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FIN4930 - Cooper Case Presentation
Transcript of FIN4930 - Cooper Case Presentation
Alex Lau (B)
Vinny Antonucci Two Current Offers Questions
& Answers Cooper Industries &
Nicholson Corp. Background Cooper Industries Organized in 1919 as a manufacturer of heavy machinery and equipment
A leading producer of engines and massive compressors in mid-1950s
Heavy dependence on sales to the gas and oil industries
Financial strength is attractive Acquisition made by Cooper Ind. Inc A supplier of portable industrial power toolsA manufacturer of small industrial air and process compressors
A maker of small pumps and compressors for oil field operations
A producer of tire-changing tools for the automotive market
The Crescent Niagara Corporation( It has high quality wrenches, pliers, and screwdrivers) Acquisition Strategy in 1966 The industry should be fairly stable, with a broad market for the products and a product line of largely small-ticket items
Acquire only leading companies in their respective market segment One of the largest domestic manufacturers of hand tool and was a leader in its two main product areas
It had 50 % share of 50 million market for files & rasps
Also 9% share of 200 million markets for hand saws and saw blades compare to Sears, Roebuck and co, Inc.
Its highest assets was distribution systems
These strengths forecasts 6% to 7% future annual growth Annual sales growth 2% (Industry growth 6%)
Profit margin 1/3rd those of other hand tool business
Book value $ 51.25(Market value $44 on May,1972)
P/E ratio 10-14
The company could contribute less than one-sixth of the combined sales
Nicholson’s Atkins saw division seemed vulnerable in view of its low profitability Multiple merger offers allowing the management to choose the best offer for their stock holders Possible hostile takeover
The Nicholson family loosing managing power H.K.Porter Company A conglomerate with wide ranging interests in electrical equipment, tools, nonferrous metals, and rubber products
It had acquired 44000 shares of Nicholson in 1967
Porter offer $ 42 per share in cash for 437000(out of 584000) to Nicholson
Porter offer $ 50 per share in cash for 177000(out of 584000) to Cooper VLN VLN was broadly diversified company with major- interests in original placement automotive equipment and in publishing
Under the VLN merger term one share of VLN new cumulative convertible preferred stock would be exchanged for each share of Nicholson. The Preferred stock could be exchanged 5 common stocks (trading between 10.62-4.63) for the first 4 years. Lastly the preferred stock would have face value of $50 dollars after the 5th year.
What does this mean? What does this mean? First year Value: @10.62x5=$53.1
Fourth year Value: 4 dividend payments of 1.6x4=$6.4
@53.1 discounted by 6.51% (treasury bond rate) for 4 years = 41.62+6.4=$48.02
@23.15 Total =24.39
Fifth Year Value: $50 discounted for 5 years =36.48 What is the maximum price for Nicholson? Pro-forma analysis Pro-Forma
Based on a sales increase of 6%.
EBIT(1-Tax)+ Depr- Chg NWC-Capex A mismanaged Nicholson? Cooper projects that it can increase Nicholson's growth rate from 2% to the industry average of 6%.
Decrease Cost of Good sold from 69% of sales to 65%.
Decrease selling and administration expenses from 22%-19%.
With the merger, Cooper can have a stronger position in the global industrial buyer market, in which they only sell 25% of its products to this market. Free Cash Flows 1972: $6.1M
1976: $7.58M Cost of Debt / Cost of Equity Cost of Debt-
Long term Debt: $12M
Interest Exp: $0.8M = 6.67%
Cost of Equity-
Mkt PPS: $27.5
Dividend: $1.60 (nicholson dividend)
Industry Growth (g) 6.00%
Cost of equity= (1.6/27.5)+.06=== 11.82% WACC Wd= 0.34We= 0.66Tax= 40%We*Ke+[ Wd*Kd(1-T)]0.66*.1182+[0.34*0.0667(1-0.40)]
WACC= 9.16% Value of Nicholson post-merger Sum of PV of future cash flows @ 9.16%=$24.24M
PV of the Terminal Value (75% of PV^)=$18.18M
Total value of $42,420,000 Maximum Price for Nicholson Based on the DCF/WACC analysis
The maximum share price would be 42,420,000/584,000= $72.64
But since we require at least the WACC return, the maxmium price Cooper should offer is.
(1-.0916)*72.64------> $65.98 Exchange Ratio The exchange ratio backs this assertion up:
Cooper must distribute 875,780 new shares at its market price of $44.
Value of target= new shares issued*pps(cooper)
38,534,328 = 38,534,328 Recommendations for Cooper's Management Team Smart acquisition at the right price The Offer Nicholson is fundamentally a strong company
Change in direction offered by new board will steer Nicholson in a profitable path
Leave Nicholson management as is
Synergies offered by the merger
Cost cutting Proceed with the acquisition of Nicholson at $50 per share (13.64% premium)
Possible offer range: $50.00 – 65.98
Provide Cooper with 50.1% shares.
Cooper: 29,000 shares
H.K. Porter: 177,000 shares
Need: 86,000 shares from speculators and unaccounted shareholders (247,000 shares)
Stock for stock transaction