Corporate

Restructuring,
Mergers and
Acquisitions
ASSIGNMENT (INTERNAL TEST)

Sneha
746
Q1. Examine any M&A case from India happened during 2019-20 with respect to the following:

a. Motivation for the acquisition

Ans. I have taken the case of acquisition of Ruchi Soya by Patanjali. Patanjali Ayurved completed its
acquisition of Ruchi Soya in December 2019 for Rs.4,350 crore.

Patanjali is a consumer goods manufacturing company. It diversified its products under this
category. These include Health Care, Skin Care, Ayurveda, Food and Home Care products.

Nutrela, a product of Ruchi Soya, is one of the largest selling soya foods brand. It has greater than
50% market share. Other than Nutrela, Ruchi Soya has approximately 110,000 hectares of palm oil
plantations in various parts of the country.

Patanjali Ayurveda already had an association with Ruchi Soya for edible oil refining and packaging.
It aims to be a major player in edible oil segment, particularly soya bean oil. It wants to work for
farmers’ benefits too.

With this acquisition, Patanjali will acquire access to a strong portfolio of mass-market edible-oil
brands, a ready-made set-up of manufacturing plants and soyabean oil brands like Mahakosh and
Ruchi Gold.

This acquisition had taken place as Ruchi Soya was going through Insolvency procedure under
Insolvency and Bankruptcy Code. Out of the Rs 4,350 crore offered by Patanjali, Rs 4,235 crore was
utilised to pay creditors whereas Rs 115 crore was used for capital expenditure and working capital
requirements of Ruchi Soya.

With Ruchi Soya, Patanjali Ayurveda looks to take on HUL, and is eager to surpass the FMCG major’s
turnover in 3-4 years, by adding a stimulus to their growth trajectory.

b. Determination of value of both the companies pre- and post-merger.

Ans. To determine the value of both the companies, we will have to look at the Discounted Cash
Flow of both the companies, for which we need to find its cost of capital.

PARTICULARS RUCHI SOYA

Risk Free Rate 6%
Tax Rate 25%

Credit Spread 14%

Synthetic Rating D
Cost of Debt [(Rf + Credit Spread) (1 - t)] 15%

Beta 1.06
Risk Premium 4%
Cost of Equity [Rf + Beta (Rm – Rf)] 10.24%

Cost of Capital 25.24%

 PARTICULARS PATANJALI
Risk Free Rate 6%
Tax Rate 25%

Credit Spread 2%
Synthetic Rating A-
Cost of Debt [(Rf + Credit Spread) (1 - t)] 6%

Beta 1.05
Risk Premium 4%
Cost of Equity [Rf + Beta (Rm – Rf)] 10.20%

Cost of Capital 16.20%

Pre-Acquisition Value – Ruchi Soya

Years EBIT (1-t) Reinvestment Reinvestment FCFF PV

(In Rs. Crores) Rate (In Rs. Crores) (In Rs. Crores)
(Mar 2019) 1 61.20 20% 12.24 48.96 ₹ 39.09
2 85.68 20% 17.14 68.54 ₹ 43.70
3 102.82 20% 20.56 82.25 ₹ 41.87
4 123.38 20% 24.68 98.70 ₹ 40.12
5 135.72 20% 27.14 108.57 ₹ 35.24
6 149.29 40% 59.72 89.57
Terminal Value 391.86 ₹ 127.18
Value of the firm (Sum) ₹ 327.20

Pre-Acquisition Value – Patanjali

Years EBIT (1-t) Reinvestment Reinvestment FCFF PV

(In Rs. Crores) Rate (In Rs. Crores) (In Rs. Crores)
(Mar 2019) 1 937.13 40% 374.85 562.28 ₹ 483.89
2 972.38 40% 388.95 583.43 ₹ 432.09
3 1008.79 40% 403.52 605.28 ₹ 385.78
4 1046.39 40% 418.56 627.83 ₹ 344.37
5 1085.21 40% 434.08 651.13 ₹ 307.35
6 1125.29 60% 675.17 450.11
Terminal Value 4892.54 ₹ 2,309.42
Value of the firm (Sum) ₹ 4,262.89
 Post-Acquisition Value – Ruchi Soya

