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You work for a leveraged buyout firm and are evaluating a potential buyout of UnderWater Company
You work for a leveraged buyout firm and are evaluating a potential buyout of UnderWater Company. UnderWater’s stock price is $24, and it has 2.25 million shares outstanding. You believe that if you buy the company and replace its management, its value will increase by 42%. You are planning on doing a leveraged buyout of UnderWater, and will offer $30 per share for control of the company.
a. Assuming you get 50% control, what will happen to the price of non-tendered shares? (10 marks)
b. Given the answer in part (a), will shareholders tender their shares, not tender their shares, or be indifferent? (5 marks)
c. What will your gain from the transaction? (10 marks)
Expert Solution
a. The value of the firm is 2.25 million shares* 24= $54 million.
Increase in value, 54*142% = $76.68 million, so now this is the value of the firm.
Amount to borrow to pay for 50% control = 2.25*50%*30
= $33.75
Value of the firm after attaching debt
= 76.68 - 33.75
= $42.93
Non-tendered price after attaching debt
= $42.93/2.25
= $19.08
b.The price of the shares has decreased from $33.75 to $19.08 after the tender offer, everyone will want to tender their shares for $30.
c. Supposing everyone tenders the shares and you will buy at $30 per share, you will pay $67.5 (30 per share *2.25 million shares) to acquire the company and it will be worth $76.68 million.
The gain will be $76.68 million - $67.5 million = $9.18 million.
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