- 30 Marks
FM – Nov 2023 – L1 – SA – Q1 – Mergers and Acquisitions
Evaluate Finkex Plc's acquisition strategy of Toba Plc, focusing on share-for-share impact, valuation methods, and shareholder implications.
Question
Finkex Plc (FP) is a listed company that operates in the pharmaceutical sector, manufacturing a broad range of drugs under license in a number of countries along the ECOWAS sub-region. For a number of years, the company has grown organically.
Three years ago, the company acquired 20% of the issued share capital of Toba Plc (TP) for N110 million, as a route to both expansion and diversification. The acquisition was by private negotiation in exchange for an issue of its own shares.
Toba Plc is involved in a different area of the pharmaceutical sector from FP as it is primarily a research-driven company involved in the development of new drugs.
To expedite the realization of its diversification strategy, the directors of FP have now decided to acquire the remaining 80% of Toba’s share capital.
Extracts from the financial statements of Finkex Plc are given below:
Finkex Plc – Extracts from financial statements for the last two years
| Year | 2023 | 2022 |
|---|---|---|
| N’m | N’m | |
| Non-current assets (including investment in Toba plc) | 602.8 | 499.4 |
| Current assets | 265.0 | 180.4 |
| Total Assets | 867.8 | 679.8 |
| Current liabilities | 199.2 | 136.8 |
| Total assets less current liabilities | 668.6 | 543.0 |
| Non-current liabilities | 149.5 | 159.4 |
| Net assets | 519.1 | 383.6 |
| Issued share capital (ordinary shares of ₦1 each) | 100.0 | 73.6 |
| Share premium | 84.0 | 12.4 |
| Profit or loss account | 335.1 | 297.6 |
| Total Equity | 519.1 | 383.6 |
| Sales revenue | 1320.6 | 496.0 |
| Earnings after tax | 51.50 | 37.60 |
| Dividend | 14.0 | 14.0 |
| Retained profits | 37.5 | 23.6 |
All that is known about Toba Plc is that it has 114 million shares in issue; total share capital and reserves are N684 million; earnings after tax in the most recent year were ₦85.2 million on sales of N1,252.0 million, which were double those of the previous year; and that it has an investment valued at N80 million (book and market) in a type of enterprise which might not be of interest to Finkex Plc.
The current stock market prices per share are: Finkex Plc 300k; Toba plc 341k. Both companies pay tax at 50%.
Required:
a. At the above market prices, how many shares of Finkex Plc would have to be issued to buy the rest of Toba Plc on a share-for-share offer? (4 Marks)
b. With regard to earnings and also the book value of assets per share, how would the above share-for-share offer affect the position of:
i. Existing shareholders in Finkex Plc; (6 Marks)
ii. The 80% shareholders in Toba Plc whose shares were to be acquired? (4 Marks)
c. Assuming that the 80% shareholders in Toba Plc were prepared to accept ₦80 million 10% Loan Stock as part of the consideration:
i. What advantages might there be for Finkex Plc in this arrangement? (2 Marks)
ii. What total price could Finkex Plc afford to pay without diluting the earnings per share of its existing shareholders, as calculated in (b) (i) above? (6 Marks)
d. If the board of Toba Plc decided to advise its shareholders not to accept an offer from Finkex Plc, what arguments might they use – including any derived from the financial information available about Finkex Plc?
(8 Marks)
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