Financial Management Report

This report analyzes the financial statements of PPHE and Andrew Brown-sword Hotels Limited, comparing their financial performance, calculating the cost of capital for PPHE, and determining the purchase consideration payable for acquiring ABH. It also examines the impact of the acquisition on PPHE's financial statements and share price movements.

Financial
Management

Executive Summary
This report summarizes financial report of two companies PPHE, the Dutch based hotel
group, and Andrew Brown-sword Hotels Limited. As financing is one of the most important part
for any business to survive it help mangers to expand their operations and in order to do so
financial management plays an important role as it shows the current position of company. This
report also show detailed analysis of financial statements of both companies. This report
summarized the cost of capital to determine the value and price per share of Andrew Brown-
sword Hotels Limited.

Table of Contents
Executive Summary.........................................................................................................................2
INTRODUCTION...........................................................................................................................1
Overview................................................................................................................................1
Andrew Brown-sword Hotels Limited...................................................................................1
1) Comparative Analysis of Financial Statements.................................................................2
Comparison between PPHE and Intercontinental Hotels Group PLC...................................2
2) Cost of Capital....................................................................................................................3
3. Calculation of purchase consideration payable by PPHE to acquire ABH:.......................5
4. Calculate the likely impact on the financial statements of PPHE following the purchase of
ABH........................................................................................................................................6
5. Share price movements of PPHE.......................................................................................6
CONCLUSION................................................................................................................................8
REFERENCES................................................................................................................................9
APPENDIX....................................................................................................................................10

INTRODUCTION
Financial management is a kind of process which is related to controlling, managing and
directing the all financial activities in a way which is suitable for the organisations (Renz, 2016).
This helps the companies in allocating the fund into different activities. Eventually, it plays a
crucial role in improving the financial position and for this purpose it includes various
calculations like ratio analysis, portfolio of different financial products etc. To understand in
broad sense about the financial report two companies: PPHE and Andrew Brown-sword hotels
limited company are selected. PPHE is an international hospitality estate group. It was founded
in 1989 and its headquarter is in Netherlands. On the other Andrew Brown-sword hotels limited
is Canterbury, Chester and Manchester. This company is involved in providing hospitality
services. It was established in 2003.
Overview
PPHE hotel group
PPHE hotel group is a Dutch based hospitality real estate group which works
internationally with a portfolio of 1.6 billion with a long leasehold assets and freehold in
Europe's resort destinations, urban markets and in leading cities. They also have an exclusive
licence from one of the world's largest hotel group, Radisson Hotel Group, under which they
expanded their business in Middle East and Africa and developed Park Plaza Hotel & Resorts.
They also have controlling ownership interest in one of Croatia,s premier hospitality companies,
Arena Hospitality Group that gives them a strong hold in Istrian Peninsula. It offers various
hospitality services in five different countries, its property portfolio includes 46 properties
offering approx 8800 rooms, 6000 mobile homes and campsite pitches in eight different
campsites.
Andrew Brown-sword Hotels Limited
Andrew Brown-sword Hotels Limited was incorporated in year 2003 on 8th of September.
It is one of the leading hotel industries in UK the headquartered office is located in Bath,
Somerset. They have various offerings in the hotel industries to provide best in class comfort and
care in their hospitality, it offers various properties some of the offering offered by them is the
Gidleigh Park which provide the sublime food and wine with their exceptional service in
Chagford, Devon, The Bath Priory which is located in a heart of bustling city in Bath, Somerset,
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Amberley Castle a retreat of the medieval age in an idyllic corner of countryside located in Nr.
Arundel, West Sussex, they provide many similar hotel across the different part of the country
with their exceptional service and food.
1) Comparative Analysis of Financial Statements
Financial statements: Financial statements are the statements which show actual
financial position of the company (Michalski, 2012). It help mangers to see and compare their
financial position with their competitors and also to check their growth. It gives a clear image of
company's ability to grow and expand. Managers uses this information to create new strategies
and achieve the competitive advantage over their competitors.
