Mergers

Olivier LEVYNE

Principle• Contribution of assets and liabilities of one of the merging

entities to the other entity (absorbing company) based on their net book value or on their economic value.

• The first company is then broken up• The merger parity is based:

– Either on book value of the shares (ie: equity book value / number of shares)

– Or on the economic (or market) value of the shares (ie: NAV per share or listed price)

• The balance sheet equilibrium then relies on the premium = Value of assets contribution – capital increase

Base case

• AssumptionsCompany 1 (to be taken over) Company 2 (absorbing entity) - pre merger Parity based on the equity BV

Accounting balance sheet Accounting balance sheetFixed assets 700 000 Capital 100 000 Fixed assets 200 000 Capital 200 000 WCR 300 000 (1000x100€) WCR 900 000 (2000x100€)

Reserves 400 000 Reserves 800 000 Net debt 500 000 Net debt 100 000

_______ _______ _______ _______Total 1 000 000 1 000 000 Total 1 100 000 1 100 000

Listed price/share 1 200 Latent capital gain: 3 000 000 Listed price/share 400

Company 1 (to be taken over)Economic balance sheet

Fixed assets 1 200 000 Capital 100 000 WCR 300 000 (1000x100€)

Reserves 400 000 Latent capital gain 500 000 Net debt 500 000

_______ _______Total 1 500 000 1 500 000

Base case

• Parity and contributions based on book valuesCompany 1 (to be taken over) Company 2 (absorbing entity) - pre merger Parity based on the equity BV

Accounting balance sheet Accounting balance sheet Company 1 2Fixed assets 700 000 Capital 100 000 Fixed assets 200 000 Capital 200 000 Value of assets (BV) 1 000 000 1 100 000 WCR 300 000 (1000x100€) WCR 900 000 (2000x100€) (Net debt) (500 000) (100 000)

Reserves 400 000 Reserves 800 000 Net debt 500 000 Net debt 100 000 Equity value 500 000 1 000 000

_______ _______ _______ _______ Nb of shares 1 000 2 000 Total 1 000 000 1 000 000 Total 1 100 000 1 100 000 Value / share 500 500

Parity 1 for 1Listed price/share 1 200 Latent capital gain: 3 000 000 Listed price/share 400 Nb of shares to issue 1 000

Nominal value 100 Company 1 (to be taken over) Capital increase 100 000

Economic balance sheet Company 2 (absorbing entity) - post mergerFixed assets 1 200 000 Capital 100 000 Accounting balance sheet (parity based on book values) Contribution (NBV) 500 000 WCR 300 000 (1000x100€) Fixed assets 900 000 Capital 300 000 (Capital increase) (100 000)

Reserves 400 000 WCR 1 200 000 Premium 400 000 Premium 400 000 Latent capital gain 500 000 Reserves 800 000 Net debt 500 000 Net debt 600 000

_______ _______ _______ _______Total 1 500 000 1 500 000 Total 2 100 000 2 100 000

Base case

• Parity and contributions based on economic values

Company 1 (to be taken over) Company 2 (absorbing entity) - pre merger Parity based on the economic value of equity Accounting balance sheet Accounting balance sheet Company 1 2

Fixed assets 700 000 Capital 100 000 Fixed assets 200 000 Capital 200 000 Value of assets (eco) 1 500 000 4 100 000 WCR 300 000 (1000x100€) WCR 900 000 (2000x100€) (Net debt) (500 000) (100 000)

Reserves 400 000 Reserves 800 000 Net debt 500 000 Net debt 100 000 Equity value 1 000 000 4 000 000

_______ _______ _______ _______ Nb of shares 1 000 2 000 Total 1 000 000 1 000 000 Total 1 100 000 1 100 000 Value / share 1 000 2 000

Parity 2 for 1Listed price/share 1 200 Latent capital gain: 3 000 000 Listed price/share 400 Nb of shares to issue 500

Nominal value 100 Company 1 (to be taken over) Company 2 (absorbing entity) - post merger Capital increase 50 000

Economic balance sheet Accounting balance sheet (parity based on economic values)Fixed assets 1 200 000 Capital 100 000 Fixed assets 1 400 000 Capital 250 000 Contribution (NBV) 1 000 000 WCR 300 000 (1000x100€) WCR 1 200 000 Premium 950 000 (Capital increase) (50 000)

Reserves 400 000 Reserves 800 000 Premium 950 000 Latent capital gain 500 000 Net debt 600 000 Net debt 500 000 _______ _______

_______ _______ Total 2 600 000 2 600 000 Total 1 500 000 1 500 000

Base case • Contribution based on book value and parity

based on the economic value per shareCompany 1 (to be taken over) Company 2 (absorbing entity) - pre merger Parity based on the economic value of equity

Accounting balance sheet Accounting balance sheet Company 1 2Fixed assets 700 000 Capital 100 000 Fixed assets 200 000 Capital 200 000 Value of assets (eco) 1 500 000 4 100 000 WCR 300 000 (1000x100€) WCR 900 000 (2000x100€) (Net debt) (500 000) (100 000)

Reserves 400 000 Reserves 800 000 Net debt 500 000 Net debt 100 000 Equity value 1 000 000 4 000 000

_______ _______ _______ _______ Nb of shares 1 000 2 000 Total 1 000 000 1 000 000 Total 1 100 000 1 100 000 Value / share 1 000 2 000

Parity 2 for 1Listed price/share 1 200 Latent capital gain: 3 000 000 Listed price/share 400 Nb of shares to issue 500

Nominal value 100 Company 1 (to be taken over) Company 2 (absorbing entity) - post merger Capital increase 50 000

Economic balance sheet Accounting balance sheet (parity based on economic values)Fixed assets 1 200 000 Capital 100 000 Fixed assets 900 000 Capital 250 000 Contribution (NBV) 500 000 WCR 300 000 (1000x100€) WCR 1 200 000 Premium 450 000 (Capital increase) (50 000)

Reserves 400 000 Reserves 800 000 Premium 450 000 Latent capital gain 500 000 Net debt 600 000 Net debt 500 000 _______ _______

_______ _______ Total 2 100 000 2 100 000 Total 1 500 000 1 500 000

Base case • Contribution based on book value and parity

based on the listed share priceCompany 1 (to be taken over) Company 2 (absorbing entity) - pre merger Parity based on the economic value of equity

Accounting balance sheet Accounting balance sheet Company 1 2Fixed assets 700 000 Capital 100 000 Fixed assets 200 000 Capital 200 000 Value / share 1 200 400 WCR 300 000 (1000x100€) WCR 900 000 (2000x100€) Parity 0,33 for 1

Reserves 400 000 Reserves 800 000 Nb of shares to issue 3 000 Net debt 500 000 Net debt 100 000 Nominal value 100

_______ _______ _______ _______ Capital increase 300 000 Total 1 000 000 1 000 000 Total 1 100 000 1 100 000

Contribution (NBV) 500 000 Listed price/share 1 200 Latent capital gain: 3 000 000 Listed price/share 400 (Capital increase) (300 000)

Premium 200 000 Company 1 (to be taken over) Company 2 (absorbing entity) - post merger

Economic balance sheet Accounting balance sheet (parity based on listed prices)Fixed assets 1 200 000 Capital 100 000 Fixed assets 900 000 Capital 500 000 WCR 300 000 (1000x100€) WCR 1 200 000 Premium 200 000

Reserves 400 000 Reserves 800 000 Latent capital gain 500 000 Net debt 600 000 Net debt 500 000 _______ _______

_______ _______ Total 2 100 000 2 100 000 Total 1 500 000 1 500 000