International Business Finance: Fenland Foods plc. Acquisition Report

This finance report analyzes the potential acquisition of Fresh Farm Foods Co. by Fenland Foods plc., focusing on financial aspects of international business. The report calculates Weighted Average Cost of Capital (WACC) using both book and market values, and explores the impact of beta on the cost of equity. Capital budgeting techniques, including payback period and Net Present Value (NPV), are applied to evaluate the acquisition's financial viability. The report examines projected cash flows, considering various assumptions and incorporating tax shield benefits. Furthermore, it addresses foreign exchange risks, the impact of currency valuation, and financing alternatives, offering insights into the strategic advantages of the acquisition and financial restructuring options. The report concludes with recommendations based on financial analysis, considering factors such as the corporation tax rate in Ireland versus the UK, and the potential for debt-free financing.

Student’s name

Finance For International Business
Fenland Foods plc. as founded in 1970 with rapid exposure in wholesome organic food and now in the
present scenario directors believe that the long-term success of the company lies in future
diversification and expansion. Merger and Acquisition is an inorganic growth as compare to organic
growth (Internal expansion). However, this shortcut is costly as the acquiring firm has to pay a
premium to the target firm. Management of the acquiring firm has to justify the premium on the
ground of synergy effect. There are various sources of synergy such as: Economic of scale,
avoidance of competition, utilization of surplus fund, Tax shield benefit or complementing
resources. Given the fact: Promoter’s equity is 30%, director with 25% and others-55%. The issue
hereunder is share price trading below their level of one year ago. It means company has shown no
growth and market capitalization is also been reduced per-se. There are different types of merger as
horizontal, vertical or conglomerate merger. In the present scenario, big firm acquiring small firm with
same production process can be provided in horizontal category.
Weighted average cost of capital, is calculated for net present value of business, serve as a
discounting rate. It is companies opportunities cost. It is used to derive future cash flow of the
company. It is minimum rate of the company which produces values to the investor. By
difference, we can say that if the company's returns are less than its weighted average cost of
capital, the company is shedding lower value, presenting that it's a positive investment.
Cost of equity = Risk free rate of return + Beta × (market rate of return – risk free rate of
return)
As per the fact of the data we can calculated Weighted average cost of capital(WACC)
 Cost of capital as per Book value of Fenland Foods plc.
Security Amount % of total %Cost %Return
Equity 1,200,000 0.631579 12.104 7.644338
Preference share 200,000 0.105263 5 0.526316
Debentures 500,000 0.263158 5.53 1.455263
Total 1,900,000 1 9.625917
WACC:- 9.625%

 Cost of capital as per Market value of Fenland Foods plc.
Security Amount % of total %Cost %Return
Equity 1,980,000 0.719176 12.104 8.704575
Preference share 235,000 0.085357 5 0.426784
Debentures 538,150 0.195467 5.53 1.080933
Total 2,753,150 1 10.21229
WACC:- 10.21%
 Cost of capital as per Market value of Fenland Foods plc. using Beta approach for cost of equity
Security Amount % of total %Cost %Return
Equity 1,980,000 0.719176 15.000 10.78764
Preference share 235,000 0.085357 5 0.426784
Debentures 538,150 0.195467 5.53 1.080933
Total 2,753,150 1 12.29536
WACC:- 12.30%
All the workings of WACC and formula applications, Refer working on excel Tab-3
When we use the method of capital budgeting, it is the process where company does the various project
analyses on forecast to check the worth of cost involved. It determine investment in new venture,
expend their operations and to calculate additional benefit for the company.
Various method to aid in the decision making process are : payback period, Profitability index and Net
present value of company.
In the present case, finance director favours a payback period of 5 years. It means it will take 5 years
to recoup the investment outlay. Fresh Farm Foods Co have nominal share capital is €550,000 at
face value of 1 and premium required is 100% of Face value i.e. 1. Total outflow will be at 11, 00,000.
In the following table Projected inflow of fresh farm food co. is calculated:
Year 2021 2022 2023 2024 2025
Sales 870000 974400 1091328 1222287.36 1368961.843
Labour cost 198000 213840 230947 249422.976 269376.8141
Other variable cost 297000 311850 327443 343814.625 361005.3563
Contribution 375000 448710 532938 629049.759 738579.6729
Fixed Cost 130000 136500 143325 150491.25 158015.8125
Profit before Tax 245000 312210 389613 478558.509 580563.8604
Tax Rate 12.50% 12.50% 12.50% 12.50% 12.50%
Profit after tax 214375 273183.75 340912 418738.695 507993.3778
Depreciation 85000 85000 85000 0 0
PAT 299375 358183.75 425912 418738.695 507993.3778
discounting rate 0.905879156 0.820617 0.74338 0.67341233 0.610030197
Future cash flow 271197.5722 293931.69 316614 281983.802 309891.3002
Assumption: it is assumed that fixed cost is includes the depreciation of Fixed asset.
Projected cashflow of fresh farm food co. is calculated:

