Waysafe Inc. consists of two grocery stores. One store is fairly valued at $30M and the other store, valued at $10M, could be torn down and then the land could be sold for $25M. Waysafe is unwilling to tear down this store and sell the land, however, because the store has been with the business since the beginning. The firm is all-equity and has 1M shares outstanding priced at $40 per share.
Your business, Blair Capital, is interested in purchasing half of the equity of Waysafe so you can tear down the second store and sells its valuable real estate. Your firm is a publicly traded company that has 2M shares outstanding at a price of $100 per share.
a) You announce your intention to purchase this firm using cash. Shareholders are aware of the value you will add to the firm by tearing down the second store and thus will revise the price at which they are willing to sell their shares upward upon hearing the announcement. What is the NPV of your investment?
b) You quietly purchase 10 percent of this firm at the current market price using cash and you then announce your intention to purchase the remaining 40 percent of the firm. What is the NPV of this investment?
c) You announce your intention to purchase 50 percent of this firm by issuing shares of your own firm and paying with those shares. Like in part (a), shareholders will revise the price of their shares upward upon hearing your announcement. What percentage of the firm do you have to sell to obtain 50 percent of Waysafe?
Your firm is also considering an LBO. In the LBO, your firm will issue a tender offer for 50% of the outstanding shares at the current share price and borrow $20M. However, Waysafe management threatens to sign a contract that will make it impossible to sell the underperforming store and will also lower the value of that store by $5M due to a new labor agreement. This contract can be thought of as a poison pill. Management will not sign this contract if you offer a 15 percent premium on the current market price of the shares you plan to buy.
d) Show why you would still prefer to purchase the firm via LBO. That is, show why you still prefer to purchase the firm at the current market price, even with the activation of the poison pill.
e) In part (d), management asked for a 15 percent premium on the current market price. What is the maximum percent premium on the current market price that management would have to ask for so that you no longer want to purchase the firm via the hostile LBO?