Dark Pool Trading

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Question 2a

The treasury department of Chawan Co, a listed company, aims to maintain a portfolio of around $360 million consisting of equity shares, corporate bonds and government bonds, which it can turn into cash quickly for investment projects. Chawan Co is considering disposing 27 million shares, valued at $2·15 each, which it has invested in Oden Co. The head of Chawan Co’s treasury department is of the opinion that, should the decision be made to dispose of its equity stake in Oden Co, this should be sold through a dark pool network and not sold on the stock exchange where Oden Co’s shares are listed. In the last few weeks, there have also been rumours that Oden Co may become subject to a takeover bid.

Oden Co operates in the travel and leisure (T&L) sector, and the poor weather conditions in recent years, coupled with a continuing recession, has meant that the T&L sector is under-performing. Over the past three years, sales revenue fell by an average of 8% per year in the T&L sector. However, there are signs that the economy is starting to recover, but this is by no means certain.

Given below are extracts from the recent financial statements and other financial information for Oden Co and the T&L sector.

Oden Co
Year ending 31 May (all amounts in $m)

2013 2014 2015
Total non-current assets 972 990 980
Total current assets 128 142 126
Total assets
1,100

1,132

1,106
Equity
Ordinary shares ($0·50) 300 300 300
Reserves 305 329 311
Total equity
605

629

611
Non-current liabilities
Bank loans 115 118 100
Bonds 250 250 260
Total non-current liabilities
365

368

360
Current liabilities
Trade and other payables 42 45 37
Bank overdraft 88 90 98
Total current liabilities
130

135

135
Total equity and liabilities
1,100

1,132

1,106
Oden Co
Year ending 31 May (all amounts in $m)
2013 2014 2015
Sales revenue 1,342
1,335
1,185
Operating profit 218 203 123
Finance costs (23)
(27)
(35)
Profit before tax 195 176 88
Taxation (35)
(32)
(16)
Profit for the year 160
144
72
Other financial information (Based on annual figures till 31 May of each year)
2012 2013 2014 2015
Oden Co average share price ($) 2·10 2·50 2·40 2·20
Oden Co dividend per share ($) 0·15 0·18 0·20 0·15
T&L sector average share price ($) 3·80 4·40 4·30 4·82
T&L sector average earnings per share ($) 0·32 0·36 0·33 0·35
T&L sector average dividend per share ($) 0·25 0·29 0·29 0·31
Oden Co’s equity beta 1·5 1·5 1·6 2·0
T&L sector average equity beta 1·5 1·4 1·5 1·6

The risk-free rate and the market return have remained fairly constant over the last ten years at 4% and 10% respectively.

Required:
a) Explain what a dark pool network is and why Chawan Co may want to dispose of its equity stake in Oden Co through one, instead of through the stock exchange where Oden Co’s shares are listed. (5 marks)

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Question 2b

The treasury department of Chawan Co, a listed company, aims to maintain a portfolio of around $360 million consisting of equity shares, corporate bonds and government bonds, which it can turn into cash quickly for investment projects. Chawan Co is considering disposing 27 million shares, valued at $2·15 each, which it has invested in Oden Co. The head of Chawan Co’s treasury department is of the opinion that, should the decision be made to dispose of its equity stake in Oden Co, this should be sold through a dark pool network and not sold on the stock exchange where Oden Co’s shares are listed. In the last few weeks, there have also been rumours that Oden Co may become subject to a takeover bid.

Oden Co operates in the travel and leisure (T&L) sector, and the poor weather conditions in recent years, coupled with a continuing recession, has meant that the T&L sector is under-performing. Over the past three years, sales revenue fell by an average of 8% per year in the T&L sector. However, there are signs that the economy is starting to recover, but this is by no means certain.

Given below are extracts from the recent financial statements and other financial information for Oden Co and the T&L sector.

Oden Co
Year ending 31 May (all amounts in $m)

2013 2014 2015
Total non-current assets 972 990 980
Total current assets 128 142 126
Total assets
1,100

1,132

1,106
Equity
Ordinary shares ($0·50) 300 300 300
Reserves 305 329 311
Total equity
605

629

611
Non-current liabilities
Bank loans 115 118 100
Bonds 250 250 260
Total non-current liabilities
365

368

360
Current liabilities
Trade and other payables 42 45 37
Bank overdraft 88 90 98
Total current liabilities
130

135

135
Total equity and liabilities
1,100

1,132

1,106
Oden Co
Year ending 31 May (all amounts in $m)
2013 2014 2015
Sales revenue 1,342
1,335
1,185
Operating profit 218 203 123
Finance costs (23)
(27)
(35)
Profit before tax 195 176 88
Taxation (35)
(32)
(16)
Profit for the year 160
144
72
Other financial information (Based on annual figures till 31 May of each year)
2012 2013 2014 2015
Oden Co average share price ($) 2·10 2·50 2·40 2·20
Oden Co dividend per share ($) 0·15 0·18 0·20 0·15
T&L sector average share price ($) 3·80 4·40 4·30 4·82
T&L sector average earnings per share ($) 0·32 0·36 0·33 0·35
T&L sector average dividend per share ($) 0·25 0·29 0·29 0·31
Oden Co’s equity beta 1·5 1·5 1·6 2·0
T&L sector average equity beta 1·5 1·4 1·5 1·6

The risk-free rate and the market return have remained fairly constant over the last ten years at 4% and 10% respectively.

Required:

(b) Discuss whether or not Chawan Co should dispose of its equity stake in Oden Co. Provide relevant calculations to support the discussion.

Note: Up to 10 marks are available for the calculations. (20 marks)

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