The Ashanti-Bogoso Merger
As part of the consolidation of mines in Ghana, Ashanti Gold Mining and
Bogoso Resources are planning a merger. The proposed merger will
occur through an exchange of shares, with Ashanti paying 1.5 shares
for each share of Bogoso. Bogoso shares are currently trading at
Cedi55, while Ashanti shares are priced at Cedi40.
The following are the details of the two potential merger candidates
(Cedi figures in millions):
Bogoso Ashanti
Revenues Cedi4,800 Cedi3,325
Expenses
(w/o Depreciation)
as % of Revenue 87.50% 89.00%
Depreciation Cedi200 Cedi74
Tax Rate 32.00% 32.00%
10% of 10% of
Working Capital Revenue Revenue
Market Value of
Equity Cedi1,900 Cedi1,450
Outstanding debt Cedi360 Cedi450
Both firms are in steady state and are expected to grow by 5% a year in
the long term. Capital spending is expected to be 90% of depreciation.
The beta for Bogoso is 1.7, and for Ashanti 1.5, and both firms are rated
BBB, with an interest rate on their debt of 9.5%. The US government
bond rate is 6%. Ghanaian bonds yield approximately 2% over US
government bonds. The market return is about 7% over the risk-free
rate.
As a result of the merger, the combined firm is expected to have a cost
of goods sold of only 86% of total revenues. earnings will grow faster, at
6%. The combined firm does not plan to borrow additional debt.
Estimate the value of Bogoso and of Ashanti, operating independently.
Then estimate their combined value, assuming no synergies. If it does
not increase debt, the combined firm's rating will be A+ (with an interest
rate of 8.75%)
Now estimate the value of the merged company, assuming synergies.
Finally, assume that, as a result of the merger, the Bogoso-Ashanti
Company's optimal debt ratio increases to 20% of total capital from
current levels. (At that level of debt, the combined firm will have an A
rating, with an interest rate on its debt of 8%.)
What is the value of the combined company? Is Ashanti overpaying?
Ian Giddy
ian.giddy@nyu.edu
Ashanti-Bogoso Seller Buyer
Bogoso Ashanti Combined Synergy More Debt
Growth 5% 5.5% 5.2% 5.5% 5.5%
Tax rate 32% 32% 32% 32% 32%
Initial Revenues 4800 3325 8125 8125 8125
COGS 87.50% 89% 86% 86%
Depreciation 200 74 274 274 274
CapEx, % of Depr. 90% 90% 90% 90% 90%
WC 10% 9% 9.6% 9.6% 9.6%
Beta 1.70 1.50 1.60 1.60 1.66
Cash 120 30 150 150 150
Cost of debt 9.50% 9.50% 8.75% 8.75% 9.00%
Equity Market Value 1700 1600 3300 4400 est. 4168
Debt Market Value 360 450 810 810 16% 1042 20%
T+1 T+1 T+1 T+1
Revenues 5040 3508 8548 8572 8572
-COGS 4410 3122 7532 7372 7372
-Depreciation 200 74 274 274 274
=EBIT 430 312 742 926 926
EBIT(1-Tax) 292 212 504 630 630
+Depreciation 200 74 274 274 274
-CapEx -180 -67 -247 -247 -247
-Change in WC -24 -16 -41 -43 -43
-Free Cash Flow to Firm 288 203 491 614 614
Cost of Equity (from CAPM) 19.90% 18.50% 19.20% 19.20% 19.65%
Cost of Debt 6.46% 6.46% 5.95% 5.95% 6.12%
WACC 17.55% 15.86% 16.59% 17.14% 16.94%
Valuation
Firm Value 2298 1960 4316 5277 5369
Less AT PV Merger costs -188 -187 -187
Less Debt -360 -450 -810 -810 -1042
Plus Cash 120 30 150 150 150
Equity Value 2058 1510 3318 4280 4140
Increase 961 822
Payment
Market value 1700 mm 1600 mm
Share price 50 40
Number of shares 34.0 mm 40.0 mm
Price Ashanti pays 1904 mm 1.4 shares and 0 cash per share
Premium 12%
New Ashanti shares issued 47.6 mm
Total Ashanti shares 40.0 mm 87.6 mm 87.6 mm 82.9 mm
Ashanti shares: estimated value 37.75 37.87 48.86 49.97
EPS 8.60 5.30 5.76
US Govt bond rate 6%
Combined beta 1.6
Market risk premium 7%
Country risk premium 2%
Optimal debt ratio ?
Combined beta, unlevered 1.42 Bu=Bl/[1+(1-T)D/E]
Combined beta, levered 1.66 Bl=Bu[1+(1-T)D/E]
Year 1 Year 2 Year 3
Merger costs 200 100 50
After tax 136 68 34