Prof. Dr.iur. Dr.rer.pol. Joachim Häcker
Pre-assignment in Corporate Finance
Name
Signature (you verify that you have done the pre-assignment on your
own without the help of any third party)
………………………………
Max. points: 100 points
Tools: Any tool
General comments:
- Please write down the solution on the space indicated (marked with a straight line). Solutions written down somewhere else can not be taken into consideration.
- Arithmetic problems: You are asked several little questions. The solution is either right or wrong. Therefore, you will be given either all points or zero points => Take your time for the calculation.
Allocation of points
1. Linde to acquire Lincare Holdings Inc. (20 points)
2. A closer look to the acquirer (20 points)
3. Deriving Linde’s WACC, FCF and beta (26 points)
4. Trading and transaction multiples (20 points)
5. General Corporate Finance issues (14 points)
All the best!
1. Linde to acquire Lincare Holdings Inc. (20 points)
Attached is a p&l and a balance sheet of Linde group (following: Linde) as well as a joint press release of Linde (acquirer) and Lincare Holdings Inc. (following: Lincare) (target). Please base your analysis on this information package and the following additional assumptions:
· Base all you valuation calculations on the fact that today is December 31, 2011.
· Linde’s market cap at the end of 2011 = €20.0bn; Linde’s EBIT (2011) = €1.834 bn.
· Only the positions named “provisions for pensions and similar obligations” and “financial debt” include interest bearing liabilities. All other liability positions are non-interest bearing positions.
· Non-controlling interests are neglected => the entire equity position can be taken when deriving the book value.
· Depreciation and amortization in 2011: €1.3bn.
· Capital expenditure in 2011 = depreciation and amortization in 2011.
· €1 = $1.26
· The purchase price for Lincare of $ 4.6bn can be considered to be an Enterprise value.
· Lincare only generates sales from healthcare.
· Lincare’s cash position = $0.2bn and Lincare’s interest bearing liabilities position = $0.9bn.
· No other data except the data given in this information pack should be taken into consideration (=> e.g. don’t look for further company or market specific information in the internet or in the annual report!)
Today you read in the joint press release (see attached) that Linde announced to acquire Lincare in a friendly transaction by way of a tender offer.
n a) Do you consider Linde’s takeover premium to be market average? Please explain. (1 point)
______
n b) What would be the share price (in $) Linde ought to pay based on takeover law? (3 points)
______
n c) Please point out how much total annual sales Linde generates from healthcare (pre acquisition of Lincare) (2 points)
______
n d) Linde will finance the transaction via equity issuances and debt capital market transactions. Please point out the percentage of the purchase price which is financed by debt capital market transactions (after having refinanced the acquisition loan). Please point out how you calculated your result (3 points)
______
n e) What would have been Linde’s expected homecare business sales in 2015 (in €) if they had not bought Lincare? Base your analysis on the fact that Linde’s homecare business is global (3 points)
______
n f) How much annual sales (in $) did Lincare generate per patient in 2011? (2 points)
______
n g) Please point out the EV/Sales and EV/EBITDA multiple which has been paid in this transaction? (2 points).
______
n h) How many Lincare shares were out in the market at the end of 2011 (based on the assumption that the market cap has been used for the determination of Lincare’s equity value)? (4 points).
______
2. A closer look to the acquirer (20 points)?
Morgan Stanley, Linde’s financial advisor scrutinizes Linde’s financial figures to come up with the deal financing. Please help them answering the following questions:
a) Linde’s EBITDA in 2011 (3 points):______
b) Linde’s tax rate in 2011 (2 points):______
c) Linde’s EV/EBIT ratio in 2011 (2 points):______
d) Linde’s NOPLAT in 2010 (3 points): ______
e) Linde’s EBT per Employee in 2011 (4 points): ______
f) Assume the following data is given for a competitor of Lincare:
n WACC 10%
n g (growth rate in the terminal value) 1%
n Valuation date is at the end of 2011
n The following free cash flows are assumed (all numbers are in €bn and occur at year’s end):
n 2012: 1,4
n 2013: 1,3
n 2014: 1,6
n 2015: 1,7
n 2016: 1,8
n The following financial figures are in €bn and occur at December, 2011:
n The interest bearing liabilities 0,9
n The non-operating assets: 0,1
n Cash: 0,4
n Beta of Lincare’s competitor is: 1,4
.
