Pasific Salmon

In: Business and Management

Submitted By gikolevs
Words 531
Pages 3
Problem:

Is the bid of $450 million from RRR sufficient in the acquisition of PSC?

Recommendation:

Even though PSC is valued at $796.47 million [refer to Exhibit 2], it is recommended that RRR offer a bid higher than $450 million but below $796.47 million. The reason for not bidding above $796.47million is because other strategic bidders may not be financially capable of offering a bid higher (according to data provided for the selected comparable company’s financial statements). On top of this RRR should keep the opportunity for ISN to re-acquire up to 12.5% of the company, valued at $13.97 million since ISN is not selling PSC by choice [refer to Exhibit 3]. It is also recommended that RRR pursue the hedging program. The probability of bankruptcy in the year 2000 without hedging is 13.08% and with hedging is 4.77%, [refer to Exhibit 4].

Supporting Analysis: The valuation of the NPV of PSC was done in Exhibit 2. Issues accounted for involved levering the beta used to calculate WACC [refer to Exhibit 1], by using the betas of High Liner Foods Inc. and Pescanova SA, companies in the industry similar to PSC. Also a terminal value was calculated (assuming a constant growth rate) and added to the NPV because PSC cannot truly be evaluated over a 5 years range, especially since it is a fishing company and it will continue to produce revenue for as long as there are fish in the ocean.

By providing the option, RRR is adding value to their bid by allowing PSC to own 12.5% of the company. Also, by including the option, up-front, it is not costing RRR more than the $450 million.

RRR is using a substantial amount of debt to finance the acquisition of PSC. By borrowing the money from BMS they have agreed to a financial distress stipulation. This stipulation states that if EBIT fell below the interest expense there would be a cost of financial distress to…...

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