Meter-Matic Limited

1428 Words Oct 31st, 2009 6 Pages
1) Explain and critically assess how Meter-matic measures up as a candidate for a leveraged buy-out? Include information about economic references from the graphs shown in the text. What are the implications of the bond rate declining and the rand becoming stronger against the US dollar?
A MBO of Meter-matic Limited (Meter-matic) was considered by the CEO his management team for mainly strategic reasons. Meter-matic did not fit into SAFREN’s strategic vision (according to Piet Malan and his management team) and was not seen as a core activity by its parent company
- Meter-matic was too small to warrant much attention within the SAFRAN group.
- Its products required a high level of technical skill and management was becoming
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- It had hard assets (buildings, plants, inventory and receivables) that may be used as collateral for lower cost secured debt.
Price of long term borrowing is decreasing therefore the costs of taking debt is at an all time low. (5) Rough value for the convertible debt
• The convertible debt amounts R5m
• The R5m would be the debt’s par (and maturity) value
• Conversion option on an equal portion of the debt
• The value of the stock EQUIS would receive if the debt was converted at t=0, is R(5/100)*valuation company beginning 2004. However this value can’t be paid out, cash will be received at a sale or liquidation or going public.

If the value of the company is getting higher than just after the MBO the debt will be converted before/during a sale or exit. Therefore the value of the convertible debt can be seen as an option (I can’t find exact theory, the book describes bonds to be converted to common stock which can be liquidated on order. In the reader ‘a note on private equity securities’ I can’t match the private equity securities as described ???)

Given the uncertainty of future value of the share you can make projections with different possibilities and calculate the NPV.
A better method (Poppe) is real options
Calculation (excel is attached)
• Assumption is sales or exit after 5 years
• Valuation of Meter-matic end of 2008 (sales
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