Answers to Question No. 1

This assignment is emphasized to evaluate the opportunity of taking over through which the various synergy benefits are expected to be achieved for which the accurate valuation of the target company using the techniques of DCF, comparable methods as well as precedent transaction together with the form of the taking over opportunity and the various means of finance to finance the offer are to be decided. For providing the solutions to the aforesaid problem the case study of the Loblaw and shoppers has been selected and based on this case study a set of questionnaires consisting of the three questions have been answered, which has been provided in the following section (Abdullah & Said, 2017).

Loblaw is one of the reporting segments of the George Weston limited and is engaged as one of the largest grocery retailer of the Canada selling variety of food, fashion and pharmacy products. Loblaw has two reportable segments in terms of retailing and financial services. It is considering for the acquisition of one of the Canada’s largest drugstore retailer naming Shoppers drug Mart engaged in the selling of healthcare and cosmetic products. To ensure the smooth acquisition, process a financial analyst a Gina kabloona who is an equity research analyst working on to provide the clients to the Shoppers for its tentative sale (Boghossian, 2017). The equity analyst has evaluated the various synergy benefits of the proposed merger, collected a set of data for making the correct valuation of the Shoppers using various methods of valuation such as discounted cash flows and comparable methods. Finally, based on the various qualitative information provided in the case study the decision of how to finance the proposed acquisition of the shoppers has been decided.

Strategic opportunities for the Loblaw for acquiring shoppers together with the synergies

Synergy benefits simply mean to explain the fact that the values of the individual separate entities shall always be less than the total value of such joined or merged entities. There could be several reasons which lead to the thought of having a merged entity and similarly the synergies are basically of the three types as cost synergy, revenue synergy and the financial synergy. It is also true that in each merger one cannot expect to ensure the presence of all these three types of synergies, but even then, if only two of these synergies are found present in any proposed merger then it is being suggested to accept the proposal of such merger (Cayon, Thorp, & Wu, 2017).

Answers to Question No. 2

The major strategic opportunities for the Loblaw for acquiring shoppers together with the synergies are provided hereunder:

1. As the Loblaw and Shoppers are engaged in the delivery of the complementary product lines and thus consequent to the take over the Cross selling of the products and services shall enable the Loblaw to offer an expansion of the products and services by incorporating the shopper’s products in its portfolio of market leading brands and convenience food and grocery items. In this case it shall assist in revenue synergy(Coate & Mitschow, 2017).
2. Expansion of the geographical coverage through the convenient 1295 retail locations of the shoppers easily accessible to the customers.
3. As it is mentioned in the study that total amount of the pre-tax synergies was $100 million in year one, $200 million in the second year and $300 million in the third and subsequent years(Charles H, Giovanna, Dennis M, & Robin W, 2015).
4. It shall ensure the long –term cost savings in terms of cost reduction by way of reduction in the supply chain, information technology, marketing and shared infrastructure together with the cost savings generated due to the proposed planning to continue to operate as a stand-alone entity. Hence the cost synergy shall be achieved.

1. Valuation of the Shoppers as per discounted cash flow(DCF)

Terminal value of the Shoppers= free cash flow*(1+terminal growth rate)/ Weighted Average cost of capital- terminal growth rate

=$608/ (1+1.5%)/4.92%-1.5%

=$1844.44

1. Valuation of the shoppers using Comparable method

As it is given in the case study that the financial analyst Kolonel while considering the valuation to be made based on the valuation metrics of the comparable companies thought to provide more weight age to the recent transaction as it would more appropriately represent the most recent market condition, hence in the given case the transaction between the Duane Reade Holdings Inc. And the Walgreen co. is the most recent one that has been chosen, based on which the Proposed valuation of the Shoppers is made hereunder (Cundill, Smart, & Wilson, 2017).

Based on   Implied TEV/LTM revenue ratio

Implied TEV/LTM revenue =0.6X

Value of the shoppers

TEV= LTM revenue*0.6

=$10782*0.6

=$6469.2 million

Based on Implied TEV/ EBITDA ratio

Implied TEV/ EBITDA ratio = 16.4X

TEV= EBITDA*16.4

=$18761.6 million

In the given case the value suggested is $18761.6 million.

