.33 : 28.18

i.e 28.18 shares of Harrolds Plc for every 22.33 shares of Selefridge held.

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