Comparison between PPHE and Intercontinental Hotels Group PLC
Intercontinental Hotels Group PLC is one of the close competitor of PPHE group of
hotels financial statements of both the hotel groups shows that revenue generated by the
Intercontinental Hotel group in year 2017 was 1784 million whereas the revenue generated by
the PPHE group of hotels in year 2017 was recorded at 325 million, in compared of revenue
generation the Intercontinental group is doing very well in the market. To compare both the
groups the key ratios are taken in to consideration such as the liquidity ratio. The current ratio of
the intercontinental group is 0.64 which shows the ability to pay off its current liabilities with
their current ratio it shows that the company,s ability to pay off its current liabilities is not that
good, whereas the current ratio of PPHE is marked at 3.44 which states that company's ability to
pay off his current liabilities is remarkably good and the company can easily pay off its liabilities
at any point of time. The quick ratio shows ability of the company to convert is current assets
into cash within one year, quick ratio of PPHE is at 3.02 which means the company can easily
convert its assets into cash whereas in the case of Intercontinental quick ratio is marked as 0.51
which states that the company is in a difficult position to convert its current assets to cash to set
off its liabilities.
In IHG there is no financial leverage and debt equity ratio is not applicable which shows
the company does not any debts to find out debt equity ratio whereas in the case of PPHE the
financial leverage ratio is recorded at 4.49 it shows that how much financial leverage is available
with it and debt equity ratio of PPHE group is recorded at 0.56 it show the capability of the
shareholder fund to set of available different debts owed by this group. To find which company
is more efficient, efficiency ratio is considered. The receivables turnover ratio of PPHE is
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rerecorded at 25.04 which show that company is considering credit sales and receivables are
paying their amount due to company on time which shows efficiency of this group, whereas IHG
marked its receivables turnover ratio at 4.35 showing its efficiency. Inventory turnover is
recorded at 202.67 whereas of PPHE group is at 53.81.
2) Cost of Capital
Cost of Capital: Cost of capital is a metric which is used by internal management to see
that a capital which a company is investing in is worth it or not (Zietlow and et. al, 2018). In this
company uses a weighted average of company's cost of equity and it cost of capital. Cost of
Capital refers to the required rate of return that a company must have in order to implement a
capital budgeting project successfully. In context of the given scenario, PPHE wants to acquire
Andrew Brownsword Hotel. For this purpose the company wants to ascertain the cost of capital
in order to discount future cash flows so as to ascertain the fair value for such move. For this
purpose the company can use a discounting rate equivalent to the weighted average cost of
capital. The discounting rate must fulfil two criteria viz. It should reflect the effect of time value
of money as well as risk attached to the investment project. The Weighted Average cost of
capital ascertained in order to discount the cash flows ,as per the calculations provided in
Appendices [1] Section, comes to 3% equivalent to the average cost of debt.
Following is the proportions of equity and debts in PPHE's capital structure:
The company has raised its capital from various sources, debts are owed from various sources
and raised its capital from equity. The description of the company's capital is as followed.
Company owes a debts of 627.8 million in the form of debentures which are redeemable
after 5 years and debts which are for less than 5 years are stated at 69.5 million, company also
owes a debts in cash of 217.7 million apart from these other debts company also owes a debts of
479.6 million to bank. Along with these above mentioned debts company has also raised it
capital from various other sources through issuing the equity share capital. The break up of the
share capital of the company is as followed.