Years EBIT (1-t) Reinvestment Reinvestment FCFF PV

(In Rs. Crores) Rate (In Rs. Crores) (In Rs. Crores)
(Mar 2020) 1 90.00 20% 18 72.00 ₹ 57.49
2 126.00 20% 25.20 100.80 ₹ 64.26
3 151.20 20% 30.24 120.96 ₹ 61.58
4 181.44 20% 36.29 145.15 ₹ 59.00
5 199.58 20% 39.92 159.67 ₹ 51.82
6 219.54 40% 87.82 131.73
Terminal Value 576.25 ₹ 187.02
Value of the firm (Sum) ₹ 481.17

Post-Acquisition – Patanjali

Years EBIT (1-t) Reinvestment Reinvestment FCFF PV

(In Rs. Crores) Rate (In Rs. Crores) (In Rs. Crores)
(Mar 2020) 1 1462.50 40% 585 877.50 ₹ 755.16
2 2074.80 40% 829.92 1244.88 ₹ 921.97
3 2732.73 40% 1093.09 1639.64 ₹ 1,045.03
4 3321.86 40% 1328.75 1993.12 ₹ 1,093.22
5 4037.34 40% 1614.94 2422.41 ₹ 1,143.45
6 4906.14 60% 2943.68 1962.46
Terminal Value 47478.71 ₹ 22,411.36
Value of the firm (Sum) ₹ 27,370.20
 c. Calculation of Synergy Valuation

Financial Synergy Ruchi Soya Patanjali Combined

Valuation
Risk-Free Rate 6.000%
Risk Premium 4.000%

Beta 1.06 1.05 1.05

Pre-tax Cost of Debt 20.0% 8.0% 8.6%

Tax rate 25.0% 25.0% 25.0%
Debt/Capital ratio 22.1% 39.0% 38.2%

Revenues 12,683.1 8,330.0 21,013.1

EBIT 84.0 1,250.0 1,334.0

Pre-tax return on capital 3.0% 8.4% 8.1%

Reinvestment Rate 20.0% 40.0% 39.1%

Length of growth period 5 5 5

Output
Cost of Equity 10.24% 10.2% 10.2%
After-tax cost of debt 15.0% 6.0% 6.4%
Cost of capital 11.3% 8.6% 8.8%

After-tax return on capital 2.2% 6.3% 6.1%

Reinvestment rate 20.0% 40.0% 39.1%
Expected growth rate 0.4% 2.5% 2.4%
Value of firm

PV of FCFF in high growth 187 2,376 2,553

Terminal value 605 13,145 12,858

Enterprise value 541 11,093 11,004

Value of Synergies
Value of firms (standalone) 11,634.5
Value of firms (combined) 11,004.1
Value of synergy (630.4)

The assumptions taken to solve parts b and c are as follows:-

 1. Beta of Patanjali has been taken by calculating the average beta of the industry, since
Patanjali is not listed.
2. Since the annual report of Ruchi Soya was not available after Mar., 2019, the numbers are
projected and/or assumed or taken average of the industry.
3. The reinvestment rate has been assumed accordingly.
4. Patanjali’s Annual report could not be found. From the turnover and other information
available from newspapers. The rest of the information is assumed.

d. Impact of the merger on overall industry

With the acquisition of Ruchi Soya, Patanjali has not only acquired Nutrela but also Mahakosh and
other well-known brands of Ruchi Soya. After the acquisition, share price of Ruchi Soya is touching
the new heights. The economy currently is going through recession in which most of the companies
are facing heavy losses due to the national lockdown. However, consumer retail food industry is
making profits. In such a situation, acquisition of Ruchi Soya is making Patanjali lots of profits.

