Genesis Power is a listed power company. Genesis Power is the subject of a takeover offer by strategic competitor Light
Posted: Wed Jul 06, 2022 6:44 pm
Genesis Power is a listed power company. Genesis Power isthe subject of a takeover offer by strategic competitor LightningCo.
For Genesis Power, the forecast EBITDA nextfinancial year (t+1) is $220 million and the expecteddepreciation expense is $70 million. Capital expenditure isforecast to be $80 million with no net working capital movementsexpected.
Genesis Power has 50 million shares outstanding trading at $40per share and net debt of $1.0 billion.
UNSW Partners, the advisers to Lightning Co observe that theaverage equity (levered) beta for Genesis Power and a basket ofcomparable companies was 0.8, with an average D/E ratio of50%. UNSW Partners advise that this comparables beta needs tobe unlevered and re-levered for Lighting Co's long term optimalcapital structure which comprises a target D/E of 66.67%. UNSWPartners observes that Lightning Co's pre-tax cost of debt is6.0%. It also observes that the tax rate for bothLightning Co and Genesis Power is 30%, the long-term risk-freetreasury bond yield is currently 3.5%, and the market risk premiumis 6.0%.
Lightning Co believes that by sharing technologies andimplementing a more successful growth strategy, it wouldcollectively result in a free cash flow growth rate from year1 and into perpetuity of 4.5%.
Lightning Co adopts these valuation parameters into its offerprice.
a) Calculate the cost of equity that Lightning Co willadopt for its takeover of Genesis Power (1mark)
b) What is the free cash forecast for Genesis Power next yearFCFt+1? (0.5 marks)
c) Utilising the formula EV = FCFt+1 / (WACC –g), and then deducting net debt from EV, calculate the offer pricefor Lightning Co's takeover bid. Calculate the takeoverpremium % for Lightning Co's takeover bid. (1.5marks)
For Genesis Power, the forecast EBITDA nextfinancial year (t+1) is $220 million and the expecteddepreciation expense is $70 million. Capital expenditure isforecast to be $80 million with no net working capital movementsexpected.
Genesis Power has 50 million shares outstanding trading at $40per share and net debt of $1.0 billion.
UNSW Partners, the advisers to Lightning Co observe that theaverage equity (levered) beta for Genesis Power and a basket ofcomparable companies was 0.8, with an average D/E ratio of50%. UNSW Partners advise that this comparables beta needs tobe unlevered and re-levered for Lighting Co's long term optimalcapital structure which comprises a target D/E of 66.67%. UNSWPartners observes that Lightning Co's pre-tax cost of debt is6.0%. It also observes that the tax rate for bothLightning Co and Genesis Power is 30%, the long-term risk-freetreasury bond yield is currently 3.5%, and the market risk premiumis 6.0%.
Lightning Co believes that by sharing technologies andimplementing a more successful growth strategy, it wouldcollectively result in a free cash flow growth rate from year1 and into perpetuity of 4.5%.
Lightning Co adopts these valuation parameters into its offerprice.
a) Calculate the cost of equity that Lightning Co willadopt for its takeover of Genesis Power (1mark)
b) What is the free cash forecast for Genesis Power next yearFCFt+1? (0.5 marks)
c) Utilising the formula EV = FCFt+1 / (WACC –g), and then deducting net debt from EV, calculate the offer pricefor Lightning Co's takeover bid. Calculate the takeoverpremium % for Lightning Co's takeover bid. (1.5marks)