Total capital raised through the issue of equity is stated at 1190.5 million which is further
classified into different groups such as market value restatement, equity attributable to
shareholders, reported, market value restatement of equity attributable to non controlling interest,
and non controlling interest (Andreou, Louca and Panayides, 2014). Company raised its capital
through share premium accounts is reported at 130.061 million, company also paid 3.636 million
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to treasury shares, 23.131 million is raised through foreign currency translation reserve, it also
paid to hedging reserve 0.437 millions, company funded its operation from accumulated earnings
which is reported as 224.363 millions and 373.482 million is generated from attributable equity
holders of parent company. Share issued to non controlling interest contributed 105.050 million
to share capital, from these sources company raised its capital total capital raise through equity
by firm is 478.532 millions. From the above sources company generated its capital from debts
and equity to manage its operations during the year 2018. For its operations company believed in
traditional funding options by raising fund through bank loans against its assets. Company has a
net debt leverage of 28.7% where PPHE shareholder equity is reported at 1048.3 million, total
bank debts is stated at 479.6 million and non controlling interest is at 142.2 million.
Comment:
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Even though PPHE uses a discount rate falling between 11% to 15%, it is important to
ascertain the discount rate using a capital budgeting method such as WACC which involves the
proportionate allocation of market risk by applying appropriate weights to the components
forming capital structure (Fabozzi and Drake, 2010). Thus, giving the valuator an accurate
measure to ascertain the feasibility and acceptability of a proposed project or investment. Hence,
for the proposed acquisition of ABH, the company should use 3% as its discounting rate.
Debt-Equity Structure of PPHE: Looking at the Debt-Equity of the structure, PPHE is
essentially a debt-financed company with its 69% of sources of finance being financial lending
institutions such as Bank whereas only 31% of its working capital requirements are fulfilled by
Equity Finance Sources.
Comment:
As per the Note 15 of Notes to Consolidated Financial Statements provided in Annual
Report of 2018, the company has been having a borrowing majorly falling under fixed interest
rate purview of the non-current liabilities. These especially include debt taken from Banks. A
heavily debt-financed organization such as PPHE will be able to undertake more of expansion
related activities without worrying about dilution of ownership of its shareholders. Hence, in the
case of proposing ABH's acquisition, the company can retain its ownership as well as control
over the operational activities of the hotel it aims to acquire without having to worry about its
investors. Also, the hotel would be able to have greater freedom and flexibility.
Comment on Usefulness, Relevance and Weakness of Using Cost of Capital Figures:
Cost of Capital or WACC, undertaken in the context of given scenario, acts as a hurdle or
discounting rate while evaluating the feasibility of a given investment or project (Lee and et .al,
2014). However it is only relevant for PPHE until and unless the capital structure of the hotel
does not change. This also proves to be a weakness for these capital budgeting techniques as it is
nearly impossible to maintain the same capital structure for PPHE or be it any other organization
as the organizational needs are dynamic in nature and keep on changing with time.
Also, the cost of capital can only reflect the true image if its able to capture time value of
money as well as the risks associated with the given project. It is worthy to note that, cost of
capital figure would be rendered useless if the business discovers a new risk associated with the
project which it had not been able to foresee during the initial stage of proposed project.
3. Calculation of purchase consideration payable by PPHE to acquire ABH:
Purchase consideration is net amount payable by acquirer company to acquiring
company (Chen and Chang, 2012). Most popular and wildly accepted method is net asset
method. Although amount of purchase consideration can be decided by mutual consent and
agreement between them. Following are the major methods to calculate purchase consideration
amount, as follows:
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Net asset method: as per this method amount of Purchase consideration = total net asset of
transferor company.
PC= Aggregate amount of asset – aggregate amount of liabilities
Net payment method: according to this method amount paid to shareholders of transferor
company would be in form of cash, shares or debentures (Akgün and et. al, 2014).
Lump sum method: In this method a Fixed amount is determined and paid by transferee
company to the transferor company. Such method not require any calculation because amount is
determined by mutual consent.
Intrinsic value/ Share exchange method: Under this method amount of Purchase
consideration is calculated by dividing the net asset value of transferor company by price of one
share of transferee company (Jain, Singh and Yadav, 2013).
