Goldblade plc is about to launch a bid for Membrane plc. Both companies are in the light manufacturing industry. Goldblade plc is currently in the process of deciding how it will go about financing the takeover. You are provided with information on the two companies below:
Profit and loss accounts for year ended 31 December 2006
Goldblade plc
Membrane plc
£m
Profit before interest and tax
122
48
Interest payments
49
18
Profit before tax
73
30
Tax (at 30%)
22
9
Profit after tax
51
21
Dividends
8
Retained profit
33
13
Balance sheets as at 31 December 2006
Fixed assets
508
228
Stocks
82
34
Debtors
66
Cash
59
25
Current liabilities
-138
-64
Long-term bank loans
-353
-121
224
132
Financed by
Ordinary shares (50p)
80
46
Reserves
144
86
Current share price (31/12/06)
£3.65
£2.03
Year low:
£3.12
£1.85
Year high:
£3.78
£2.47
Average industry gearing level:
40%
(debt divided by debt plus equity; equity at market value, debt at book value)
Goldblade expects that in order to secure a controlling share in Membrane it will have to offer a premium of 20 per cent on the current market price of Membrane’s shares. Goldblade’s long-run cost of borrowing currently stands at 10 per cent. The company is considering whether to finance the deal using a share-for-share offer or a cash purchase.
(a) If the company were to finance the takeover using a share-for-share offer, advise Gold blade plc on what form the offer should take and the number of shares it will issue.
(b) In the light of the information given above, critically evaluate whether a cash offer or a share-for-share offer would be more appropriate for Gold blade plc.
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