Review
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financing_the_acquisition_week_7.docxRunning head: FINANCING THE ACQUISITION 1
FINANCING THE ACQUISITION 5
Financing the Acquisition
The purchase price for Dunkin’ Donut’s to acquire Krispy Kreme is within the range between the maximum of $1,275 million and $322 million for the absolute bare minimum (See Exhibit 6 for calculation). The difference between the two is $952 million. The initial acquisition price Dunkin’ is preparing to offer is $215.6 million. The offer was determined by taking the true value of Krispy Kreme (intrinsic value) and increasing it by the calculated rate of return of 16.5% (See Exhibit 7 for calculation). If this initial offer price is undesirable to Krispy Kreme, Dunkin’ will prepare counter offers.
Another option that is available to the board of Dunkin Donut to fund the merger would be the utilization of share (stock) swaps. The stock swaps would allow for the acquisition to be settled by exercising the option of allowing Krispy Kreme’s shareholders to acquire some stakes in Dunkin Donuts after the takeover occurs. This would allow these shareholders to still be part of the acquiring company and this could be a good mechanism for ensuring that the shareholders of Krispy Kreme agree to the deal to sell their shares to Dunkin. The shares would, thus, be valuated at agreeable figures to both parties and accurate. The accuracy allows for the determination of a fair swap ratio.
*Numbers taken from SEC.gov directly from the 10K of Krispy Kreme.
Krispy Kreme’s Book Value $238 million
Outstanding Liabilities Assumed $85 million
Total Bare Minimum Purchase Price $323 million
Krispy Kreme’s Market Value ($1,275 million)
Max Purchase Price $1,275 million
Difference between Max & Min Price $952 million
Exhibit 7: Rate of Return / Offer Price
Intrinsic Value = $185.1 million (See Exhibit 3)
Rate of Return = rf + b(fm - rf)
Risk free rate (rf) (10 year treasury constant maturity rate) = 2.20%
Beta (b) = 2.69
Market return (fm) = 7.5%
Required rate of return = (2.20% + 2.69(7.5% - 2.20%) = 16.5%
Offer Price
Intrinsic Value * (1 + Rate of Return)
$185.1 million * (1.165) = $215.64 million
Conclusion on Financing of the Acquisition.
Synergies and opportunities will be created when Dunkin’ Donut’s acquires Krispy Kreme. The potential financial benefits that can be achieved through the combination between these two companies are extraordinary. Revenues and share prices will increase, which will make shareholders’ happy. Depreciation expense will increase due to a large increase in assets. The acquisition will create a chain reaction that will drive up the firms’ market and book value. Other benefits directly related to the acquisition of Krispy Kreme by Dunkin’ Donut’s are the cost of reduction of weeding out competitors in the market. Costs will also be reduced because Dunkin’ Donut’s will be able to gain better suppliers and raw materials, as well as better production techniques. The company will also benefit largely from the combined talent of employees and technology.
DD is able meet the asking price that KK shareholders will approve. The company has weathered some difficult business conditions coupled with among other factors increased competition and bad weather. However, the decline is sales has not stopped the revenue growths that the company has experienced. In addition, the increase in profits and per share translates to the company’s ability to match the asking price of Krispy Kreme. DD is definitely bound get value for its premium as KK has lately been very profitable and the acquisition would ensure that the DD has a larger network of stores to work. DD expects to get a large increase in sales volume and revenue too. The company will be able to break-even after the acquisition and make some accounting profits.
20% equity, look into how to issue new stock or stock swaps (week 7)
Stock Swaps:
A stock swap occurs when shareholders' ownership of the target company's shares are exchanged for shares of the acquiring company as part of a merger or acquisition. Stock swaps allow one company to take over another without having to pay cash for the whole operation. This is exactly with Dunkin’ is looking to do in the acquisition of Krispy Kreme. Instead, it uses its own stock as currency. During a stock swap, each company's shares must be accurately valued in order to determine a fair swap ratio.
Swap ratio is an exchange ratio used in case of mergers and acquisitions. It is the ratio in which the acquiring company offers its own shares in exchange for the target company's shares. The difference in their share prices and the number of shares outstanding then have to be factored in, and the acquiring company may need to throw in a little extra to get the target company's board of directors and shareholders to play ball. The result might be a nice clean ratio, such as 2-for-1 or 1-for-3, or it can be a lot more finessed.
Dunkin’ Donut’s currently has shares authorized but now issued and this would be an ideal opportunity to utilize some of those share in acquiring Krispy Kreme. Since a majority of the financing will come from a bond issuance the options for Dunkin’ will be to offer a stock swap with current shareholders of Krispy Kreme stock. This makes the most sense to provide shareholders with the opportunity to acquire shares in Dunkin’ Donut’s and based on the current market price of Krispy Kreme and Dunkin’ Donut’s the swap ratio would be 2.8 : 1. This indicates that shareholders of Krispy Kreme would be offered 1 share of Dunkin’ Donut’s for every 2.8 shares of Krispy Kreme they currently own (See Exhibit 1 for Calculation).
Exhibit 1
*Share price pulled from googlefinance.com
Dunkin’ Donut’s Share price: $51.37
Krispy Kreme Share price: $18.35
Swap ratio: 51.37 / 18.35 = 2.7995 or 2.8
