Macquarie University Finance Report: Watpac Acquisition Analysis

This report provides a comprehensive analysis of the Watpac acquisition by BESIX, focusing on financial valuation and appraisal. It begins with an executive summary that outlines the analysis and findings, including a recommendation regarding the acquisition and concerns arising from the appraisal. The report then delves into the valuation appraisal, discussing the methodologies used, such as the perpetuity model and EBITA multiplier, and the application of these methods to the case. It also assesses the offer made by BESIX, considering the ASX Settlement Operating Rules and the implications of the takeover bid. The report examines market capitalization, EBITA multiples, and the potential benefits of the acquisition, such as increased market share and access to resources. The analysis highlights the importance of considering the tax positions of shareholders and the limitations of valuation techniques, particularly the availability of detailed segment-specific data. Overall, the report offers a detailed financial perspective on the Watpac acquisition, providing valuable insights into the valuation process and the potential outcomes for stakeholders.

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Name of the Student
Name of the University
Author Note

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Table of Contents
Part 1: Executive Summary........................................................................................................2
Summary of analysis and findings.........................................................................................2
Recommendation....................................................................................................................3
Concern arising from appraisal..............................................................................................3
Part 2: Valuation Appraisal........................................................................................................4
Part 3: Assessment of Offer.......................................................................................................5
References..................................................................................................................................6
Appendix....................................................................................................................................8

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Part 1: Executive Summary
Summary of analysis and findings
The off market offer that has been made are related upon the agreement that has been
done mutually and if there is some stock exchange that is involved. Watpac Limited has come
into an agreement with the BESIX Group SA, that they are taking all the shares from them
(Grant 2017). Thus, through this acquisition, both of them will have common directors
though that is the basic requirement in obtaining the IER. All the decisions will be made are
based on the shareholders and after the evaluation it can be seen that it will be beneficial for
the shareholders if the acquisition is beingdone(Peters 2016). From the annual report, it can
be observed that the underlying EBITA has been reduced from $36 million in the financial
year 2014 to $11.8 million in the financial year 2016. It has been decreased as there has been
reduction in the earnings that has been derived from the segment of Civil & Mining, and
there were certain challenging things in the resource industry, also there has been reduction in
the in the iron ore industry(Sharma et al. 2019).
BESIX acquired Watpac in the period of April and May 2013, which has been done
after the agreements upon the purchase of an interest of 15.6 %, which is from the major
Watpac shareholder (Im et al. 2018). In the next phase, BESIX does acquire all the shares of
Watpac that does increase the shareholding to 19%. Thus, the interest has also increased by
9% that will increase the current shareholding to 28.1%.
From the Watpac shareholders, it can be seen that it can be seen that the proportional
nature of the scheme, has an issue for some of the Watpac shareholders, which has been
considered as the scheme. In addressing the feedback, it has been there has been several
conclusion, previously reached by the inde pendent expert that considered the Scheme,

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BESIX is now proposing to acquire 100% of the Watpac Shares it does not already own by
way of an unconditional all-cash off-market takeover bid for the same consideration as was
offered under the Scheme.
Three potential sources of synergic benefit to the company are the market share that
the acquiring company can gain, access to the resources of the target company and the
management and the skilled manpower of the company.
Recommendation
BESIX plans to make a purchase of all the shares which are held outstanding at a
value of A$0.92 each share in cash which is a price of acquisition, showing a value of about
A$ 123m and a total EV value for Watpac ofaround A$149m. The bid purchased at A$0.92
per share in cash demonstrates premium of 38.8% on the price of weighted average share at a
period of more than one month. This becomes an interesting result of the shareholders of
Watpac since the bid is showing aimportant premium to the share priceWatpac and improves
the calibration. In addition, it ultimately creates an opportunity for the Watpacresulting in
aspect of growth on the trust of BESIX enlarging experience and expertise globally. It will
ensure the long-term success of the Watpac.
Moreover, the offeracceptance based on the tax position of the shareholders of
Watpac,depends on the situation of an individual investor. Hence, it becomes important to go
through the target statement.
Concern arising from appraisal
From the above valuation and appraisal of the acquisition proposal, it can be observed
that the acquisition of the Watpac would cause a synergic benefit to the BESIX and it will
increase the value of the combined business. As the target company is already having an
established market and efficient operations, the company can gain an access to the resources

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and market share of the company. Hence, there will be some benefits in the monetary form as
well as in the non monetary forms to the acquiring company. From the appraisal techniques
as applied, it can be observed that the valuation techniques used by the company for the
construction segment only. It becomes difficult for an individual to make valuation of a
particular segment of the business as all the required information for such valutioan are not
sperately available for the target segment of the compay in the annual report. Hence, the main
concern arising from the appraisal is that the compariason of such valutation with the real
data.
Part 2: Valuation Appraisal
In addressing the critique of the approaches, which has found in several academic
journals, there are certain protocols that have been followed upon studying the impact of the
special issue of the Accounting History (Nissim 2017). There are several arguments that can
be found upon this approach, which has been seen at the time of research, key constructs and
methodology. It can be also seen, in the cross-cultural accounting research there are several
critics through the literature review (Mercer 2016). In using the perpetuity model using the
EBITA multiplier, in the analysis of the Discounted Cash Flow (DCF) neither the perpetuity
growth model nor the exit multiple approacheswill be renderedas the perfect, accurate
estimate of terminal value (Sui 2017). There are choices at the time of evaluating the terminal
value, which will depend upon the wishes of the investor, and at the time of more optimistic
estimate or in conservative estimate.
In measuring the operating profit of the organization,it can be found through the
EBIDTA margin. There is also some alternative that are used at the time of evaluation,
though for the easy calculation and in finding the operating profitability the EBITA is divided
by the total revenue, which will be resulted in operating profitability.