Year 2021 2022 2023 2024 2025
Sales 870000 974400 1091328 1222287.36 1368961.843
Labour cost 198000 213840 230947 249422.976 269376.8141
Other variable cost 297000 311850 327443 343814.625 361005.3563
Contribution 375000 448710 532938 629049.759 738579.6729
Fixed Cost 130000 136500 143325 150491.25 158015.8125
Profit before Tax 245000 312210 389613 478558.509 580563.8604
Tax Rate 12.50% 12.50% 12.50% 12.50% 12.50%
Profit after tax 214375 273183.75 340912 418738.695 507993.3778
discounting rate 0.89047195 0.7929403 0.70609 0.62875431 0.559888076
Future cash flow 190894.9243 216618.4 240715 263283.759 284419.4351
Note: discount rate used above is WACC of acquiring co. as per market value with beta
Having various assumption on Projected Inflows of Fresh Farm Food co. we have future cashflow of
projected 5 years to define net present value of company. On tab 1 of excel, three different assumption
has been noted and elaborated with formulae.
Fresh Farm Food co.
Assumption Cashoutflow Cash inflow NPV
1 1473618 11,00000 373618
2 1195931 11,00000 95931
3 1095743 11,00000 (4257)
As per the 3rd assumption we have negative NPV, as mentioned above, it is just margin negative. After 3
years, benefit of tax shield on asset will not be available to the company. As compare to 1st and 2nd case
Cash inflow will be more as pound is much more stronger than euro.
A business expansion point of view, it is good to do business with Irish company
 The corporation tax rate in the Republic of Ireland (12.5%) is much lower than the UK
corporation tax(21%).
 There would be no restriction barrier on the transfer of Profits/cash flows to the UK and it
will benefit the company in terms of foreign exchange.
 we can make the debt free company by paying from reserve and surplus account as rate of
interest is very high with the bank.
 Debt and equity ratio is very low i.e.30(160000/550000)
 Company has huge brand value as it have established for 45 years.

 Sales growth is increasing simultaneously and profit after tax shows that it has
tremendously growth after acquisition.
One of the limitation shown in Fresh Farm Foods Co project is labour cost will even higher as those
forecasts may be demanded by the workforce. however, we could look the opportunity as contract
financing for labour.
If we calculate the Net asset value of the company(fresh farm)
Total asset-Total Liability/number of share= 855600/550000= 1.556
NAV is most frequently compared to market capitalization to find undervalued or overvalued
investments.
The Price earnings ratio of Fresh Farm Foods Co has not been provided in the fact of question.
However, two peer publicly owned companies in the same business sector.
Company P/E ratio
Norfolk Foods plc 12
Suffolk Organic plc 8
We can use the average method to calculate the P/E ratio of of Fresh Farm Foods in case it is not
given. However, it is mentioned that Norfolk had grown at a similar rate to Fresh Farm Foods Co.
So, we can take 12 to calculate the P/E ratio of Fresh Farm Foods Co.
Profit After Tax 114650
Share capital 550000
Earnings per share 0.208
P/E ratio 12
MPS 2.5014
Total value of co. 1375800
Note: for all the formulae and explanation, refer Tab 2.
As mentioned above, 1375800 is the highest amount payable to the Fresh Farm Foods co.
2nd point of view:

As mentioned in the question, PAT is given for the period of six months; it means EPS required to be
calculated on the basis of 6 months. Share capital is 5,50,000 for 1 year and 275,000 would be for 6
months. Whereas, EPS is .417, P/E is 12 and MPS is 5. Total value of the company 27,51,600.
Whereas, if we have to check whether given P/E is low or high. With given fact of P/E is 12. it’s not
compared to the competitors P/E or historical P/E of stock from same line of business. We cant
predict it is cheap buy or expensive buy until an unless we don’t have the at least 10-12 peer
company of consumer staples business. As personal point of view, 12 P/E is considered to be good
buy and if we make the debt free company.
At the time of acquisition of another company, there are lot things where fenland have to check
before paying the cash amount. One the method to purchase the farm land co is financial
restructuring; it is done internally with the consent of various stakeholders. In the present case,
acquiring company have strong currency in comparison to target company. Fenland Foods plc
Is regularly providing dividend to its shareholder i.e. 175,000 in 2019 and 162000 in 2018.
(In thousands)
Reserve and surplus(Fenland) Amount
Profit and loss 1393
Bank/Cash 140
Retain earning 451
Total 1984
It shows that acquiring company is rich in cash reserve. If we retain the amount of dividend in the
company 175. Total reserve would be 2159. As per the currency valuation of euro it would become
2504.44(2159*1.16). Therefore, we can consider using the amount of cash reserve for acquisition
purpose.
As mentioned in study, company only 45% promoters and director holding. Share is trading below
par. To capitalize the undervalue of share, company can go for the buy back option to retain or
regain the trust of various stakeholders because company share is trading below their level of one
year ago. It is company strategic device aimed at bringing more equity capital without going for any
additional shares. Companies discloses large free reserves and it can use money to purchase or

