Regulation of takeovers

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Question 3b

Sigra Co is a listed company producing confectionary products which it sells around the world. It wants to acquire Dentro Co, an unlisted company producing high quality, luxury chocolates. Sigra Co proposes to pay for the acquisition using one of the following three methods: 

Method 1

A cash offer of $5•00 per Dentro Co share; or

Method 2

An offer of three of its shares for two of Dentro Co’s shares; or

Method 3

An offer of a 2% coupon bond in exchange for 16 Dentro Co’s shares. The bond will be redeemed in three years at its par value of $100.

Extracts from the latest financial statements of both companies are as follows:

Sigra Co  
$’000
Dentro Co
$’000
Sales revenue  44210 4680
--------- ---------
Profit before tax 6190 780
Taxation (1240) (155)
--------- ---------
Profit after tax  4950 625
Dividends (2700) (275)
--------- ---------
Retained earnings for the year  2250 350
--------- ---------
Non-current assets 22450 3350
Current assets  3450 247
Non-current liabilities 9700 873
Current liabilities 3600 436
Share capital (40c per share)  4400 500
Reserves 8200 1788

Sigra Co’s current share price is $3•60 per share and it has estimated that Dentro Co’s price to earnings ratio is 12•5% higher than Sigra Co’s current price to earnings ratio. Sigra Co’s non-current liabilities include a 6% bond redeemable in three years at par which is currently trading at $104 per $100 par value.

Sigra Co estimates that it could achieve synergy savings of 30% of Dentro Co’s estimated equity value by eliminating duplicated administrative functions, selling excess non-current assets and through reducing the workforce numbers, if the acquisition were successful.

In relation to the acquisition, the board of directors of Sigra Co are considering the following two proposals:

Proposal 1
Once Sigra Co has obtained agreement from a significant majority of the shareholders, it will enforce the remaining minority shareholders to sell their shares; and

Proposal 2
Sigra Co will offer an extra 3 cents per share, in addition to the bid price, to 30% of the shareholders of Dentro Co on a first-come, first-serve basis, as an added incentive to make the acquisition proceed more quickly.

Required:

With reference to the key aspects of the global regulatory framework for mergers and acquisitions, briefly discuss the above proposals. (4 marks)

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