Woolworths Company Merger and Takeover: Financial Analysis Report

This report presents a financial analysis of a proposed merger and takeover deal involving Woolworths Company and James Richardson Corporation. It explores the strategic rationale behind the deal, focusing on potential benefits such as market diversification, backward integration, and the creation of synergy. The analysis includes a description of James Richardson, types of takeovers, sources of synergy, and the calculation of market capitalization and offer price. The report also addresses financing options, cost of capital, net present value (NPV) calculations, and post-merger stock price estimations. Furthermore, it examines the risks associated with the takeover and discusses strategies for maximizing shareholder wealth. The report concludes with recommendations for Woolworths management, emphasizing the importance of aligning stakeholder interests and leveraging the combined resources of both companies to achieve higher returns.

Woolworhts Company
Merger and Takeover
Business Financial analysis
University Name-

Task-1
EXECUTIVE SUMMARY
Every organization needs to expand its business in long run to increase the overall
outcomes and efficiency of the business. In this report, Woolworths Company has been
selected to determine which strategic alliance would be better to create value on its
investment. It is analyzed that Woolworths Company already has strong market values and by
diversifying its business in other industry company could easily create value on its
investment. The CEO of Woolworths is inclined towards determining whether entering into
strategic alliance with the James Richardson would be beneficial for it or not. However, the
main issue arise related to arranging financial capital and aligning the interest of different
stakeholders with the organization objectives. It is analyzed that Woolworth’s company could
easily lower down the cost of capital by issue of debt funding to finance its takeover deal. It
is analyzed that if company would want to create value on its investment then it will first
have to undertake the cost of capital and financial leverage in long run. The deal with the
James Richardson will increase the overall values and also helps company to pool the interest
of the managers with the organization to take imperative strategic decisions. The main benefit
which Woolworths will have would be related to customer centric data base management. It
will allow company to grab potential clients and also diversify its business in furniture selling
options. This report emphasises upon the takeover deal of Woolworths Company with the
James Richardson Company. This deal would be beneficial will result to creation of the
higher return on capital employed and synergy in the business.
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Table of Contents
Task-1.........................................................................................................................................1
EXECUTIVE SUMMARY........................................................................................................1
INTRODUCTION......................................................................................................................4
Task-2.........................................................................................................................................5
(a) Description of James Richardson Corporation............................................................5
(b) Types of takeover and benefits associated with all deals............................................5
Variety of takeovers and their respective benefits.................................................................5
© Sources of synergy.............................................................................................................6
Sources of synergy.................................................................................................................6
(D) Market capitalisation of the target, the synergy and hence advise the management of
the existing company on the offer price.................................................................................7
Advise to the management of Woolworths............................................................................8
(e) Option to pay off the takeover deal or consideration to shareholders..............................9
(f) Computation of the cost of equity of company NPV and post-merger stock price........10
Calculation of cost of capital............................................................................................10
Computation of the net present value of expected net results..........................................10
Post-Merger stock Price...................................................................................................13
Task-3.......................................................................................................................................15
(a) Company raise the capital using internal funds, debt, equity, hybrid securities or a
combination of the above.....................................................................................................15
© Share issue affects the wealth of the existing shareholders.............................................16
Task-4.......................................................................................................................................17
(A) Risk associated with the takeover deal of the Woolworths with the James Richardson
Corporation..............................................................................................................................17
Sensitivity analysis...............................................................................................................17
Maximization of the wealth of the shareholders of the both companies..............................19
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Conclusion................................................................................................................................19
References................................................................................................................................20
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INTRODUCTION
Merger and amalgamation are the key strategic option which assists company to
expand the business in this competitive economy. The report explains the strategic
opportunities which can be grabbed by a corporation in order to expand its business in long
run. The motive of the report is to discuss the directions through which a company can
survive for longer period of time and increase the growth and success probability of the
business. The ways that can be taken up by the company to meet this objective are mergers,
amalgamations, joint venture and others. All such strategic alliances help the corporation to
enhance the efficiency and productivity of their business as well as experience the growth at
good pace. The main expansion strategy adopted by Woolworth Group Limited is to make a
strategic alliance with a corporation that is involved in the business of manufacturing
furniture. It is named as James Richardson Corporation and the company also deals in
hospitality and real estate sector. By merging its business with James Richardson, Woolworth
can enjoy many benefits such as it can diversify its area of operations, stimulate backward
integration and can use their assets and employees to create effective synergy in long run.
