Ch29 The Birdie Glove

The Birdie Glove-Hybrid Glove Merger Birdie Golf, Inc. has been in merger talks with Hybrid Golf Company for the past six months. After several rounds of negotiations, the offer under discussion is a cash offer of $550 million for Hybrid Golf. Both companies have niche markets in the golf club industry, and the companies believe a merger will result in significant savings in general and administrative expenses. Bryce Bichon, the financial officer for Birdie, has been instrumental in the merger negotiations. Bryce has prepared the following pro forma financial statements for Hybrid Golf assuming the merging takes place. The financial statements include all synergistic benefits from the merger:

2008

2009

2010 1,000,000,

2011 1,125,000,00

2012 1,250,000,

Sales Production

800,000,000

900,000,000

000 700,000,00

0

000 875,000,00

costs Depreciatio

562,000,000

630,000,000

0

790,000,000

0

n Other

75,000,000

80,000,000

82,000,000 100,000,00

83,000,000

83,000,000 125,000,00

expenses

80,000,000

90,000,000

0 118,000,00

113,000,000

0 167,000,00

EBIT Interest Taxable

83,000,000 19,000,000

100,000,000 22,000,000

0 24,000,000

139,000,000 25,000,000

0 27,000,000 140,000,00

Income Taxes

64,000,000

78,000,000

94,000,000

114,000,000

0

(40%) Net Income

25,600,000 38,400,000

31,200,000 46,800,000

37,600,000 56,400,000

45,600,000 68,400,000

56,000,000 84,000,000

Bryce is also aware that the Hybrid Golf Division will require investments each year for continuing operations, along with sources of financing. The following table outlines the required investments and sources of financing.

Investments Net working capital Fixed assets

2008

2009

2010

2011

2012

20000000 15000000

25000000 25000000

25000000 18000000

30000000 12000000

30000000 7000000

Total Sources of financing: New Debt Profit retention Total

35000000

50000000

43000000

42000000

37000000

35000000 0 35000000

16000000 34000000 50000000

16000000 27000000 43000000

15000000 27000000 42000000

12000000 25000000 37000000

The management of Birdie Golf feels that the capital structure at Hybrid Golf is not optimal. If the merger take place, Hybrid Golf will immediately increase its leverage with a 110 million debt issue, which would be followed by a 150 million dividend payment to Birdie Golf. This will increase Hybrid's debt to equity ratio from .50 to 1.00. Birdie Golf will also be able to use a 25 million tax loss carryforward in 2009 and 2010 from Hybrid Golf's previous operations. The total value of Hybrid Golf is expected to be 900 million in five years, and the company will have 300 million in debt at that time. Stock in Birdie Golf currently sells for 94 a share, and the company has 18 million shares of stock outstanding. Hybrid Golf has 8 million shares of stock outstanding. Both companies can borrow at an 8% interest rate. The risk-free rate is 6%, and the expected return on the market is 13%. Bryce believes the current cost of capital for Birdie Golf is 11%. The beta for Hybrid Golf stock at its current capital structure is 1.30. Bryce has ased you to analyze the financial aspects of the potential merger. Specifically, he has asked you to answer the following questions: 1. Suppose Hybrid shareholders will agree to a merger price of $68.75 per share. Should

Birdie proceed with merger? 2. What s the highest price per share that Birdie should be willing to pay for Hybrid? 3. Suppose Birdie is unwilling to pay cash for the merger but will consider a stock

exchange. What exchange ratio would make the merger terms equivalent to the original merger price of $68.75/share? 4. What is the highest exchange ratio Birdie would be willing to pay and still undertake

the merger?

Diketahui :

ß = 1,30 Return of Market (RPM) = 13% Risk Free rate(rRF) = 6% Interest Rate = 8% Cost of Debt (rd) = (Rf + Interest Rate) (1 – Tax) = 6.4% Debt setelah merger = 110 jt Debt sebelum merger = -40 juta Dividen setelah merger = 150 jt Dividen sebelum merger = -80 juta Rasio Hutang / Debt dengan Equity sebelum merger = 0.5 Rasio Hutang / Debt dengan Equity sesudah merger = 1 wd Sesudah merger = (D / D+S) = (110 jt / 260 jt) = 42,3% ws Sesudah merger = (S / D+S) = (150 jt / 260 jt) = 57,7% Maka wd Sebelum merger = (D / D+S) = (-40 jt / -120 jt) = 33,3% Dan ws Sebelum merger = (D / D+S) = (-80 jt / -120 jt) = 66,7% Harga Saham Birdie Golf = 94$ per lembar Jumlah saham Birdie Golf = 18 juta Nilai Birdie Golf menurut saham = 18 juta x 94 = 1.692.000.000 Jumlah saham Hybrid Golf = 8 juta Cash yang ditawarkan untuk syarat merger = 550 juta Perkiraan Market Value Hybrid Golf setelah 5 tahun = 900 juta Perkiraan Hutang Hybrid Golf setelah 5 tahun = 300 juta Tax Loss dari merger = 25 juta