4. Calculate the likely impact on the financial statements of PPHE following the purchase of
ABH
Here in given case scenario calculation is done as per net asset method. As per this method
net assets of acquired company is considered as purchase consideration to be payable, thus in
order to calculate purchase consideration first net asset is calculated by deducting current
liabilities and provision from total amount of assets. To obtain price per share is to be payable
amount of net purchase consideration is divided by total number of shares of acquiring company.
ABH Limited reported total fixed asset is of 69195285 and current liabilities and provision is of
2951547 and 1625511 respectively, so net purchase consideration payable would be 64618227
and equivalent price per share is 1.005.
5. Share price movements of PPHE
Market share price fluctuation is one of the challenging phase for an organization to
address the requirement of business in ethical manner. The process affect the share price
fluctuation and market position in the stock market (). Transformative investment price and set is
mainly based upon the consolidation and management process that helps in constructing the data
in various form. Transformative venture is set progressively to profit PPHE. Fast approaching
extension in London (c 900 rooms) and broad redesigns ought to bring a stage change in
development opportunity While combination of its Croatian retreat organizations is now
satisfying (twofold digit ascend in room rate in Q3. In the interim, PPHE's Q3 exchanging update
communicated certainty it should keep on overcoming headwinds to live up to its 2016 outcomes
desires. Solid funds are obvious in August's exceptional profit of 100p/share and effective
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lodging refinancing, which underline generous shrouded saves ('reasonable esteem' change of c
1,000p/offer to detailed 803p NAV). The share fluctuation indicates towards changes and
multiplications of both the existing and new shares.
There is an opportunity find out in Croatia share market. PPHE has selected this
particular form of business in more strategic and contingent manner. The profits from the
anticipated £115m improvement spend incorporated into our conjectures may accumulate in full
just past the extent of this audit. For one year from now, the benefit driver remains the new
rooms in London since expenses may be relied upon still to be an issue and the main
consideration of misfortune making Q1 will discourage Croatia. New development activity in
Croatia The proposed improvement of Are naturist, PPHE's recorded Croatian venture, into a
"generous Central and Eastern European relaxation and accommodation organization" is a
conceivably energizing supplement to PPHE's demonstrated spotlight on full-administration
"reasonable extravagance" inns with a decent geographic and visitor blend in European door
urban areas.
Corporate governance: significant changes development and changes was introduced
during the year 2018. A new premium segment of the main market of London Stock Market
initiated for making investor base stronger. New policies and streams were initiated and
improvise related to different sections and benefits for managing the report in different phases.
Creating value for investors and managing the operations also remained consistent for all the
operations and business improvements.
Market efficiency: Efficient share market is the main aspect considered essential in
terms of managing the effective flow of shares (Ahammad and Glaister, 2013). PPHE group has
initiated many partnership operations and businesses and are stable with the growth with
intensified corporation with Radisson hotel group. The unique central reservation system mainly
aligned with the perpetuity of maintaining the effective market position. The position mainly
associated with deploying the changes in various form as group’s interest and performance with
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collective performance. The development in e commerce and distribution analyzed with
managing the flow of violability. Growth can be measurable by analyzing the annual Adjusted
EPS (Pence), it states that shareholders’ earning from operational activities with effective
adjustments. Changes are calculated with 4% of the group’s total and expected average cost was
to keep the real estate in effective form.
CONCLUSION
The above report concise the concept of financial management. It conclude the impact and
results of merger and acquisition done by organisation in various forms. Cost of capital, share
price payable by PPHE for the purchase of Andrew Brown sword Hotels limited cited in various
forms. It is resulted that after acquainting ABH limited the share price and market cap get
increased in London stock market. There is a positive impact reflected after the acquisition of
ABH limited.
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REFERENCES
Books and journals
Renz, D. O., 2016. The Jossey-Bass handbook of nonprofit leadership and management. John
Wiley & Sons.