The report identifies potential options and target areas that can be availed by Woolworths for
the purpose of expanding its business in future and increases its competency in the market
(Woolworths Company, 2017).
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Task-2
The chief executive officer of Woolworths Bradford Banducci has looked up to many
opportunities which can help in the company’s expansion strategies. He has undertaken many
plans that can allow them to make their business more effective and viable for the long run.
The main reason for creating alliance with James Richardson is that Woolworths want to
increase its market share in the Australian market. Along with this, the company is focused
on extending its business activities. If the firm takeover the corporation, it can easily get their
core product that is furniture for the purpose of resale. Also, it will help Woolworths to have
a backward integration in a way that it can stimulate the supply and manufacturing of
furniture products with help of machineries available with James Richardson. Overall, the
outcomes of the merger will be positive and will definitely help the company to strengthen its
operation and enjoy growth in coming years (Woolworths, 2017).
(a) Description of James Richardson Corporation
James Richardson Corporation is an Australia based furniture, real estate, hospitality and
retail corporation having its headquarters situated at Melbourne. The company approximately
have 2300 individuals working in the organization. It is considered to be the best company in
terms of offering duty-free retail stores in airports and border crossings. This company has
strong client based mechanism which it has been using to customize its products and services
offered in market (James Richardson, 2017).
(b) Types of takeover and benefits associated with all deals
Variety of takeovers and their respective benefits
There are several types of alliances which a company can take for expanding its businesses.
Some of them are amalgamation, joint venture and mergers. As Woolworth has strong
liquidity position, it can easily take over the James Richardson to meet its strategic objectives
made in regarding of business expansion.
 Joint Venture: Under this, two or more companies combine their assets and available
resources for meeting a predetermined objective.
 Takeover: It is defined as a procedure under which one company purchases more than 505
shareholdings of another company.
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 Merger: It is the strategic alliance where two companies combined and come together to form
a new organization. In other words, it is also known as amalgamation that helps one company
to create value on invested capital.
The above definitions of all the options suggested that the best method for Woolworths would
be to takeover James as it wants to create diversity in its business. The takeover will
ultimately result in the company’s market share and market capitalization. It will make
Woolworths strong enough to survive in the competitive market. Furthermore, taking up the
James Richardson would also attract potential customers for its business that will ultimately
have a positive impact on company’s profitability
© Sources of synergy
Sources of synergy
There are several sources of synergy which can be used by Woolworth Group if it sticks to its
objective of taking over James Richardson.
According to its recent annual report, the financial position of Woolworths is quite
impressive and does reflect low financial risk. The Takeover option of James Richardson will
require the company to issue shares to the shareholders of acquired company. As a result, the
share capital will increase in the business and overall outcomes will strengthen the position of
Woolworths.
Another source through which synergy can be created is to cut down the cost of production.
The consolidation of positions, functions, assets and other sources of both the companies will
ultimately result in increased productivity and enhanced revenue. This will eventually help
the company to reduce the cost of production. By taking over James Richardson, Woolworth
can easily use its assets and machinery to manufacture furniture products and resale them in
the market (Warren, Reeve, andDuchac, 2011).
Combing the business will bring more expertise and knowledge in the company as the key
managers and other executives of James will use their skills to make reliable and relevant
decisions for the company. Taking over will allow Woolworths to integrate the pool of
knowledge which can be used in taking decisions and making strategic alliance for future.
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Team building will be another source of creating synergy. The takeover of James Richardson
will bring the highly qualified and experienced employees in the organization. Along with
this, providing them the proper training programs to all the employees will smooth the
process of creating value for investment.
(D) Market capitalisation of the target, the synergy and hence advise the management
of the existing company on the offer price
Market capitalization defines the total market value of the company which is calculated by
multiplying the current share price of the company with its number of shares outstanding.
The value of enterprise is the theoretical takeover value which includes the capital required
for outstanding number of shares (Nikolai, Bazley, and Jones, 2009).
It is basically the market value of company’s outstanding shares. The above formula is used
to calculate the market cap of the firm. In order to derive the same, company need to gather
following information of the target company (Warren, Reeve, andDuchac, 2011).
Computation of the market capitalization of the company
Particular Amount in AUD $ Million)
Stockholders' equity Outstanding $ 86.00
Offer price $ 10.00
Market capitalization $ 860.00
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After assessing the details and information of the company, it could be inferred that the net
market value of the business is AUD $ 135 which reflects that if Woolworths wants to buy
the shares of the company then it will have to pay AUD $ 135 million to James Richardson
(James Richardson, 2017).
