Essay on Blue Arrow

2310 Words May 1st, 2012 10 Pages
Executive summary

Blue Arrow is a publicly held firm and the leading UK employment agency. The management is thinking about expanding further in to the US by buying the largest temporary help company in the world, Manpower. The bid was to be made by a cash tender offer funded by a fully underwritten rights issue of £837 million. In this report we calculate the value of one right and the value of the underwriter's put as of August 3 by using the Black-Scholes and put-call parity valuation approach. In addition we assess the sensitivity and validity regarding these calculations, and discuss the fee charged by the underwriter.
The detailed assumptions regarding our calculations are: o The rights are issued on August 3; one right can be
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1. Valuing the rights and the "underwriter's put"
Firstly we calculate the value of the rights and the "underwriter's put" as of August 3. In the valuation process we assume the following: o Acquisition is funded by a fully underwritten rights issue of £837 million. o The rights are issued on August 3; one right can be converted into 2.5 shares with an issue price of £1.66 per share. o Blue Arrow's price per share as of August 3 is £2.162 before the issue announcement is made. o The accepted bid for Manpower is $82.5 per outstanding share, resulting in a total bid of £831.8 million. The acquisition is conducted at this price. o The rights issue closes on September 28. o Everyone is fully informed about the issue and acquisition after the announcement is made.

a) Adjusting market cap
Not all of the information needed is explicitly given in the case, and we therefore had to make "backward calculations" in order to estimate the different input variables.
After the rights issue was completed, CNW's Corporate Advisory Department was left with 35 million shares or 4.9993% of Blue Arrow's share capital, which implies a total number of shares after the issue of 35m/0.049993 = 700.1 million. The total amount raised from the issue was £837 million with an issue price of £1.66, which implies a total number of issued shares of 837m/1.66 = 504.2 million. This results in 700.1m - 504.2m…

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