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Ferdinand petra - merger M&A (extract)

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Extract of financial training slides on Mergers (M&A)

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Ferdinand petra - merger M&A (extract)

  1. 1. 1Ferdinand Petra – www.ferdinand-petra.com – All rights reserved 2018 © Financial training Merger (Extract) www.ferdinand-petra.com Prof: Ferdinand Petra (contact@ferdinand-petra.com) Any reproduction, copy of this document is strictly forbidden without prior consent of the author
  2. 2. 2Ferdinand Petra – www.ferdinand-petra.com – All rights reserved 2018 © Merger
  3. 3. 3Ferdinand Petra – www.ferdinand-petra.com – All rights reserved 2018 © Reminder: Initial Situation Equity 118 Net Debt 200 (o.w. 400 of debt less 200 of cash) Fixed assets 263 WC 55 Target (in €m) Seller A Seller B 33.3%66.7% Equity value € 500m Number of shares 25,000,000 Implied share price € 20 Net income 2015 € 28m Earnings per share 2015 € 1.12 Dividends paid in 2015 € 7m Dividends per share 2015 € 0.28 Target Shareholder 100% Equity 420 (o.w. 90 of share capital and 330 of retained earnings ) Fixed assets 120 WC 50 Net Cash 250 Bidder (in €m) Equity value € 900m Number of shares 90,000,000 Share price € 10 Net income 2015 € 35m Earnings per share 2015 € 0.39 Dividends paid in 2015 € 10.5m Dividends per share 2015 € 0.12 Bidder 100% Merger
  4. 4. 4Ferdinand Petra – www.ferdinand-petra.com – All rights reserved 2018 © Focus On Share-for-share Deals (1/5)  Sellers A and B tender their Target’s shares to Bidder and receive shares of Bidder in exchange  Both companies survive, Target becomes a subsidiary of Bidder and the shareholders of Target are new shareholders of Bidder  For listed companies, contribution of shares is also called “Share for Share Exchange Offer” or “Share Swap” Merger
  5. 5. 5Ferdinand Petra – www.ferdinand-petra.com – All rights reserved 2018 © Focus On Share-for-share Deals (3/5)  Relative ownership by A and B of Bidder depends on the valuation of shareholders’ equity of Target and Bidder and gives the relative weight  The exchange ratio is the ratio of the number of shares of Bidder to be tendered for each Target share received  The exchange ratio is deducted from the relative weight Relative weight = Shareholders’ equity value of Target Shareholders’ equity value of Bidder = 500/900 = 0.56 Target’s shareholders will hold 35.7% = 0.56/ [1+0.56]) of Bidder →Bidder’s shareholders will hold 64.3% Exchange Ratio = Relative weight x # shares Bidder # shares Target = 0.56 x 90/25 = 2 2 shares of Bidder in exchange for 1 share of Target Merger
  6. 6. 6Ferdinand Petra – www.ferdinand-petra.com – All rights reserved 2018 © Focus On Share-for-share Deals (4/5) Target (in €m) 100% Equity 920Fixed assets 620 (o.w. 500 of shares Target) WC 50 Net Cash 250 Bidder (in €m) Seller A Shareholder ? % ? % ? % Seller B Equity 118 Net Debt 200 Fixed assets 263 WC 55 Compute the equity ownership of Shareholder, Seller A and Seller B (% and €m) Note: statutory accounts =  Merger
  7. 7. 7Ferdinand Petra – www.ferdinand-petra.com – All rights reserved 2018 © Focus On Share-for-share Deals (5/5) Target (in €m) 100% Equity 920Fixed assets 620 (o.w. 500 of shares Target) WC 50 Net Cash 250 Bidder (in €m) Seller A Shareholder Seller B Equity 118 Net Debt 200 Fixed assets 263 WC 55 11.9%23.8% 64.3% 66.7% x 35.7% x (500 + 900) = 333 Compute the equity ownership of Shareholder, Seller A and Seller B (% and €m) 33.3% x 35.7% x (500 + 900) = 167 Note: statutory accounts ∆ = + 500 ∆ = 0 Merger
  8. 8. 8Ferdinand Petra – www.ferdinand-petra.com – All rights reserved 2018 © Financial Consequences  Target shares are exchanged against shares / equity of Bidder: − Financial risk is minimized − Operational risk is shared − Bidder keeps its cash  Sellers are “buyers” in the new entity: − Long and tough negotiations to set the relative weight / exchange ratio… – Exchange ratio on stand-alone values (see next slide) – Or Fixed sharing of synergies (50/50 or 60/40 for instance) − … and the level of synergies (Where do they come from ? How are they shared?): Merger
  9. 9. 9Ferdinand Petra – www.ferdinand-petra.com – All rights reserved 2018 © Example Of Contribution Analysis % contribution (excl. synergies) Implied Buyer Target Synergies Pro-Forma Buyer Target Pro-Forma Exchange ratio Sales LTM 21,298 3,039 - 24,337 87.5% 12.5% 100.0% 0.453 2016E 20,759 3,197 - 23,956 86.7% 13.3% 100.0% 0.493 2017E 21,923 3,460 - 25,383 86.4% 13.6% 100.0% 0.506 2018E 23,125 3,749 - 26,874 86.0% 14.0% 100.0% 0.521 EBITDA LTM 3,519 785 91 4,395 81.8% 18.2% 100.0% 0.736 2016E 3,399 841 91 4,330 80.2% 19.8% 100.0% 0.822 2017E 3,589 916 91 4,597 79.7% 20.3% 100.0% 0.851 2018E 3,781 1,013 91 4,885 78.9% 21.1% 100.0% 0.896 EBIT LTM 2,809 725 91 3,625 79.5% 20.5% 100.0% 0.861 2016E 2,689 769 91 3,549 77.8% 22.2% 100.0% 0.961 2017E 2,830 845 91 3,766 77.0% 23.0% 100.0% 1.007 2018E 2,973 935 91 3,999 76.1% 23.9% 100.0% 1.066 Net Income LTM 1,422 470 60 1,952 75.2% 24.8% 100.0% 0.958 2016E 1,547 546 60 2,153 73.9% 26.1% 100.0% 1.023 2017E 1,658 605 60 2,323 73.3% 26.7% 100.0% 1.058 2018E 1,770 675 60 2,505 72.4% 27.6% 100.0% 1.106 Merger
  10. 10. 10Ferdinand Petra – www.ferdinand-petra.com – All rights reserved 2018 © Legal Process  Share for share deal is usually structured as a capital increase reserved to Sellers A and B. It is voted at Bidder’s shareholders’ meeting with usually super-majority minimum threshold (2/3 of votes, present or represented, in France for instance) − Bidder shareholders have to approve the contribution value  Shareholders of new entity often sign a Shareholder Agreement: − Joint objectives − Provision to get a seat at the board of directors − Anti-dilution provisions (protection of minority interests) − Right of first approval clause of any new shareholder (private companies) − A pre-emptive right, often in favor of Shareholder on the shares tendered to Seller A and B − If Shareholder wants to sell his shares, Sellers A and B have to do so (drag-along right) / may want to sell their shares at the same price (tag-along right) − A lock-up provision: sale of share prohibited for a temporary period − A deadlock provision that helps to exit one of the shareholders to solve a governance problem Merger

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