The aim of Patanjali is to beat Hindustan Unilever Ltd. – India’s fast-moving consumer goods maker –
in terms of turnover. This would help Patanjali gain a huge market share in the industry and create a
great competitive situation for other companies in the industry.

Q2. Write short notes on the followings:

a. LBOs –

LBOs refer to Leveraged BuyOut. An LBO is the acquisition of another company using a substantial
amount of borrowed money to meet the cost of acquisition. The assets of the company being
acquired are often used as collateral for the loans, along with the assets of the acquiring company.

LBOs are conducted for three main reasons.

1. To take a public company private
2. To spin-off a portion of an existing business by selling it
3. To transfer private property, as is the case with a change in small business ownership.

However, it is usually a requirement that the acquired company or entity, in each scenario, is
profitable and growing.

For example, the case taken above, of Ruchi Soya and Patanjali is an LBO.

One of the largest LBOs on record was the acquisition of Hospital Corporation of America (HCA) by
Kohlberg Kravis Roberts & Co. (KKR), Bain & Co., and Merrill Lynch in 2006. The three companies
paid around $33 billion for the acquisition of HCA.

Summary of Steps in a Leveraged Buyout:

1. Build a financial forecast for the target company
2. Link the three financial statements and calculate the free cash flow of the business
3. Create the interest and debt schedules
4. Model the credit metrics to see how much leverage the transaction can handle
5. Calculate the free cash flow to the Sponsor (typically a private equity firm)
6. Determine the Internal Rate of Return (IRR) for the Sponsor
7. Perform sensitivity analysis

b. Join Venture –

Joint Venture is a business contract in which two or more than two organizations or parties share the
ownership, expenditure, return on investments, profit, governance, etc. To gain a constructive synergy
from their competitors. Various organizations expand either by infusing more capital or by the medium
of Joint Ventures with organizations.

Joint Venture can be better understood through its characteristics: -

1. A joint venture is entered between two or more parties to extract the qualities of each other and
create synergy.

2. Two or more parties pool their resources for the purpose of accomplishing a specific task.
3. A joint venture can take advantage of the combined resources of both companies to achieve
the goal of the venture.
4. They use economies of scale for lesser cost occurrence and greater revenue generation.

c. Buyback of Shares –

Buyback of shares refer to the repurchasing of shares of stock by the company that issued them. A
buyback occurs when the issuing company pays shareholders the market value per share and re-
absorbs that portion of its ownership that was previously distributed among public and private
investors.

With stock/share buybacks, the company can purchase the stock on the open market or from its
shareholders directly. In recent decades, share buybacks have overtaken dividends as a preferred
way to return cash to shareholders. Though smaller companies may choose to exercise buybacks,
blue-chip companies are much more likely to do so because of the cost involved.

Since companies raise equity capital through the sale of common and preferred shares, it may seem
counter-intuitive that a business might choose to give that money back. However, there are
numerous reasons why it may be beneficial to a company to repurchase its shares, including
ownership consolidation, undervaluation, and boosting its key financial ratios.

d. Delisting of equity shares –

As per SEBI (Delisting of Equity Shares) Regulations, 2009, delisting of security means the removal of
listed security from the stock exchange platform and thus no longer be traded on the bourse (stock
market). This usually takes place when a company ceases operations, declares bankruptcy, merges,
does not meet listing requirements, or seeks to become private. Also, due to heavy legal compliance
load and cost related to it, the companies resort to the delisting of shares.

The SEBI (Delisting of Equity Shares) Regulations, 2009 contains the provisions applicable to the
delisting of equity shares in India. The provisions of these regulations shall apply to the delisting of
equity shares from all or any of the recognized stock exchanges where such shares are listed but
these shall not apply to any delisting made pursuance to a scheme sanctioned by the National
Company Law Tribunal (NCLT) under IBC, 2016, if such revival scheme –

1. Lays down the specific procedure to complete delisting; or

2. Provides the exit option to the existing public shareholders at a specified rate.

A stock exchange shall not permit delisting in following circumstances:

1. Pursuant to buyback of equity shares by the company; or

2. Pursuant to a preferential allotment made by the company; or
3. Unless a period of three years has been elapsed since the listing of that class of equity shares on
any recognized stock exchange; or
4. If the instrument issued by the company which are convertible into the same class of equity
shares that are sought to be delisted are outstanding.

