Prepared for: Adnan Habib (ANB) Lecturer, School of Business, North South University.
Course: FIN 440 Section: 2 Date of submission: 3rd August 2016 Prepared By: Md.Zishanul Haque ID # 151 1488 630 Kazi Sadi Mamud
ID # 142 1563 030
Abrarul Islam Labib ID # 141 0970 030 Md.Shahariar Hossain ID # 132 1314 030
TABLE OF CONTENTS Page no. 01
Acknowledgement
03
02
Letter of transmittal
04
03
Company Description
05
04
Ratio analysis
07
05
Pro-forma statements of both company
07
06
WACC
09
07
Value of the company
13
08
About merger & sources of synergy
15
09
conclusion
16
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ACKNOWLEDGEMENT
A successful project can never be prepared by the single effort or the person to whom project is assigned, but it also demand the help and guardianship of some conversant person who helps in the undersigned actively or passively in the completion of successful project. The success and final outcome of this project required the guidance and assistance from some people and we are extremely fortunate to have got this all along the completion of our project. Whatever we have done is only due to such guidance and assistance and we would not forget to thank them. We respect and thank our honorable course instructor ADNAN HABIB for giving us the opportunity to do this project and providing us all support and guidance which made me complete the assignment on time, we extremely thankful to him for providing such a nice support and guidance. We are really grateful because we managed to complete this project within the time given by our instructor. This is a group project and it cannot be completed without the effort and co-operation from all group members. Finally we would like to express our heart-felt gratitude to all the people for their suggestions, guidance and help to complete our project. This project has indeed help us to explore more knowledgeable avenues related to the topic and we are sure it will help us in our future.
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LETTER OF SUBMISSION August 03, 2016 Adnan Habib (ANB) Course Teacher Lecturer, School of Business, North South University.
Subject: Submission of FINAL GROUP PROJECT “Potential Merger Analysis”.
Dear Sir, We are pleased to submit the Finance Report on Potential Merger Analysis that you have asked. We tried to find the scope of this project and its prospect from a pragmatic point of view. We have faced many obstacles in preparing the report. But at the end we have successfully accomplished preparing the document.
Therefore, we request you to accept this report. We believe that you will find it in order. We are eagerly expecting your feedback on the overall report.
Yours sincerely. Md.Zishanul Haque ID # 151 1488 630 Kazi Sadi Mamud ID # 142 1563 030 Abrarul Islam Labib ID # 141 0970 030 Md.Shahariar Hossain ID # 132 1314 030 P a g e 4 | 17
Company Description The report for our project consists of the companies Renata Limited and GlaxoSmithKline, Bangladesh. These two companies are evaluated through different financial methods to determine the value of the companies in the year of 2014. Throughout the report we would show how we have projected the PROFORMA and FREE CASHFLOW of the two companies using the historical data analysis of the companies 3 years’ data. After determining the numbers we have calculated the share price of each of the company and compared it with the actual share price that is listed in the DSE Index to estimate whether the company’s share price is over or
undervalued.
An Overview of Renata Limited:
Renata Limited (formerly Pfizer Limited) is one of the leading and fastest growing pharmaceutical and animal health product companies in Bangladesh. The company started its operations in 1972 as Pfizer (Bangladesh) Limited. In 1993, Pfizer transferred the ownership of its Bangladesh operations to local shareholders and the name of the company was changed to Renata Limited. The core businesses of Renata Limited are human pharmaceuticals and animal health products. In Bangladesh it is the 4th largest pharmaceutical company and the market leader in animal health products. In addition, Renata products are exported to Afghanistan, Belize, Cambodia, Ethiopia, Guyana, Honduras, Hong Kong, Kenya, Malaysia, Myanmar, Nepal, Philippines, Sri Lanka, Thailand, United Kingdom, and Vietnam. The Company is listed on the Dhaka Stock Exchange with market capitalization of approximately Taka 50 billi on. The Company has eight manufacturing facilities spread over three manufacturing sites. In addition Renata Oncology Limited has two manufacturing facilities. Distribution of products is carried out by 19 depots across the country.