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In the analysis part, analysis of multiples of different companies has been done where
those companies are compared to the Watpac’s construction business. Most companies have
high EV value than the Watpac. The nature of their operations and the relevant fields where
they offer their service made the listed companies to earn a high amount of profit margins as
compared to the construction business. This high amount of profit margin of the listed
companies depicts that those companies are most able to incur the losses on contracts of an
individual when they arise. However, small profit margin gives restricted margin for errors in
the course of tender errors or project cost overruns as supported by the decreased profit
margins in recent years.
Stand-alone approach is usually used for the cost allocation method, which is been
used by various entities for the cost allocation. The standalone products that has been made
are based on the valuation of several components or in several segments in the
business(Binder and Högsdal 2017).Through this analysis it can be understood the self-
contained earning power of an organization through the incorporated revenue and costs that is
been directly associated by the units. It is also very crucial for the management and for them
those who are investing money i.e. the investors and analysts. In finding the overhead costs, it
has been done related to the cost object (Verriest, Bouwens and De 2018). The valuation
method that has been used by the organizations are upon the market value, and upon the
controlling interest basis which will be based upon the sum-of-parts approach. There are
certain divisions, whichhas been doneupon the market value, which has been added in the
value of surplus assets.
Part 3: Assessment of Offer
In accepting the offer, which been given to the Watpac by BESIX; there are certain
rules and valuation. All the things that are been stated are based upon the ASX Settlement

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Operating Rules which will be stated before the offer period. The base valuation is being
done for the determination of the assumptions that has been made from the project team,
which is to be likely occurred (Ehrhardt and Brigham 2016). Upon the analysis, the number
of share that are involved in merger and acquisition are 1, 84,005 and 1, 86,030. The market
price for the shares has been $0.70 and $0.56. Thus, the market capitalization resulted in $1,
28,804 and $1, 04,177. As Watpac is an ASX listed organization,which does has operations
and acts as the contractor in the construction business, civil engineering and mining. The
BESIX is European based construction company and a major shareholder in WTP.
The EBITA which is been evaluated is through the addition of the impaired expenses
with the profit before tax and after that deduction of the finance income. The market
capitalization which is been evaluated is through the multiplication of the number of shares
and the market price per share. Thus, the market capitalization resulted in the $ 1, 28,804 and
$ 1, 04,177. Upon adding the value of debt in the market capitalization, in adding the value of
debt and in deduction of the cash and cash equivalent, then it will resulted in the value of
enterprise. The EBITA multiple does resulted in 0.98 and 0.51.

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References
Binder, C. and Högsdal, N., 2017. EBIT & Co. Controlling & Management Review, 61(2),
pp.58-61.
Ehrhardt, M.C. and Brigham, E.F., 2016. Corporate finance: A focused approach. Cengage
learning.
Grant, D., 2017. Comparing Three Convertible Debt Valuation Models. Business Valuation
Review, 36(1), pp.32-41.
Im, U., Brandt, J., Geels, C., Hansen, K.M., Christensen, J.H., Andersen, M.S., Solazzo, E.,
Kioutsioukis, I., Alyuz, U., Balzarini, A. and Baro, R., 2018. Assessment and economic
valuation of air pollution impacts on human health over Europe and the United States as
calculated by a multi-model ensemble in the framework of AQMEII3. Atmospheric chemistry
and physics, 18(8), p.5967.
Mercer, Z.C., 2016. EBITDA Single-Period Income Capitalization for Business
Valuation. Business Valuation Review, 35(3), pp.86-102.
Nissim, D., 2017. EBITDA, EBITA, or EBIT?. Columbia Business School Research Paper,
(17-71).
Peters, L., 2016. Impact of probability distributions on real options valuation. Journal of
Infrastructure Systems, 22(3), p.04016005.
Sharma, N., Sharma, M.P., Singh, S. and Vyas, B., 2019, July. Methodology for Valuation of
Shunt Capacitor Bank in Power Grid. In 2019 10th International Conference on Computing,
Communication and Networking Technologies (ICCCNT) (pp. 1-7). IEEE.

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Sui, Y., 2017. The Research on the Applications and Limitations of EBITDA. DEStech
Transactions on Environment, Energy and Earth Sciences, (icseep).
Verriest, A., Bouwens, J. and De Kok, T., 2018. The Prevalence and Validity of EBITDA as
a Performance Measure. Available at SSRN 3171131.

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Appendix