Finance: Cash Flow and Oakfield Plc Essay

Submitted By kss8886
Words: 576
Pages: 3

Oakfield plc, has surplus cash balances of £23 million which are currently invested in short term money market deposits. The company is quoted on the London Stock Exchange and the current share price is 785 pence. The Company’s growth is achieved by strategic acquisitions and the surplus cash available now is intended primarily for this purpose. The remit of the company’s acquisition committee is to identify possible acquisition targets, and the most recent recommendation made by the committee is the purchase of Bird plc, a small company listed on the (Alternative Investment Market) AIM. The shares of this company are currently trading at 370 pence. Bird plc operates in a different industry to Oakfield plc. Although Bird.plc is quoted, 50% of its shares are still owned by three directors, who have stated that they might be prepared to recommend the sale of Bird, but they consider that its shares are worth £ 22 million in total.

The acquisition committee have provided the following industry data in support of their recommendation;

Oakfield PLC
Bird PLC

Average P/E ratio
10:1
6:1
Equity Beta
0.95
0.8
Earnings Yield
10.9%
19.2%
Average dividend growth (last 5 years)
7%
8%
Average P/E of companies recently

taken over based upon offer price
12:1
7:1

The following economic data is available;
The current 3 month treasury- bill rate is 6% per annum, and the market rate of return is 14% per annum. The rate of inflation is 2.4 % per annum and is expected to remain at approximately at this level in the near future.

The expected effects of acquisition would be as follows;
Pre-tax advertising and distribution savings of £ 150 000 per year (at current prices) would be possible.
Some land and buildings of Bird plc would be sold for £ 800 000 (after tax).
50 employees of Bird would immediately be made redundant at an after tax cost of £ 1.2 million. Pre-tax annual wage savings, are expected to be
£750 000 (at current prices) for the foreseeable future.
The three existing directors of Mallard would each be paid £ 100 000 per year (not index –linked) for three years for consultancy services.

Summarised financial data:

Oakfield plc Bird plc £ 000’s £ 000’s
Turnover 480 000 38 000
Pre tax operating cash flow 51 000 5 300
Dividend 11 000 842
The tax rate is 33%

Net Fixed Assets 168 000 8 400
Current Assets 135 000 4 700
Current liabilities 99 680 3 900 203 320 9 200
Financed by
Ordinary shares (25 p) 10 000 Bird (10 p) 500
Reserves 158 320 5 200
10% Bank term loan 15 000 recent 11% 3500
12% Debentures 2010…