Is the bid of $450 million from RRR sufficient in the acquisition of PSC?
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 ...view middle of the document...
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 the company of $50 million. This could potentially devastate the company; however, looking at the forecasts for future EBIT it can be seen that PSC’s revenues are growing at a constant rate and it is unlikely financial distress will occur. The estimated growth rate applied in the forecasts is reasonable due to the risk of competing vessel disappearing, the overall reduction in operating costs and PSC having the highest percentage total allowable catch. RRR plan to finance the acquisition of PSC using a substantial amount of debt is not going to hurt the chances of RRR winning the bid.
Hedging is good for the shareholders. In this case, hedging protects investors against currency fluctuations. It allows the returns for the investment to be derived from the performance of the company invested in and not from the value of the home currency relative to the foreign currency. To mitigate the currency exposure, PSC can accept and work in US dollar. The types of hedges used in the case are forward contracts. PSC can also consider the use of futures contract, currency options, or currency swaps.