Ketika Struktur modal dan WACC (Weighted Average Cost Capital) tidak tetap, maka untuk menilai Value dari suatu merger tersebut digunakan model APV atau Adjusted Present Value, dengan langkah sebagai berikut : Langkah Cari BCC's pre-merger cost of equity dan unlevered cost of equity: Biaya Ekuitas sebelum merger = rsL = rRF + (RPM) ß = 6% + (13%)1.30 = 22,9%. Biaya Ekuitas tanpa leverage sebelum merger rsU = wdrd + wsrsL = 0.423(6.4%) + 0.577(22.9%) = 18.95% = 2,702% + 13,2133% = 15, 9153% after the merger, BCC will have 42,3 percent of debt costing 6,4%, so its levered cost of equity and WACC will be: rsL = rsU + (rsU –rd)(D/S) = 15, 9153% + (15, 9153% - 6,4%)(42,3/57,7) = 22,891% WACC = wdrd(1-T) + wsrs = 0,423 (6.4%)(1-0.40) + 0,577 (22,891%) = 1,62432% + 13,2081% = 14, 8324% Free cash flows = NOPAT - net retentions =

Free Cash Flow

2008 8000000

2009 9000000

2010 1000000

2011 1125000

2012 125000000

Sales Production

00 5620000

00 6300000

000 7000000

000 7900000

0

costs Depreciati

00 7500000

00 8000000

00 8200000

00 8300000

875000000

on Other

0 8000000

0 9000000

0 1000000

0 1130000

83000000

expenses

0 8300000

0 1000000

00 1180000

00 1390000

125000000

EBIT NOPAT =

0 4980000

00 6000000

00 7080000

00 8340000

167000000

EBIT (1-T) Net

0 3500000

0 5000000

0 4300000

0 4200000

100200000

Retentions Free Cash

0 148000

0 100000

0 2780000

0 4140000

37000000

Flow

00

00

0

0

63200000

Perhitungan g diasumsikan = 2% -

Horizon Value FCF 2012 (HVU, 2012) = FCF2012 (1 + g) / (rsU + g) = 63,200,000 (1.02) /0.1483 – 0.02 = 61.960.784 / 0,1283 = $482,936,744.46

-

Horizon Value Tax Shield (HVU, TS) = 2008 2009 2010 2011 2012 190000 220000 240000 250000 270000 Interest Tax Shield

00 00 00 00 00 760000 880000 960000 100000 108000 0

= TS2012 (1 + g) / (rsU + g)

0

0

00

00

= 10,800,000 (1.02) /0.1483 – 0.02 = 11,016,000 / 0,1283 = $85,861,262.6656

Cash Flow to be discounted at the unlevered cost of equity : 2008 2009 2010 1480000 1000000 2780000 Free Cash Flow Unlevered Horizon Value FCF + Horizon

0

00

0 4829367

0

414000

0

00 100000

01 1080000

7600000 8800000 9600000

00

0 8586126

1480000 1000000 2780000 0

0

Value TS + Horizon Value

2012 6320000

44 5631191

Value Interest Tax Saving Tax Shield Horizon

0

2011 414000

100000

3 9622921

00

3

7600000 8800000 9600000

Vunlevered = (14800000 / 1 + 0.1483) + (10000000 / 1 + 0.1483)^2 + (27800000 / 1 + 0.1483)^3 +(41400000 / 1 + 0.1483)^4 + (63200000+ 482936744 / 1 + 0.1483)^5 = $376237199,7 VTax Shield = (7600000 / 1 + 0.1483) + (8800000 / 1 + 0.1483)^2 + (9600000 / 1 + 0.1483)^3 +(10000000 / 1 + 0.1483)^4 +

(10800000+85429213/ 1 + 0.1483)^5 = $78972706,2 Estimated Hybrid Golf Equity Value = $455.209.906 + 25000000 = $470.209.906 Nilai tersebut lebih rendah dari yang diestimasi Birdie Golf, yaitu $600.000.000

1. Dengan penawaran saham $68.75 per lembar, maka NPV dari

penawaran ini adalah : = $1.692.000.000 + $470.209.906 – $68.75(8.000.000) = $1.612.209.906 Karena NPV positif maka penawaran ini dapat diterima. 2. Maximum Bid Price = $68.75 + ($1.612.209.906 / 8.000.000) =

$270,2762 3. Harga Saham Birdie Golf = 94$ per lembar

Jumlah saham Birdie Golf = 18 juta Jumlah saham Hybrid Golf = 8 juta Penawaran saham $68.75 per lembar =

$68.75(8.000.000) =

$550.000.000 α = New Shares issued / Old Shares + New Shares Issued (N) α x $2.162.209.906 = $550.000.000 α = 0,2543 0,2543 = N / 18.000.000 + N 4.500.000+ 0.2543N = N

0.7457 N = 4.500.000 N = 6.034.598 shares untuk 8 juta shares Hybrid Golf Atau rasio 0,7543 :1 4. Highest Exchange Ratio

Penawaran saham $94 per lembar =

$94(8.000.000) =

$752.000.000 α = New Shares issued / Old Shares + New Shares Issued (N) α x $2.162.209.906 = $752.000.000 α = 0,3478 0,3478 = N / 18.000.000 + N 6.260.262 + 0.3478N = N 0.6522 N = 6.260.262 N = 9.598.684 shares untuk 8 juta shares Hybrid Golf Atau rasio 1,1998 :1