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An Overview of GlaxoSmithKline:
GlaxoSmithKline (GSK) Bangladesh Limited carries with it an enviable image and reputation for the past 6 decades. A subsidiary of GlaxoSmithKline plc.- one of the world's leading researchbased pharmaceutical and healthcare companies GSK Bangladesh, continues to be committed to improving the quality of human life by enabling people to do more, feel better and live longer. The Company’s principle activities include secondary manufacture of pharmaceutical products and marketing of vaccines, pharmaceutical healthcare products and health food drinks In 1949 the Company commenced its journey in Bangladesh with its’ corporate identity as Glaxo
in Chittagong as an importer of products from the Glaxo Group Companies. It started spreading its spectrum from being an importer to a manufacturer by establishing its own manufacturing unit at Chittagong in 1967. The facility till date is considered as one of the Centers of Excellence in Global Manufacturing & Supply Network of the Group. The global corporate mergers and acquisitions has seen the evolution of the Company’s identity
in the past 6 decades. In line with mergers and acquisitions the identity changed from Glaxo to Glaxo Welcome Bangladesh Limited following the Burroughs Welcome acquisition in 1995 and finally to GlaxoSmithKline Bangladesh Limited during 2002 after merger with SmithKlineBeecham in December 2000. The mega merger of the Company enables it to deliver cutting edge advancements in health care solutions. The relentless commitment, setting of standards of ethical standards and quality backed leading edge technology of the Company has built a strong relationship between the stakeholders and GSK Bangladesh. With the ever committed 615 numbers of personnel all over the country GSK Bangladesh, which now comprises of both Pharma and Consumer, continually strive to meet the GlaxoSmithKline mission to improve the quality of
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human life by ensuring healthcare products, health drinks and different corporate social responsibility programs. GSK is committed to developing new and effective healthcare solutions. The values on which the group was founded have always inspired growth and will continue to do so in times to come.
Ratios 2014
2015
2016
2017
Net Working Capital
1,876,912
2,156,579
2,330,601
2,503,257
Total Debt / Total Asset
53.93%
53.06%
52.61%
53.16%
Retention Ratio
54.29%
37.14%
21.68%
21.68%
Interest expense / Total interest bearing debt
-12.48%
-12.48%
-12.48%
-12.48%
Price / Earnings ratio
21.2535
18.9937
17.8151
16.4829
PRO-FORMA STATEMENT RENATA PHARMACEUTICALS LTD and GSK PHARMACEUTICALS LTD
To make pro-forma statement, we went through the following steps: 1. Collecting the latest three years (2012-2014) of f inancial statements (income statement & balance sheet). 2. Using “Forecast” function in excel, we predicted the forecasted sales figure for the next three years (2015-2017) on the basis of previous years’ sales figure.
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GSK Year
SALES
2012
5,553,812.00
2013
6,774,872.00
2014
7,187,225.00
2015
8,138,716.00
13.24%
2016
8,730,781.67
7.27%
2017
9,562,464.22
9.53%
Renata Ltd. 2012
SALES 7,858,515,209
2013
9,130,607,862
2014
11,432,554,648
2015
13,047,932,012
14.13%
2016
15,121,022,324
15.89%
2017
16,888,970,671
11.69%
YEAR
3. We created pro-forma income statements for both the companies (3 to 5 years) assuming sales growth rate each year is the rate at which all the other major components will increase except interest expense and depreciation. Depreciation, of the all the years, remained constant but interest expense changed later. 4. Then moving on to the balance sheet, we increased all current assets & fixed assets of all forecasted years in line with sales growth rate. In that similar way, we increased shortterm non-interest bearing debt as well which includes trade payables, cost accruals, provisions and other liabilities, unclaimed dividend, provision for taxation. But we kept all the interest bearing debt constant. 5. Then to figure out retained earnings in the balance sheet of the forecasted years, I had to multiply the net income of that specific forecasted year with company’s retention ratio, and then I added it up with previous year’s retained earnings. In this way, I found the total
retained earnings of the forecasted years. 6. Now there is an inequality between total assets and total liability and equity. P a g e 8 | 17
The EFN of Renata of the three forecasted years 2015, 2016, 2017 were respectively 497193799, 994635090, and 654196313. The EFN of GSK of the three forecasted years 2015, 2016, 2017 were respectively 164528000, -158133000, and 71796000. 7. So To fund EFN of Renata Ltd, we had to increase short term interest bearing liabilities and long term debt for 2015 and 2016. For 2017, we needed to increase short term interest bearing liabilities only to fund EFN. While doing this we tried to keep the debt ratio of each year close to each other. But in case of GSK the EFN of 2015 and 2016 were negative and retained earnings were enough to fund EFN. Moreover, the 2017 EFN was positive which was funded with short-term debt.
