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CHAPTER 6 Merchant Banking
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CHAPTER 8 The Many Virtues of Going Public
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1 Advantages of a publicly traded stock: Liquidity Well defined price Impersonal market Simplification of control issues Diversification for owners Capital raising facilitated Can attract management with options Merger premium
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2b 604(1 + IRR)10 = 2,6344 IRR = 159
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CHAPTER 9 A Partial LBO: Almost Private Equity
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1b Year
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Shares V = $400,000,000 Outstanding Price per Share
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Shares Purchased with $90,000,000
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Percentage of Ownership
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2 3 4 5
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20,000,000 15,500,000 12,012,000 9,309,000 7,214,000
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2000 2581 3330 4297
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4,500,000 3,488,000 2,703,000 2,095,000
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25% 32% 42% 54% 69%
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Solutions ________________________________________________ 167
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CHAPTER 10 Metromedia (1984) 1 Serial zero-coupon ($960 nominal) 15-year debentures 12-year exchangeable 18-year floating rate Total $ 380 225 335 400 $1,358
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4 tB
Sale of pieces at good prices Focus 5 Add an equity kicker 6 2038(29,584,000) = $602,922,000 _______ x26 $156,800,000
7 VL = 1,228,000,000 B = 1,358,000,000 S = Negative The equity value is the value of an option Different results are obtained if $4016 is used as the stock price to obtain V u
Vu = 4016(29,584,000) tB VL B S
$1,188,093,000 + 625,000,000 $1,813,093,000 -1,358,000,000 $ 455,093,000
Solutions ________________________________________________ 169
LBO of RJR Nabisco (1988)
A higher interest rate would reduce the debt capacity 3 233 million shares outstanding x$109 price $25,397 million or $25397 billion Purchase price
SOLUTIONS
4 Compare $25397 billion with any of the above calculations P/E = This is large
KKR overpaid; KKR won the bid but paid too much
Solutions
CHAPTER 12 Marietta Corporation (1994-1996) Valuation of Marietta (September 30, 1995)
1 Using the balance sheet: Current assets Restricted cash Marketable securities Total cash equivalents Current liabilities Net cash equivalents How much could be captured There was $6,500,000 of long-term debt $32,300,000 2,700,000 2,400,000 $37,400,000 8,600,000 $28,800,000
Debt and Value
Net long-term debt (book) $6,514,000 Assume cost was 06 over 12 years
PV using 10 = 777,000 B(12,10) = 777,000(68137) = $5,300,000 Reduction in liability = $1,200,000
SOLUTIONS
2 Estimating the value Quarter Ending December 30, 1995 Net income Taxes Depreciation* Goldman* EBITDA for quarter Annualized EBITDA Multiplier Balance sheet values Value of firm 400,000 300,000 800,000 300,000 $ 1,800,000 _______x 4 $ 7,200,000 _______x 4 $28,800,000 28,800,000 $57,600,000 $
Is the quarter's performance average for the year Using Net Income $ 400,000 ________ x 4 Annual Income $ 1,600,000 _______ x l0 Total stock value $16,000,000 or $276 per share
(add the balance sheet value) LBO Value Using 1995's lowest price: Vu = 3,621,000($800) Add $40,000,000 of debt x______ 35 VL $29,000,000 $14,000,000 $43,000,000**
*Estimated **Before balance sheet values of $28,800,000
Solutions _____________________________________________________ 173
Can change the amount of debt and initial stock price
Using a price of $8 Vu = 3,621,000($800) tB Cash, and so on $28,968,000 14,000,000 28,800,000 $71,768,000
3 Is $40,000,000 of 10 debt feasible $4,000,000 of interest with $7,200,000 of EBITDA is feasible Some of the debt could be zero coupon NOTE: $1025(3,621,000) = $37,115,000 4 A share repurchase program that used excess liquid assets and debt capacity would have interesting effects on the stock price
174 _________________________________________________SOLUTIONS
CHAPTER 13 The Managerial Buyout of United States Can Company (2000) 1 This is an MBO (or LBO) A merger with Pac A $20 per share tender offer 2 Who Management, directors, and their affiliates What Keep or increase their shares in US Can 3 A capital gain 4 The bonus goes to management I would not like to invest in a firm with management fleeing The bonus is not tax efficient Is it a bribe An incentive 5 9% of common and 3% of total equity 6 03($160) = $48 million Value before recap = $145 million (54% of equity) with a $20 price per share and $109 million with a $15 price per share 7 Total fees were $445 million 8 The low was $14562 and the high was $1500 Premium = 9 Suspect Buying by US Can in 2000 Buying by Derbyshire in 2000 Buying by Kirk in 2000 Buying by Soler in 2000
Solutions
176 _________________________________________________SOLUTIONS
CHAPTER 14 Phillips Petroleum, Mesa, and Icahn (1984-1985)
1 The different amounts of debt are relevant Value is added here by increasing the amount of debt
Solutions 5 Second offer
6 Evaluation of Icahn's Changes Preferred Stock
Without preferred stock: Common stockholders receive: Y With preferred stock paying Dp : Common stockholders owning the preferred stock receive: (Y-Dp) + Dp = Y Increased Dividend Let S = basic value of common stock exclusive of dividend RE = value of retention With dividend: Value = S + (l-tp)D Without dividend: Value = S + RE where RE is value of retained earnings Which is better