What is the equity value of Lincare’s competitor based on these figures and your DCF calculation? Please compare this DCF equity value to the equity value of Lincare. (6 points)?
Equity value of Lincare’s competitor ______
3. Deriving Linde’s WACC, Free Cash Flow and Beta (26 points)?
a) Calculate Linde’s WACC based on the following assumptions (4 points):
Risk-free rate = 4%
Expected value for the return on the market = 11%
Cost of equity = 13%
Equity weighting = 30%
Tax rate = 35%
Cost of debt = 8%
WACC of Linde ______
b) The following data is given for Linde:The expected value for the return of the market portfolio is: / 11%
The risk-free rate is: / 4%
The cost of equity is: / 13%
Please calculate the Beta for Linde acording to CAPM (2 points)
c) The following data for Lincare is given:
The covariance of the return of the Lincare share
with the return of the market portfolio: / 10%
The variance of the return of the market portfolio: / 9%
Please calculate the beta according to CAPM (5 points)
Lincare’s beta ______
d) Please derive Linde’s Free Cash Flow (FCF) in 2011 based on the assumptions pointed out at the beginning of the case and on the data set attached to this paper. Please point out some intermediate results (e.g. NOPLAT, operating gross cash flow etc.) in order to get at least some points even in the case that the final result might be wrong) (10 points).
NOPLAT (1 point) ______
Change in provisions (3 points)______
Change in working capital (5 points) ______
Free Cash Flow (1 point)______
e) The following starting values for the listed peer group of Linde are given (5 points):
Levered beta / Tax rate / Leverage (d/e)Abenios / 1,1 / 30% / 1,2
Beldon / 1,3 / 30% / 1,5
Cortagon / 1 / 30% / 0,8
Please derive the levered beta of Linde based on the peer group mentioned above.
The mean should be used.
Beta of Linde ______
4. Trading and transaction multiples (20 points)
a) Trading multiples (5 points)
Abenios, Beldon, Cortagon, Delbito and Engelstein are competitors of Linde. Morgan Stanley considers these five companies to be Linde’s peer group. Morgan Stanley comes up with the following financial data (data as of Dec. 31, 2011):
Peer group / Enterprise value(in k€) / EBIT (in k€)
Abenios / 2,000,000 / 225,000
Beldon / 1,500,000 / 210,000
Cortagon / 3,050,000 / 280,000
Delbito / 2,290,000 / 340,000
Engelstein / 1,800,000 / 190,000
Calculate the equity value of Linde based on the peer group mentioned above. For the valuation the median has to be applied for the aggregation of the multiples, and no extreme values should be eliminated.
Equity value of Linde ______
b) Transaction multiples (15 points)
Abenios, Beldon, Cortagon, Delbito and Engelstein bought some companies in the last two years (see exhibit below). The transaction price can be considered to be an equity value. Abenios, Beldon and Cortagon bought 100% of the target. Delbito bought 88% and Engelstein 2.3% of the target. How could you use this information in order to calculate the equity value of Linde based on the “transaction multiples method” and assuming that these transactions are the only comparable transactions? Base your answer on the P/E ratio and the P/B multiple. The median has to be applied for the aggregation of the multiples.
Comparable transaction / Transaction price which was paid for the respective share(in k€) / Net income of target (B, D, F, H, J) (in k€) / Book value of target (B, D, F, H, J) (in k$)
Abenios acquired company B / 13,000,000 / 878,378 / 5,916,667
Beldon acquired company D / 7,600,000 / 697,248 / 5,250,000
Cortagon acquired company F / 9,450,000 / 814,655 / 5,850,000
Delbito acquired company H / 5,890,000 / 633,333 / 4,930,769
Engelstein acquired company J / 10,230,000 / 1,012,871 / 5,715,000
Equity value of Linde (based on P/E) ______
Equity value of Linde (based on P/B) ______
5. General Corporate Finance issues (14 points)
Please tick the box (2 points each):
Appendix 1: Joint Press Release
(Source: REUTERS)
PS: This press release has been modified in order to come up with a strategic fit connected to the case study pointed out above. No liability for the completeness and the correctness of the data can be given.
