MFL & MRL Merger
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Transcript of MFL & MRL Merger
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MITTAL FOOD Ltd & MAHANAGAR
RESTAURANT Ltd.
Based on information gathered from KPMG and going through the recent
business new the hypothetical case study on Mergers and Acquisitions has
been developed. I took the help of my project guide (Professor
Ramakrishna) and C.A Mr. Anindo Dutta to make the valuations as practical
as possible. Some of the valuation strategies that has been incorporated, is
extract from my M.Com classes of Dr. Malayendu Shah H.O.D of finance,
Calcutta University
The assumptions, which are the keystone of the case study, are enumerated
below:
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It is assumed that the existing undertakings are operating at a level
below optimum but when they combine their resources and efforts,
they can reduce the cost of production including selling and
administrative expenses. It will take 4-5 years to achieve this synergy.
Both the companies do not have any Preference Share Capital.
All the shares are fully paid up and authorized share capital of Mittal
Food ltd. is of 157497 shares of rupees 10 each and of Mahanagar
Restaurant Ltd is of 25000 shares of Rs 10 each.
Depreciation is calculated on Diminishing Balance Method.
There is no interest to be paid by Mahanagar Restaurant Ltd after
merger on debt capital, as the loan taken from Mittal Food ltd would
be adjusted.
The earnings of both the firm for the year 2005 has been taken for
calculating the E.P.S after merger.
Both the companies are listed companies.
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Financial year for both the companies closes at 31st December.
Point to be noted: The prevailing tax rate for each year has changed
Mittal Food ltd. (M.F.L) was established in 1995 to manufacture steel
generally used for producing home appliances and machines. The company
invested Rs.4 lacks in a small concern called Mahanagar Restaurant Ltd
(M.R.L). During the past 5 years, M.F.Ls sales have grown at an average of
about 10%\year, which is below the industry benchmark, and P.A.T have
grown at about 8%. The fluctuating profit of the company has caused its P.E
ratio to be much low.
To reduce its earning instability M.F.L is now planning to acquire 51%
ownership in M.R.L, which has a poor management, and to make it, its
subsidiary. Currently M.F.Ls share is selling for Rs. 75 in the market. The
synergies for acquiring M.R.L are enumerated below:
1. The target company belonged to the related business so it will help in
vertical merger and penetrate in newer area.
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2. It has generated a stalwart goodwill among the consumer and is time
honoured as a good Quick Service Restaurant (Q.S.R).
3 It had 50 outlets in Delhi and Mumbai. The revenue generated
from these outlets will help in maintaining a stable PE ratio.
MRL is known for its quality of products and services including. It has a
strong logistic throughout its 50 outlets spread across the capital and
Mumbai. The company is planning to make its maiden entry in Kolkata.
Due to poor management and lack of innovative dishes, the companys
performance was bogged down with the entry of new kids in the block. The
company could not pay heed to product innovation due to the high cost of
raw material and processed items required for such Endeavour.
MRLs sales have grown at an average of 6% per year. The companys
earning has been low due to decline in sales and the average market price
of company s shares in recent times has been lower than its book value.
The board of MRL thinks that when they took a loan from MRL, it helped
them to deal with their financial inadequacy and now if they join with
M.F.L, they can get raw material and process ingredients at lower costs
from the humungous product portfolio of MFL. Moreover, MFLs supply
chain will enable easy availability of the products in all the outlets.
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The current price of MRLs share is Rs. 28 only. MFL thinks that if they
could acquire MRL, they could turn around the company and increase its
share value in the market. However, M.R.L favoured merger with M.F.L
instead of becoming a subsidiary. According to shareholders of M.R.L, if
one company is made a subsidiary of other the idea behind the synergy
would fall and there will not be any unified command as it tantamount to be
dominated by the parent company.
But M.F.L wanted to acquire M.R.L and claimed to grow their sales by 8%
within 3-4 yrs but as M.R.L has so low growth rate in sales, MFL will be
paying them for each share an amount much lower than their current market
price. MRL agreed to that but their condition was to get raw materials at a
much more lower costs which will help to reduce cost of goods sold at least
64% of sales. MFL anticipates that to support sales growth of 8% of M.R.L,
they have to bear a capex equal to 5% of sales for the first 5 yrs.
Now the million-dollar question arises whether both the companies will
have an increased E.P.S in the post merger milieu and what price M.F.L
should pay to M.R.L if they merge with each other. From M.R.Ls point of
view, a vertical integration of upstream suppliers like Reliance
Petrochemicals ltd. with Reliance Industries ltd in the year 1992 will help
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the company to achieve the desired result of synergy and reduce the cost of
production.
The financial statement (in a summarized form) issued by both the
companies for the year ended 31st December 2005 are given below.
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Mittal Foods Ltd
Summarized P/L statement for the last five years (Rs in 000)
Year 2001 2002 2003 2004 2005
Net Sales 5470 6150 6642 7529 8056
Cost of good sold 3900 4500 5467 5480 5975
Depreciation 110 155 139 125 143
Selling & Admin 671 788 970 1003 1020Expenses
Totalexpenses 4681 5443 6576 6608 7138
EBIT 789 707 66 921 918
Interest 132 152 160 191 284
EBT 657 555 94 730 634
Tax 353 292 - 368 226
PAT 304 263 - 362 408
Per share data
Year 2001 2002 2003 2004 2005
EPS (Rs) 1.93 1.67 1.81 2.3 2.59
Book Value (Rs) 25.28 26.00 26.41 26.75 27.55
Market Value (Rs) 54.34 61.25 57.5 71.25 75.00
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Z
Summarized Balance Sheet
As on 31st December 2005
Liabilities (Rs. In thousand)
Sources of Funds
Shareholders Fund
Paid up capital (1, 57, 497 sharesOf Rs. 10 each) 1575
Reserve and surplus 3155 4730
Borrowed Funds
Secured 1203
Unsecured 967 2170
Current Liabilities 1860
8760
Assets
Gross Block 4748
Less depreciation 143
Net Block 4605
Investment
Loan to MSUL 400Other Deposit 29 5034
Current Assets 3726
8760
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Mahanagar Restaurants Ltd
Summarized P/L statement for the last five years (Rs in 000)
Year
2001 2002 2003 2004 2005
Net Sales 1442 1490 1580 1721 1823
Cost of good sold 995 1055 1150 1244 1323
Depreciation 37 40 45 45 85
Selling & Admin 260 275 280 292 302Expenses
Total expenses 1292 1370 1475 1581 1710
EBIT 150 120 105 140 113
Interest 19 20 20 30 35
EBT 131 100 85 110 78
Tax 45 34 25 35 27
PAT 86 66 60 75 51
Per share data
Year 2001 2002 2003 2004 2005
EPS (Rs) 3.44 2.64 2.40 3.00 2.12
Book Value (Rs) 23.76 25.00 26.28 27.65 30.00
Market Value (Rs) 30.84 44.04 42.25 25.48 28.0
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Summarized Balance Sheet
As on 31st December 2005
Liabilities (Rs. In thousand)
Sources of Funds
Shareholders Fund
Paid up capital (25000 sharesOf Rs. 10 each) 250
Reserve and surplus 320 570
Borrowed Funds
Loan from MSL 400
Current Liabilities 178
1148
Assets
Gross Block 457
Less depreciation 85
Net Block 372
Investment 23
Current Assets 753
1148
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