I would recommend financial strategies # 2 - $100 million purchase price funded by 100% debt. (This is before I did free cash flow forecast for # 9). It will provide the highest tax shield of $17.49 million for CPP. In addition, Pinkerton has the highest value of $107.34 million under this strategy.
Below is the balance sheet after CPP and Pinkerton acquisition. * CPP market value leverage ratio is 7.46% and book value leverage is 14.69% before acquisition. * After acquisition, with $75 million debts, the market value leverage ratio is 52.99% and the book value leverage ratio is 64.49%. * After acquisition, with 100 million debts, the market value leverage ratio is 69.95% and the book value leverage ratio is 85.14%.
Below is the transaction of loss equity. CPP receives $25 million from the bank but gives up $32.58 million to the bank for the promised 45% equity after acquisition. The cost of doing equity issue is $7.58 million. Equity Issue with $ 75 million debt|
Value of Combined CPP| 147.4|
Minus Long term debt| 75|
Minus 45% to banks| 32.58|
CPP receive| 25|
From the expected cash flow table below, CPP has extra free cash flow by financing $75 million debt compare to financing $100 million. Both strategies provide positive free cash flow for the next five years.
From the Pessimistic cash flow table below, CPP has more cash flow by financing $75 million debt compare to financing $100 million. $75 million debt strategy provides positive cash flow for the next five years. On the other hand, $ 100 million debt financing will lead to negative cash flow on the fourth and fifth year.
* I would recommend Tom Wathen to bid on Pinkerton. The acquisition with Pinkerton will create synergy and bring incremental free cash flow to CPP. According to the valuation, the value of CPP is about $ 41.53 million and the value after acquisition will increase to $147...