Zietlow, J., and e.t.all, 2018. Financial management for nonprofit organizations: policies and
practices. John Wiley & Sons.
Michalski, G., 2012. Accounts receivable management in nonprofit organizations. Zeszyty
Teoretyczne Rachunkowości, 68(124), pp.83-96.
Andreou, P. C., Louca, C. and Panayides, P. M., 2014. Corporate governance, financial
management decisions and firm performance: Evidence from the maritime
industry. Transportation Research Part E: Logistics and Transportation Review, 63,
pp.59-78.
Jain, P. K., Singh, S. and Yadav, S. S., 2013. Financial management practices. In An empirical
study of Indian corporates (Vol. 3, pp. 265-278). Springer New Delhi.
Akgün, A. E. and e.t.all, 2014. The mediator role of learning capability and business
innovativeness between total quality management and financial
performance. International Journal of Production Research, 52(3), pp.888-901.
Chen, C. M. and Chang, K. L., 2012. Diversification strategy and financial performance in the
Taiwanese hotel industry. International Journal of Hospitality Management, 31(3),
pp.1030-1032.
Lee, J. J., and e.t.all, 2014. The financial impact of loyalty programs in the hotel industry: A
social exchange theory perspective. Journal of Business Research, 67(10), pp.2139-
2146.
Fabozzi, F. J. and Drake, P. P., 2009. Finance: capital markets, financial management, and
investment management (Vol. 178). John Wiley & Sons.
Ahammad, M. F. and Glaister, K. W., 2013. The pre-acquisition evaluation of target firms and
cross border acquisition performance. International Business Review, 22(5), pp.894-
904.
Malmström, M., Wincent, J. and Johansson, J., 2013. Managing competence acquisition and
financial performance: An empirical study of how small firms use competence
acquisition strategies. Journal of engineering and technology management, 30(4),
pp.327-349.
Hasnan, S., Rahman, R. A. and Mahenthiran, S., 2012. Management motive, weak governance,
earnings management, and fraudulent financial reporting: Malaysian evidence. Journal
of International Accounting Research, 12(1), pp.1-27.
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APPENDIX
1. Calculating Discount Rate using WACC Technique:
Weighted Average Cost of Capital (WACC)
Proposed Dividend for next year 0.35
Current Market Value of Stock 0.1660
Growth in Dividend 45.8%
Cost of Equity 2.57%
Cost of Debt 3.10%
Equity 478542
Debt 1083660
Total Debt 1562202
WACC [(E/V)*Ke + (D/V)*Kd] 0.03%
Note: The values of Proposed Dividend and Growth in Dividend have been extracted
from the annual report of PPHE, precisely from pages 1 ('Our Purpose' Section) Financial
Summary point five and page 56 respectively. Also, values of equity and debt have been
extracted from the consolidated Balance Sheet given on Page 51 of the Annual Report 2018.
Assumptions
Cost of Debt has been assumed to be equivalent to the average cost of bank debt
2. Debt-Equity Structure of PPHE in 2018:
Equity 478542
Debt 1083660
Total Capital 1562202
Equity to Total Capital 31%
Debt to Total Capital 69%
Equity to Total Capital = (478542/ 1562202)*100 = 31%
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Market price fluctuation
Year end Revenue EBITDA PBT EPS DPS EV/EBITDA
12/14 217.0 76 28 68.9 19.0 8.7
12/15 218.7 80 31.8 76.1 20 8.6
12/16e 266.0 85 23.5 51.1 20 10.2
12/17e 318.0 98 28.5 63.3 21 8.6
Calculation of Shares
Fixed Assets
Goodwill 173206
Tangible Assets 43585590
Current Assets
Stock 157346
Debtor 1377585
Investments 16200000
Cash and bank 7701558
Total 69195285
Less:
Current Liabilities 2951547
Provision for liabilities 1625511
Purchase Consideration 64618227
Number of shares 64292008
Price per share 1.005074021
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