Title: Neros Pasta:
1Neros Pasta
- Presented By ICI Representatives
- Jennifer Jones
- Chris Dennison
- Robert Sturgis
2Background
- ICI is a subsidiary of National Mills a large
food processing company (started in 1983). - National Mills has been encouraging expansion and
offering to supply additional capital. - We will determine if the acquisition of Neros
Pasta will Add Economic Value to ICI.
3Agenda The 4 Ds
- Discussion of Merger Related Topics
- Determine Projected Cash Flows For 1996 and Into
The Future - Discount All Cash Flows To Find NPV the Maximum
Price ICI Would Be Willing To Pay For Neros - Decide How Neros Current Management Will Be Used
After The Acquisition
4Rationale For Merger
- Tax Considerations -
- Treatment of Losses
- Use of Merger as a tax-free method to dispose of
excess cash flows - Diversification -
- As a Means of Stabilizing a Firms Earnings
- Control -
- Managers Personal Incentives
- ICI wants to expand business to generate greater
earnings - Neros Management will act to protect their 30
stake in their business
5Rationale (Cont.)
- Purchase of Assets Below Replacement Costs
- Synergy -
- Occurs when two companies join together with the
intention of increasing the overall value of both
companies.
6Friendly Vs. Hostile Takeover
- Friendly Takeover
- Agreement between acquiring company and the
target company - Management encourages stockholders to tender
their shares at the agreed price.
- Hostile Takeover
- Disagreement between acquiring company and the
target company - Management discourages the tendering of
stockholder shares.
7Hostile Takeover Premium
- There is reason to believe that hostile takeovers
provide a offering price premium. - The acquiring company has to win over
stockholders. - An increase offering price detracts other
would-be acquiring firms.
8 Figures For Merger
- The last trading price was 1.50 per share
- Neros beta coefficient is 1.2 (close to the
industry average) - Tax rate increase from 30 to 40
- Debt ratio increase from 40 to 50
- 5000000 shares outstanding
9Beta Calculations
- First Unlever Neros Beta
- bu bL
1.2
1 (1-T)(D/S) 1
(1-.3)(.4/.6) - bu .82
- Now Relever Beta with ICIs and Neros Debt
- bL bu1(1-T)(D/S) .821(1-.4)(.5/.5)
- bL 1.31
10ICIs Discount Rate for Neros
- We will use Neros Cost of Equity as the Discount
Rate. - CAPM Ke krf (MRP)B
7 (6)1.31
14.85
11Post Acquisition Assumptions
- Sales Growth 1996 - 1999
25.0 - Assets Growth 1996 - 1999
20.0 - Long-Run Growth 2000 -
5.0 - Variable Costs / Sales
85.0 - Fixed Costs / Assets
15.0 - Depreciation / Assets
5.0
12Pro-Forma Statements
- 1996
- Net sales 20000000
- Var. Operating Costs 17000000
- Depreciation 250000
- Fixed Operating Costs 750000
- Interest expense 250000
- ----------
- Earnings before taxes 1750000
- Taxes 700000
---------- - Net income 1050000
- Plus depreciation 250000
- ----------
- Cash flow 1300000
- Reqd addn to equity 500000
- ----------
- Available CF 800000
- Expected terminal value
- ----------
- Free cash flow 800000
Sales Growth 25 VC/S 85 DEP/A
5 FC/A 15
13Pro-Forma Statements
- 1996 1997
- Net sales 20000000
25000000 - Var. Operating Costs 17000000
21250000 - Depreciation 250000 300000
- Fixed Operating Costs 750000
900000 - Interest expense 250000 300000
- ---------- ----------
- Earnings before taxes 1750000
2250000 - Taxes 700000 900000
- ---------- ----------
- Net income 1050000
1350000 - Plus depreciation 250000 300000
- ---------- ----------
- Cash flow 1300000
1650000 - Reqd addn to equity 500000
600000 - ---------- ----------
- Available CF 800000
105000 - Expected terminal value
- ---------- ----------
14Pro-Forma Statements
- 1996 1997 1998 1999
- Net sales 20000000
25000000 31250000 39062500 - Var. Operating Costs 17000000
21250000 26562500
33062500 - Depreciation 250000 300000
360000 432000 - Fixed Operating Costs 750000
900000 1080000 1296000 - Interest expense 250000 300000
360000 432000 - ---------- ----------
---------- ---------- - Earnings before taxes 1750000
2250000 2887500
3699375 - Taxes 700000 900000
1155000 1479750 - ---------- ----------
---------- ---------- - Net income 1050000
1350000 1732500 2219625 - Plus depreciation 250000 300000
360000 432000 - ---------- ----------
---------- ---------- - Cash flow 1300000
1650000 2092500 2651625 - Reqd addn to equity 500000
600000 720000 216000 - ---------- ----------
---------- ---------- - Available CF 800000
105000 1372500 2435625 - Expected terminal value
23532574 - ---------- ----------
---------- ----------
15Return on Equity
1996 1997 1998
1999 Net income 1050000 1350000
1732500 2219625 Equity
2500000 3000000 3600000
4320000 ROE 42 45 48.13
51.38
16NPV using Pure Discounted Cash Flows
1996 1997 1998 1999 Available
800000 105000
1372500 2435625 CASH
FLOWS 25951539
________ ________ _________
_________ 800000
1050000 1372500 28387164
CF CF99(1g) ke - g
Continuing Cash Flow
2435625(1.05) .1485-.05
25951539
NPV 800000 1050000
1.372500 28387164
(1.1485)1 (1.1485)2
(1.1485)3 (1.1485)4
NPV 18711226 Shares 5000000
3.74 Maximum Price Per Share
17NPV using Multiples of CashSalesNet Income and
Market/Book Ratio
1996 1997 1998 1999 Available
800000 105000
1372500 2435625 CASH
FLOWS 23532574
________ ________ _________
_________ 800000
1050000 1372500 25968199
Multiple Valuation
Weight Product Pure DCF N/A 25951539
0.3 7785462 Multiple of cash flow
9.0 21920625
0.3 6576188 Multiple of sales 0.6 23437500
0.1 2343750 Multiple of net
income11.0 24415875
0.2 4883175 Market/Book multiple 4.5
19440000 0.1 1944000
23532574
NPV 800000 1050000
1.372500 25968199
(1.1485)1 (1.1485)2
(1.1485)3 (1.1485)4
NPV 17321128 Shares 5000000
3.46 Maximum Price Per Share
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21Offering Price for Neros
- At the Crossover Price of 2.48 per share ICI
and Neros would benefit equally. - Neros last trade showed that 500 shares traded
at 1.50. - Because Neros stock is traded so infrequently
ICI will greatly increase the liquidity of the
company. - For these reasons ICI can expect to pay between
1.50 and 2.48 a share for Neros Pasta.
22 Offering Price for Neros (Cont.)
- We recommend that ICI offer Neros Management
2.00 a share for the 5000000 outstanding
shares with a clause to retain the current
management. - 2.00 a share would represent at least a 33
Premium above the price that Neros shareholders
could expect to sell their shares. - This provides immediate creation of wealth for
all current shareholders including the
management.
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24Final Offer
- If Neros Management chooses to reject this
offer we recommend that ICI sweeten the offer to
2.10 a share. - This price would represent a 40 Premium over the
1.50 trading price.
25- If Neros Management still refuses to accept the
offering price we advise ICI to proceed with a
Hostile Takeover.
26We are happy to answer any questions.
Neros Pasta
