The Chief Financial Officer’s suggestion appears to be a disposal of ‘crown jewels’. Without the cash reserves, Pursuit Co may become less valuable to SGF Co. Also, the reason for the depressed share price may be because Pursuit Co’s shareholders do not agree with the policy to retain large cash reserves. Therefore returning the cash reserves to the shareholders may lead to an increase in the share price and make a bid from SGF Co more unlikely. This would not initially contravene the regulatory framework as no formal bid has been made. However, Pursuit Co must investigate further whether the reason for a possible bid from SGF Co might be to gain access to the large amount of cash or it might have other reasons. Pursuit Co should also try to establish whether remitting the cash to the shareholders would be viewed positively by them.
Whether this is a viable option for Pursuit Co depends on the bid for Fodder Co. In part (iii) it was established that more than the expected debt finance would be needed even if the cash reserves are used to pay for some of the acquisition cost. If the cash is remitted, a further $20,000,000 would be needed, and if this was all raised by debt finance then a significant proportion of the value of the combined company would be debt financed. The increased gearing may have significant implications on Pursuit Co’s future investment plans and may result in increased restrictive covenants. Ultimately gearing might have to increase to such a level that this method of financing might not be possible. Pursuit Co should investigate the full implications further and assess whether the acquisition is worthwhile given the marginal value it provides for the shareholders (see part (i)). |
