Project #28289 - Finance/Entrepreneurship

Nanpo Case

Written Assignment

 

Objective: Learn about an international IPO process involving “red chip” companies on the Stock Exchange of Hong Kong .  Utilize a comparables analysis and discounted cash flow techniques to value an international company. 

 

Written Assignment:

 

1.    What did the changes Moftec implemented in 1992 permit regional Chinese companies to do?

2.    What were the major businesses of Nanpo immediately prior to their IPO?

3.    Analyze financial trends (including growth in revenue and profitability) and summarize your major conclusions.

4.    What is the estimated market value of the company’s assets based on data stated in the case (i.e., the break-up value of the company)?

5.    Reference excel template attached with the assignment for question 5 and 6.

 a. Value the company using the comparables data stated in the case in Exhibit 7.  Explain which companies you believe are most comparable and what the resulting valuation range is for Nanpo.    How does the debt position of Nanpo impact the riskiness of the company and your conclusion?

b.  Assess the capital structure of Nanpo versus the companies you select as being comparable from Exhibit 7, and show how Nanpo’s debt/equity ratio , total debt ratio, and long term debt/equity ratio compares to the comparable companies.

c. What conclusions can you draw regarding the amount of debt Nanpo has used in its capital structure?  Do you agree with the case at the top of page 6, that 40% debt, 60% equity is a good target for Nanpo over the long term?

6.    Reference excel template attached with the assignment for question 5 and 6.

Develop financial projections for Nanpo and value the company using a DCF model.  Show your calculation for cash flow used in your model.  Explain your assumptions, including revenue and profitability growth rates, the capital structure assumed for your WACC and the discount rate used in your valuation analysis, and your terminal value assumptions.  What percentage of the company’s value is due to the terminal value in your base case model? 

7.    How do the valuation estimates you developed in item 5 and 6 compare to estimates developed by Mr. Tan and Mr. Yang?  How do the valuations compare to the average multiple of companies traded on the Stock Exchange of Hong Kong?

8.    Six weeks before the IPO was scheduled to list, Mr. Yang receives a phone call followed by a letter of interest from the President of CLP Holdings indicating interest in entering into potential discussions to acquire Nanpo (instead of the company going public).  The highlights of the letter of interest are summarized below. 

a.    Letter of Interest to acquire Nanpo with a value range of $250-350M

b.    The final valuation would be set following due diligence and negotiation of final terms

c.    Transaction would be structured as a purchase of assets (cash for assets)

d.    Nanpo operations would generally remain in place, but would be integrated with CLP Holdings to maximize synergies between the operations.  Some employee relocations were anticipated, but CLP would offer all employees positions in the new location.  Mr. Yang and other senior managers would retain their positions following the merger for at least 24 months. 

e.    CLP Holdings would agree to retire $50M of Nanpo’s debt and invest an additional $75M in Nanpo to develop the business in a manner consistent with CLP’s vision for the company.

f.     The letter provided for a period of 60 days for exclusive discussions with CLP and negotiation of definitive acquisition documents, during which the plans for the IPO would be put on hold  

g.    Nanpo must sign and return the Letter of Interest within 10 business days if they want to accept the offer and move into exclusive acquisition discussions with CLP

h.    The letter of interest is nonbinding, and is subject to:

                                              i.     Customary due diligence by CLP

                                             ii.     No adverse change in Nanpo’s business or operations  

                                           iii.     No adverse change in economic or market conditions in general

                                           iv.     the negotiation of a definitive asset purchase agreement,

                                            v.     retention of 95% of  key Nanpo employees (the list of employees would be defined during due diligence, but would include Mr. Yang)

                                           vi.     final approvals by the Chinese Government, CLP Holdings and Nahum Group’s Board of Directors for the acquisition

i.      The transaction would be expected to close within six months

 

As Mr. Yang reflected on these developments, he thought there would be substantial synergies between the companies, that would result in a 5% increase in revenue in the next year and additional revenue of 10% per year above his forecast thereafter.  He also expected a 3% decrease in expenses (due to economies of scale) for all forecast periods for Nanpo’s P&L.  The President of CLP has been clear the valuation was not negotiable outside of the stated range, and failure to enter into exclusive discussions within the 10 day time window would mean the end to discussions.  While the valuation offered by CLP was somewhat lower than he had hoped for, the combination with CLP would help with Nanpo’s debt position and offer the chance for continued growth.  Mr. Yang also realized that CLP Holdings had very good relationships with top officials in the PRC government, as well as at Nashum Group, and MOFTEC, so Mr. Yang did not expect any regulatory issues or concerns from the Chinese Government or from his parent company.   As he mulled the latest development, he thought to himself that his parent company would be greatly swayed by his input on whether to stop the IPO process and entertain the acquisition offer or to reject the offer and continue with the IPO process. 

·      What are the pros and cons of the terms in the letter of interest?

·      What issues, if any, need to be clarified?   

·      Should Nanpo withdraw their IPO and enter into discussions with CLP Holdings?  Why or why not?       

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Due By (Pacific Time) 04/23/2014 08:00 am
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