Joint Press Release
Linde to acquire Lincare Holdings Inc. in a friendly transaction by way of a tender offer and merger
· Linde offers USD 41.50 in cash per Lincare share
· Total consideration: USD 4.6 bn
· Lincare’s Board of Directors recommends that shareholders accept the offer
· Formation of global leading healthcare provider within the gases industry
· The global megatrend healthcare provides stable business growth
· Business in North America further strengthened
Munich, Dec. 31, 2011 – The Linde Group has entered into a definitive agreement for the acquisition of Lincare Holdings Inc., a US-based homecare health company. Under the terms of the agreement, Linde will make a tender offer for all outstanding shares of common stock of Lincare at USD 41.50 per share in cash. Following the purchase of shares in the tender offer, Linde intends to complete the acquisition of Lincare through a merger, following which Lincare will become a wholly owned subsidiary of Linde.
The Lincare Board of Directors has unanimously approved the transaction. The price of USD 41.50 represents a premium of 64% over Lincare’s share price of USD 25.26 on Dec 22, 2012 (the last day prior to press reports speculating as to Lincare’s auction process), and also represents a premium of 49% over the three month volume weighted average price per Lincare share. The total consideration of the transaction will be USD 4.6 bn.
“This strategic acquisition enables us to take the next big step in this stable, sustainable and profitable business field,” Prof. Dr.-Ing. Wolfgang Reitzle, CEO of Linde AG, explained. “Against the background of demographic changes, the healthcare industry is a megatrend in which we will be able to participate more strongly in a new setup. Together with Lincare, we will become the global leading healthcare provider within the gases industry and further internationalize our business. Lincare, as the industry leader in the US, provides us an ideal platform to roll out our innovative products − which are already successful, particularly in Europe − into the U.S., the largest region for healthcare revenues globally. Our U.S. subsidiary, LifeGas, already enjoys a close business relationship with Lincare for several years. We are looking forward to welcoming the Lincare management and all employees to The Linde Group.”
“We are very pleased to make this announcement,” John P. Byrnes, CEO of Lincare, said, “the Lincare Board believes that being part of a world-class organization will afford the company benefits it would not be able to realize on its own. This transaction will benefit all of the stakeholders involved and we look forward to being part of the Linde Group.”
The Linde Group and Lincare have common roots: Lincare was originally known as Linde Homecare Medical Systems and had grown out of the Americas business of Linde at the beginning of the 20th century. Linde Homecare Medical Systems became a subsidiary of Union Carbide when it acquired Linde’s U.S. business in 1917. Today’s Lincare was carved out from Union Carbide in 1987.
By acquiring Lincare, Linde will double sales in its North American Gases Division and respectively regaining market strength.
Following the acquisition, Linde will generate annual sales of EUR 2.8 bn (pro-forma) from healthcare. With 11,000 employees, Lincare generated sales of EUR 1.5 bn and EBITDA of EUR 363 m in 2011. The company is the global leader in the respiratory homecare industry and serves approximately 800,000 patients. Respiratory homecare describes the treatment of patients with respiratory diseases outside of clinical facilities. It includes respiratory therapies, for example, oxygen therapies, sleep therapies and inhalation therapies. Linde’s homecare business sales were EUR 300 m in 2011.
The global healthcare industry has a size of about EUR 12 bn. Two-thirds of the healthcare industry is homecare, which is the fastest growing segment with a growth rate of approximately 6 percent per annum. With a size of more than EUR 4 bn, the U.S. is the largest healthcare region globally. As the industry leader, Lincare operates in virtually all U.S. states as well as Canada. At present, Linde Homecare covers the U.S. region only as a supplier to other home healthcare providers. As a result of the acquisition, Linde will be the only global gases company with a leading position in homecare globally as well as in the important U.S. and European regions.
The funding of the transaction will be done by an acquisition loan in the total amount of USD 4.5 bn and through available cash. The acquisition loan will be refinanced by equity issuances of up to EUR 1.5 bn and debt capital market transactions. The Linde Group is committed to maintaining its current credit ratings (A/A3).
Completion of the offer is subject to customary conditions, including the expiration of the waiting period provided by U.S. antitrust laws and the tender of at least a majority of Lincare’s outstanding shares of common stock. Closing is expected for the third quarter of 2012.