Voluntary delisting means delisting of equity share of a company voluntarily on the application of
the company. Subject to the provisions of the regulations, a company may delist its equity shares
from all the recognized stock exchange where they are listed but after providing the exit opportunity
to the public shareholders if that stock exchange has nationwide trading terminals like NSE and BSE.
If equity shares of a company remain listed on any recognized stock exchange but delist from other
stock exchange like Calcutta stock exchange than there is no requirement of giving exit opportunity.

e. Tender Offer –

It is a type of public takeover bid, a public, open offer or invitation (usually announced in a
newspaper advertisement) by a prospective acquirer to all stockholders of a publicly traded
corporation (the target corporation) to tender their stock for sale at a specified price during a
specified time, subject to the tendering of a minimum and maximum number of shares. In a tender
offer, the bidder contacts shareholders directly; the directors of the company may or may not have
endorsed the tender offer proposal.

To induce the shareholders of the target company to sell, the acquirer's offer price is usually at a
premium over the current market price of the target company's shares.

For example, if a target corporation's stock were trading at Rs.100 per share, an acquirer might offer
Rs.115 per share to shareholders on the condition that 51% of shareholders agree. Cash or securities
may be offered to the target company's shareholders, although a tender offer in which securities are
offered as consideration is generally referred to as an "exchange offer."

A tender offer often occurs when an investor proposes buying shares from every shareholder of a
publicly traded company for a certain price at a certain time. The investor normally offers a higher
price per share than the company’s stock price, providing shareholders a greater incentive to sell
their shares.

Q3. Distinguish between DCF, FCFE and FCFF with the help of an example.

Discounted cash flow (DCF) valuation views the intrinsic value of a security as the present value of its
expected future cash flows. When applied to dividends, the DCF model is the discounted dividend
approach or dividend discount model (DDM). This reading extends DCF analysis to value a company
 and its equity securities by valuing free cash flow to the firm (FCFF) and free cash flow to equity
(FCFE). Whereas dividends are the cash flows actually paid to stockholders, free cash flows are the
cash flows available for distribution to shareholders.
Free Cash Flow
Free Cash Flow FCFF = EBIT (1- t) + Depreciation + Amortization –
to the Firm
to Equity (FCFE)
(FCFF) Change in Non- Cash Working Capital – Capital
Expenditure
= Cash flow = Cash flow Where,
available to available to
EBIT = Earnings before income tax

Common Common t = Corporate tax rates

Stockholders Stockholders FCFE = Net Income + Depreciation + Amortization –
Change in Non- Cash Working Capital

Debtholders *(1-D) – Capital Expenditure*(1-D)

Where,

D = Debt ratio
Preferred
Stockholders DCF = CF1/(1+r)1 + CF2/(1+r)2 + CFn/(1+r)n

where:

• CF = the cash flow for the given year. CF1 is for year one, CF2 is for year two, CFn is for
additional years

• r = the discount rate

Example:
Assume Working capital investment = 20, fixed capital investment =0 and debt repayments = 4

Sales 100
- Operating Expense 20
EBITDA 80
- Depreciation 20
EBIT 60
- Interest 20
PBT 40
- Tax (@30%) 12
PAT 28

FCFF = Net Income + Non-cash expenses – working capital investment + Interest (1-T) – fixed cost
investment

FCFF = 28 + 20 – 20 + 20(1-0.3) - 0
= 42

FCFE= FCFF – interest (1-T) – principal repayments or debt repayments

FCFE= 42- 20(1-0.3) – 4

=24
REFERENCE –

1. Money Control Website

2. Annual report of Ruchi Soya
3. Mint
4. Investopedia