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 Cedi4,800 Ashanti Cedi3,325
Revenues Expenses (w/o Depreciation) as % of Revenue Depreciation Tax Rate Working Capital Market Value of Equity Outstanding debt
87.50% Cedi200 32.00% 10% of Revenue Cedi1,900 Cedi360
89.00% Cedi74 32.00% 10% of Revenue Cedi1,450 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 Growth Tax rate Initial Revenues COGS Depreciation CapEx, % of Depr. WC Beta Cash Cost of debt Equity Market Value Debt Market Value Revenues -COGS -Depreciation =EBIT EBIT(1-Tax) +Depreciation -CapEx -Change in WC -Free Cash Flow to Firm Cost of Equity (from CAPM) Cost of Debt WACC Valuation Firm Value Less AT PV Merger costs Less Debt Plus Cash Equity Value Increase Payment
Seller Bogoso 5% 32% 4800 87.50% 200 90% 10% 1.70 120 9.50% 1700 360 T+1 5040 4410 200 430 292 200 -180 -24 288 19.90% 6.46% 17.55% 2298 -360 120 2058
Buyer Ashanti 5.5% 32% 3325 89% 74 90% 9% 1.50 30 9.50% 1600 450 T+1 3508 3122 74 312 212 74 -67 -16 203 18.50% 6.46% 15.86% 1960 -450 30 1510
Combined 5.2% 32% 8125 274 90% 9.6% 1.60 150 8.75% 3300 810 8548 7532 274 742 504 274 -247 -41 491 19.20% 5.95% 16.59% 4316 -188 -810 150 3318
Synergy More Debt 5.5% 5.5% 32% 32% 8125 8125 86% 86% 274 274 90% 90% 9.6% 9.6% 1.60 1.66 150 150 8.75% 9.00% 4400 est. 4168 810 16% 1042 T+1 8572 7372 274 926 630 274 -247 -43 614 19.20% 5.95% 17.14% 5277 -187 -810 150 4280 961 T+1 8572 7372 274 926 630 274 -247 -43 614 19.65% 6.12% 16.94% 5369 -187 -1042 150 4140 822
20%
Market value Share price Number of shares Price Ashanti pays Premium New Ashanti shares issued Total Ashanti shares Ashanti shares: estimated value EPS
1700 50 34.0 1904 12% 47.6
mm mm mm mm
1600 mm 40 40.0 mm 1.4 shares and
0 cash per share
8.60
40.0 mm 37.75 5.30
87.6 mm 37.87 5.76
87.6 mm 48.86
82.9 mm 49.97
US Govt bond rate Combined beta Market risk premium Country risk premium Optimal debt ratio Combined beta, unlevered Combined beta, levered Year 1 Merger costs After tax 200 136
6% 1.6 7% 2% ? 1.42 Bu=Bl/[1+(1-T)D/E] 1.66 Bl=Bu[1+(1-T)D/E] Year 2 100 68 Year 3 50 34