Workings:

1. Determination of the offer price for the Shoppers

 Computation of cost of equity of the Shoppers

 = Risk-_free rate of Return+ Beta*Market -Premium

=1.35*.7(5.14)

=4.95%

1. Weighted average cost of capital of the Shoppers

= Cost of equity*total value of equity/Total value of the firm+ After –tax cost of debt* total value of the debt/ Total value of the firm

=4.95%*9202.5/9449.5+3.75%*$247/$9449.5

=4.92%

Calculation of the Market –Risk Premium= Expected rate of return on equity- Risk-free rate

Expected Return on equity= EPS/Current market price

=$2.92/$45

=6.49%

Market -Premium=6.49%-1.35%

=5.14%

Total Value of the firm = Total Value of Equity+ Total value of Long –term debt

=$45*204.5+$247

=$9449.5

After tax cost of debt = 4.99 (1-24.88%)

=3.75%

As it is given in the case study that the financial analyst Kolonel is considering about the various means of financing the scheme of purchase of shoppers by Loblaw either by means of exchange of shares or by means of cash or a combination of the both. For which various factors like degree of leverage is one of the key factors (Kaufmann, 2017). Hence the calculation of the financial leverage and degree of financial leverage was made below which showed that the Loblaw is already a debt-ridden entity, hence the raising of further debt would make it much risky. At the same time the market condition also said that it has sufficient capacity to repay its financial obligations subject to adverse market condition from the standard poor rating of BBB (Johan, 2018).

Answers to Question No. 3

Now the second option left is either to make the public issue for raising the cash or the last option is to issue the shares of the Loblaw to the shareholders of the Shoppers. In this case as the George Weston limited is already holding 63% of the stake of the Loblaw, hence in such a case if it proposes to make the public issue for raising of the requisite cash won’t impact the George Weston Limited’s ownership rights (Sinclair, Leo, & Wright, 2007). Further making private issue shall again increase the stake of the George Weston limited in the Loblaw because of which the Board of the Loblaw shall have to sacrifice its decision-making power totally on the George Weston limited. Because of which it may be difficult in future for it to take further beneficial strategic decision due to the concentration of power in the Hands of the George Weston limited, though already holding a huge amount of ownership (Kang, Yu, & Lee, 2016). Hence it is better to make either the public offering of the shares of the Loblaw for raising cash, but at this point of time the shares of the Loblaw is performing too well. Hence if we consider the issue of the shares to the shareholders of the Shoppers, then there would be very little number of shares to be issued considering the present market price of the Loblaw’s share (Pamela & Tamara, 2013).

After analysing the above, it seems better to issue the shares of the Loblaw to the shareholders of the Shoppers in exchange of the purchase consideration to be paid on them.

Conclusion

From the above discussion it is to be concluded that the process of taking over and the consequent decision making requires the critical analytical thinking on the various aspects before reaching to the final decision. At the same time, it demands the in-depth knowledge of the various financial as well as non-financial aspects to be considered by the decision maker.

References

Abdullah, W., & Said, R. (2017). Religious, Educational Background and Corporate Crime Tolerance by Accounting Professionals. State-of-the-Art Theories and Empirical Evidence, 129-149.

Boghossian, P. (2017). The Socratic method, defeasibility, and doxastic responsibility. Educational Philosophy and Theory, 50(3), 244-253.

Cayon, E., Thorp, S., & Wu, E. (2017). Immunity and infection: Emerging and developed market sovereign spreads over the Global Financial Crisis. Emerging Markets Review.

Charles H, C., Giovanna, M., Dennis M, P., & Robin W, R. (2015). CSR disclosure: the more things change…? Accounting, Auditing & Accountability Journal, 28(1), 14-35.

Coate, C., & Mitschow, M. (2017). Luca Pacioli and the Role of Accounting and Business: Early Lessons in Social Responsibility. 

Cundill, G., Smart, P., & Wilson, H. (2017). Non?financial Shareholder Activism: A Process Model for Influencing Corporate Environmental and Social Performance. International Journal of Management Reviews, 20(2), 606-626.

Johan, S. (2018). The Relationship Between Economic Value Added, Market Value Added And Return On Cost Of Capital In Measuring Corporate Performance. Jurnal Manajemen Bisnis dan Kewirausahaan, 3(1).

Kang, D., Yu, G., & Lee, S. (2016). Disentangling the effect of the employee benefits on the employee productivity. The Journal of Applied Business Research, 32(5), 1447-1458.

Kaufmann, W. (2017). The Problem of Regulatory Unreasonableness (First ed.). New York: Routledge.

Pamela, K., & Tamara, Z. (2013). Attaining legitimacy by employee information in annual reports. Accounting, Auditing & Accountability Journal, 26(7), 1072-1106.

Sinclair, R., Leo, M., & Wright, C. (2007). Benefit System Effects on Employee Benefits Knowledge, Use, and Organizational Commitment. Journal of Business and Pyschology, 20(1), 3-32.