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    Mar 23, 2012, 08:58 AM
    Asset valuation, Dividen valuation and earnings valuation calculation
    Hello. I'm currently studying for my Contemporary Corporate Finance exam. There is a question which has a high chance of being in my exam and I really need an answer for it since my lecture is unavailable and there is no other way of getting that answer. The question is:

    Communicate plc (Communicate) is a telecoms company listed on the Main Market of the London Stock Exchange. Currently it has approximately 7.2 million customers in the South East of England.
    On 22 December 2011, Communicate received a formal takeover approach from Parlez SA (Parlez) a French listed telecoms company. Parlez has bought 6% of Communicates shares on the open market in the previous three months. During recent weeks, Parlez has met with the board of Communicate to try to reach agreement on an offer for Communicate that reflects fair value for shareholders. These talks included a discussion on the performance of Communicate's continuing businesses, its potential value to Parlez and how the parties might cooperate during the anticipated regulatory investigation. Parlez owns two other telecoms companies in the UK and has a market share of around 12 million customers in England and 15 million in France. Parlez has asked for permission to begin the due diligence process on Communicate.
    A copy of the formal takeover bid of Parlez is given below:
    A proposed cash payment of 1140p per share for Communicate (a total offer of £19,176m). An additional amount of £600m would be paid to the Communicate's bondholders whose bonds would automatically convert to ordinary shares in the event of a takeover.
    In terms of this proposal, Communicate will be permitted to pay dividends in the normal course of business, prior to the deal being completed but no further interest on the bonds would be paid.

    It is estimated that it will take up to 12 months to obtain regulatory approval for this deal, therefore completion of the deal and payment to both the ordinary shareholders and the bondholders of Communicate would be at the end of December 2012.

    The directors' initial thoughts are that the offer undervalues Communicate and that any takeover would results in significant job losses. However to fulfil their responsibilities you have been appointed to advice Communicate on the bid. In particular the directors would like you to consider the offer made by Parlez and to calculate whether it would be acceptable to either the ordinary shareholders or the convertible bondholders of Communicate, or indeed both. You have been supplied with extracts from the most recent set of group management accounts for Communicate and some supplementary information.
    Extracts from the most recent set of management accounts
    Income Statement for the year ended 30 September 2011

    £m
    Revenue 13,754
    Cost of sales 9,190
    Gross profit 4,546
    Operating costs 910
    Operating profit 3,654
    Finance costs 976
    Profit before taxation 2,678
    Taxation 804
    Profit for the financial year 1,874


    Statement of Financial Position as at 30 September 2011

    £m £m
    Non current assets 25,850
    Current Assets 38,540
    Current Liability 16,160 22,380
    Net Current assets 17,004
    Non Current liability
    Net Assets 31,226


    1. Disposal of subsidiary
    Included in the figures are the results of Communicate's Australian subsidiary (Ayers) that was disposed of in early October 2011 because of licensing problems in New South Wales. The subsidiary had net assets of £11,298mm at 30 September 2011 which included non current debt of £2351m consisting of:
    7% long term loan £2,105m
    2.9% medium term loan 246m
    £2,351m
    Communicate received £5578m on the disposal with the new buyer taking on the subsidiary's debt.

    2. Future maintainable earnings
    Ayers contributed 32% of Communicates operating profit.

    The £5,578m received from the sale of Ayers will be re-invested in new investment projects that will earn an anticipated average pre-tax return of 20% per annum.

    Communicate are currently implementing a corporate restructuring plan to deliver £120m of annualised pre-tax cost savings by steamlining the corporate structure of the group n This will lead to a reduction in a wide range of reporting, regulatory and management functions previously required and by simplifying the management structures of the continuing operations and corporate functions. One-off restructuring costs of £70m are expected in order to achieve this.

    3. Dividend policy
    Recently Communicate announced the following with regard to future dividend policy. It has just paid a dividend of 50p per share for the year ended 30 September 2011. This represents a year-on-year increase of 11%. For the next two years, the board is aiming to deliver an annual increase in the dividend of 7%. The economic outlook beyond the next two years indicates that growth is likely to slow to 5% per annum and remain constant at this level.

    4. Additional information
    • The P/E ratio for quoted companies in this industry is considered to be 10.
    • The corporation tax rate is 28%.
    • Shareholders require a return of 10% per annum .Convertible bondholders require a return of 6% per annum
    • The long term liabilities of Communicate include £520m 4% convertible bonds. These bonds are automatically convertible into ordinary shares on 31 December 2015 or in the event of a change in control of Communicate. The price of the conversion is fixed at £11.00. Analysts expect that the share price of Communicate on 31 December 2015 will be around £13.60. Interest on the bonds is paid annually on 31 December.
    • Communicate has 1,880m ordinary shares in issue
    • The size of the energy market (number of customers) in the UK is approximately 70 million.
    • The current share price of Communicate is £10.74.
    In addition the board have asked you to address their concerns regarding the following:
    1. The directors are aware that there may be a considerable volume of regulation that may apply as Communicate is a listed plc and would like you to provide them with a summary of the key regulations that could affect Communicate and would have to be complied with as a result of the takeover bid.

    2. The deal takes the form of a cash offer however several of the directors think that a share-for-share exchange would be more beneficial to the shareholders and would like you to explain the advantages and disadvantages of a each method of payment to the shareholders of both Communicate and Parlez.

    3. Suggest ways in which Communicate could legitimately defend itself against this takeover bid and the conditions under which such a defence might be valid.

    4. One of the younger directors completed a MSc in Finance several years ago and is aware that there is a body of research evidence that suggests that the majority of acquisitions are unsuccessful. The directors would like you to summarise the main findings of the research and explain how this might affect the shareholders and directors of Communicate.

    The question asks to calculate the asset valuation, dividend valuation and earnings valuation.

    I'd appreciate any help. Thank you for your time.

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