Assignment Brief – CaffreyCo

Caffrey Co (“CAFFREY”) a company established in the 1950’s owns a large chain of supermarkets. It has grown from one single supermarket in Dublin to 47 supermarkets located throughout Ireland and the United Kingdom. Its share price has risen steadily over the past number of years and it is currently €3.60 per share. There are currently 8,800,000 ordinary shares in issue. Profits after tax have remained steady at €4,950,000 over the past five years.

In the last 10 years CAFFREY has diversified into many different areas and food sales now only account for 40% of its turnover. CAFFREY sells clothes and electronics from kitchen appliances to laptops as well as selling sports equipment and furnishings. In recent times CAFFREY has diversified into financial services and now offers credit cards and car insurance to its customers.

The company is cash rich and has substantial cash reserves accumulated on its Statement of Financial Position.

The Strategic Financial Manager (“SFM”) has signalled to the Board of Directors that while their Statement of Financial Position is in a very healthy position their cash reserves should be invested in order to yield a higher return to the shareholders. The SFM has proposed expanding the company through a strategy of acquisition. The SFM has carried out some preliminary research and identified a company called Brogan Limited (“BROGAN”) which he proposes CAFFREY should consider taking over.

BROGAN is an online service platform that allows its customers to buy and sell products on line.

BROGAN is financed primarily by annual subscriptions payable in advance by its 3 million members. BROGAN generates 10% of its turnover through advertising revenues. If the takeover is agreed, CAFFREY Limited would preserve the “BROGAN” name which is extremely well known by its customers.

The shares in BROGAN are held by one institutional investors each holding 1,000,000 shares each. The current PE (Price Earnings) ratio in the industry that BROGAN operates is 5 times. BROGANhas a profit after tax of €625,000 for the year ended 31 December 2015.

The SFM anticipates that profits before tax will rise by €1,688,000 as a result of combining both companies and the PE ratio of the combined company will be 7.

The SFM has proposed to pay for the acquisition using one of the following two methods:

• A cash offer of €5.00 for each BROGAN share; or
• Share-for-share exchange where two of CAFFREY’s shares would be offered for one of BROGAN’S shares.

REQUIREMENT:

Part (A)

Prepare a report to the Board of Directors of CAFFREY that:

• Identifies the reasons why CAFFREY should acquire BROGAN and discusses how the various stakeholders of BROGAN might react to the takeover

30 Marks

(ii)        Identifies the potential problems that CAFFREY may face in running BROGAN.                                                                                     20 Marks

(iii)       Estimatesand discussesthe percentage gain on a CAFFREY Share and on a “BROGAN” share under each payment option.                                  20 Marks

            Report            Format                                                                                  5 Marks

Part (B)

(v)        CAFFREY itself has been subject to a takeover bid from HARTE, a listed company which is also in the retail sector and has a market capitalisation of €480 million.

Evaluate the general post-bid defence tactics and comment on their suitability for CAFFREY to try and prevent the takeover from HARTE.

15 Marks

Professional presentation of appropriate academic work correctly referenced using the Harvard Referencing System                                    10 Marks

                                                                                                Total 100 Marks

Sample Examination Marking Criteria