takeover shares and other various securities purchasing its own share, can use their funds in a wise
and effective manner.
Provided, Foreign exchange play an important role in Merger and acquisition. The Pound is
considered to be strong currency when it rises in value against euro currencies in the foreign
exchange market. A strengthening pound means it can buy more of a foreign currency than before
and A fenland foods makes exports less competitive and it can easily enter into foreign markets it
creates an incentive while exporting and the pound to euro exchange rate (GBP-EUR) is meanwhile
higher by a margin with trading at 1.16. still we have unclear picture that how much amount of
foreign exchange cash will go through this and as per the fact given in question, bank loan with
fresh farm is 160,000 on which 20% is required to be paid i.e. 32000 and actual flow will be
27586(32000/1.16).
It is considered possible that, as the Irish economy develops further, that mean Euro will become
stronger as exchange rate may also get decrease and effect of fixed cost will decrease there too.
Therefore, even higher wages than those forecasts may be demanded by the workforce will be paid
off easily. a question arouse is that who gains maximum from merger and acquisition when we to judge
in terms of domestic and cross border transactions. A main agenda arouse is at initial stage, can weak
currency sustain with strong currency.
Fresh Farm Foods Co. have nominal face value of €1shares 5,50,000 and the directors have
indicated that they would require a premium of 100% that means 2(1face value+1premium) per
share. So, total amount will 11,00,000(550000*2). So, outflow from Fenland Foods plc. would be
948275. (11,00,000/1.16). at the conclusion, we can suggest that if Fenland Foods plc. borrow loan
from their own country bank only that would be beneficial for the company in terms of payment as
well as tax shield benefit of 21% would be eligible for the company.
There are various key alternatives for financing the purchase
Fenland Foods plc. can invest into the business through bank financing. There are various options
when it sanctions the amount through bank. Examples: cash credit or Term loan. Where in, Cash
credit it helps the company to avail only the amount required in the business against stock
statement provided by the company or trade receivables of company. If look at the balance sheet
of Fenland co. it have
Asset Amount

Stock 216
Debtor 1176
Total 1392
It means company can easily go for the valuation of stocks and debtor. Which are paid with the
operating cycle. It would help the fenland to sanction the loan from their own books and it is very
famous concept in UK for the stock business. Wherein, drawing power would also be in
parameters. Secondly, Mezzanine Lenders, are individual or organization provides loan to the
businesses, they don’t require to have guarantee like traditional banks. Their loan have aspect of
converting debt amount into equity amount. These kind of loan company mainly opt when
company have shortage of fund or going for acquisition of business. This kind of financing increase
the value of stock withheld by existing shareholder but, actually it dilutes the value of stock.
Thereafter, company can go for the option of buyback. Most importantly, it help the company
owners with required capital they need to take over another business or for
expansion/diversification.
Thirdly,
As per company point of view, there is Tax shield benefit is available to the company and at the
time of calculation of profit of the firm, the interest amount is deducted from the profit.
Another option is Initial public offer i.e. IPO by the company to raise the funds. Where it can the
amount for expansion, research and development work to test other market, do publicity of their
own product, becoming debt free company. Subsequently, it help to increase market share and
overall capitalization of the company. Afterall, it can go for buyback of share to gain control in the
company.

Raising money through commercial paper or non-corporate debt, these are basically help the
company to raise money without collateral security. In this case, payment of interest amount is
very low and also having the option of roll over and these are basically used for purpose of 1 or
2 year only.
Before acquisition it is advisable to fenland to go for the due-diligence of Target Company to check
matter such as : Past profitability of the company, past data of partners , why they are ready to sell the
business, legal matter of company, all the calculation of intellectual property such as Goodwill of
business, does business is wholly dependence on the one of the supplier, What technology in-licenses
does the company have and how critical are they to the company’s business, find the customer backlog,
does the seasonality effect the revenue, related party transaction or many manipulation to raise the
sales, check the summery of various labor disputes and etc. bottom line and top line profitability of the
company these are very important matter for the company before making takeover.
Overall conclusion from the acquisition of fresh farm food, we can say that it is good business deal to
acquire ongoing of different country and it help the fenland to expand its presence into different
market. Foreign currency inflow would be high. There is no government interference and inflow of
cashflow and profit is free with cross-border transfer.

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