The computation of the market capitalization of the James Richardson has been computed as
below (Baker, Jabbouri, andDyaz, 2017).
Net value of Company Amount in AUD $ Million)
Particular
Total Assets 219
Total Liabilities 84
Net Value of Business 135
Advise to the management of Woolworths
The main advice to management of Woolworths Company is to offer its own shares at
premium to the existing shareholders of James Richardson. It would allow company to align
the interest of the shareholders of James Richardson with the organization development.
Company could use these methods to create value on its investment. Nonetheless, those
shareholders of James Richardson who are against this deal could be offered cash
consideration for their shares. This will be based on the mutual understanding which they
have with each other’s (Vogel, 2014).
It is analyzed that the estimated synergy which Woolworths and James Richardson would
both have depends upon the associated factors. Company would have at least 25% synergy on
the basis of economic condition and internal and external factors which are affecting the
business growth (Warren, and Jones, 2018).
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Estimated figures for the synergy for the Woolworths (AUD $ in million
Net Value of Business $ 135.00
Add % of synergy 25%
Estimated figure $ 33.75
Assumption based on the creation of the synergy
The creation of the synergy is based on the effective business outcomes and team
building approach. The main assumption of creating synergy is based on the team building
and use of the existing market share of the James Richardson Corporation. This will allow
Woolworths to grab more potential clients while diversifying the market. Company will
combine its existing market share of the James Richardson Corporation and its own market
share and after that by using the loyalty card approach it could easily increase the overall
sale. The increased sales will allow company to strengthen overall market share and return on
capital employed in long run. Woolworths Company should use the existing client based data
program to strengthen the overall outcomes (Sinha, 2012).
(e) Option to pay off the takeover deal or consideration to shareholders
There are several options to pay off the takeover deal in this case. The Woolworths Company
could easily pay off to the shareholders of the James Richardson Corporation by issues of
shares of its own company and cash as well (Rao, 2011).
This takeover option will be based on the decision of the Woolworths Company. If in case,
Woolworths Company finds that there is no better option available to create value on its
investment then it will use its liquid assets to buy the shares of the James Richardson
Corporation. However, in this case, Woolworths Company could use the mix option to pay
off the dead of takeover. Company will issue its own shares to allow shareholders of James
Richardson Corporation to swipe their own shares. In addition to this, those shareholders who
are rigid towards the deal can be paid off by giving the cash payment (Heitger, Mowen, and
Hansen, 2007).
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Now the main crux of this deal is that Woolworths Company should pay off this deal by
undertaking partially cash payment and share stock payment (Krantz, and Johnson, (2014).
(f) Computation of the cost of equity of company NPV and post-merger stock price
Calculation of cost of capital
Calculation of Required rate of return
Risk free rate (A) 4%
Beta (B) 0.0024639
Market Risk premium (C) 6%
Required rate of return [A+(B*C)] 4.01%
(Please see the more calculation in the attached excel files
Computation of the net present value of expected net results
Year
Particular 1 2 3 4 5
Sales (in units)
$
52,000.00
$
62,400.00
$
74,880.00
$
89,856.00
$
107,827.20
Price
$
777.00
$
792.54
$
808.39
$
824.56
$
841.05
10

Total sales
$
40,404,00
0.00
$
49,454,49
6.00
$
60,532,303.
10
$
74,091,539
.00
$
90,688,043
.74
(-) Variable Costs
$
16,380,00
0.00
$
19,656,00
0.00
$
23,587,200.
00
$
28,304,640
.00
$
33,965,568
.00
Contribution
$
24,024,00
0.00
$
29,798,49
6.00
$
36,945,103.
10
$
45,786,899
.00
$
56,722,475
.74
(-) Fixed Cost
$
6,500,000.
00
$
6,500,000.
00
$
6,500,000.0
0
$
6,500,000.
00
$
6,500,000.
00
Net Profit
$
17,524,00
0.00
$
23,298,49
6.00
$
30,445,103.
10
$
39,286,899
.00
$
50,222,475
.74
(-)Depreciation
$
5,128,571.
43
$
5,128,571.
43
$
5,128,571.4
3
$
5,128,571.
43
$
5,128,571.
43
Net Profit before Tax
$
12,395,42
8.57
$
18,169,92
4.57
$
25,316,531.
68
$
34,158,327
.57
$
45,093,904
.31
(-) Tax @28%
$
3,470,720.
00
$
5,450,977.
37
$
7,594,959.5
0
$
10,247,498
.27
$
13,528,171
.29
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