Foxy News (currently trading at $50/share) is considering purchasing its rival P

Question

Foxy News (currently trading at $50/share) is considering purchasing its rival Pulitzer Publications. Both firms currently have 1,000,000 shares outstanding and Pulitzer generates $1,500,000 in free cash flows each year. Foxy estimates that synergies between the two firms would generate another $100,000 each year in free cash flows as well as increase growth in Pulitzer’s business from 5% to 6% each year (the appropriate discount rate for Pulitzer is 10%). Foxy’s management is considering whether to offer straight cash for each share of Pulitzer or whether to offer their target a 40% stake in the combined firm.

If Pulitzer's shareholders are indifferent between a cash purchase and an equity-backed purchase, at what price per share would the shareholders of Pulitzer be indifferent between the two offers?

Explanation / Answer

Value of combined entiry = 90000000

40% of that is 36000000, which will be lower than the fair value as calculated above. Hence it would be better to offer 40% stake

For indifferent price, Pulitzer shareholders should get equal to their Fair value of 40000000 Rs

so it would be 36000000/1000000 = $36 per share

Foxy Pulitzer CMP 50 No of sh 1,000,000 1,000,000 Free cashflow 1,500,000 Synergies 100,000 Growth 6% Discount rate 10% Fair value 50 Cash flow next year/(Ke-g) CF1 Cash flow for next year (1500000+100000) 1,600,000 (Ke-g) Ke - g = 10%-6% 4% MV of Pulitzer 40,000,000 No of shares 1,000,000 Fair value per share 40.00 For cash pay

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