WACC To figure out WACC Of both companies, we went through the following steps: 1. we copied the daily closing prices and the DSE General Index (later changed to DSE-X Index) from the stock exchange of 7 years (2008-2014) and put those on excel file. 2.
Then we figured out the annual rates of return and the index using the formula (last day of year price – first day of year price) / first day of year price
3. We found out the beta coefficients using the annual rate of return and the market rate of return using a formula in excel. 4. To determine CAPM, we found out the risk free rate of the latest year which is actually the Treasury bill rate and then used the latest year market return in CAPM formula. 5. This required rate of return is the cost of equity. Now we have both the cost of equity and the cost of debt (Interest Expense / Total Interest bearing debt). We multiplied both the cost of equity and the cost of debt with their respective weights and deducted the tax amount (only for debt). 6. Then finally we added up the two amounts and figured out the WACC of the latest year which is for Renata 11.4% and for GSK 12.30%.
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Renata Ltd.
Cost of Equity To identify Cost of Equity we have to find the annual rate of return. And for this we have to find the BETA, and required rate of return of Renata Ltd.
From the chart below, we need to calculate the value of BETA first. The formula we have used in the excel work sheet is = =SLOPE (C5:C18, E5:E18) So the amount of BETA we have found
BETA= 0.8194313 The company has lower systematic risk Risk free rate of market is 8.3%. So the Cost of Equity using CAPM model is
Required Rate= Rf + β* (Rm-Rf) = 6.7%
We can see that Cost of Equity is positive. Condition of the company is good because of positive required rate of return.
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TRADE DATE
CLSPRICE
01-01-2008
7793.75
DGEN/DSEX
3,008.91 30-12-2008
7,789.25
-0.000577386 2,795.34
01-01-2009
(0.07)
7,748.25 2,807.61
30-12-2009
12,051.50
0.555383474 4,535.53
03-01-2010
0.62
12009.75 4,568.40
30-12-2010
12942.75
0.077686879 8,290.41
02/01/2011
0.81
12,420.25 8,304.59
29-12-2011
1,205.00
-0.902981019 5,257.61
01-01-2012
(0.37)
1,264.30 5,351.75
30-12-2012
739.50
-0.415091355 4,219.31
01-01-2013
(0.21)
736.30 4,190.99
30-12-2013 01-01-2014
-0.019421431 722.00 722.40
4,266.55
0.02
4,286.15 30-12-2014
984.00
0.362126246 4,864.96
0.14
Cost of Debt
After applying the formula for WACC, which is, Weighted Average Cost of Capital = Weight of Equity*Cost of Equity + Weight of Debt*Cost of Debt*(1- Corporate Tax Rate), we found WACC to be 11.4%. Thus, the WACC for Renata Ltd.is positive and the required return will be positive.
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GSK Cost of Equity To identify Cost of Equity we have to find the annual rate of return. And for this we have to find the BETA, and required rate of return of GSK. From the chart below, we need to calculate the value of BETA first. The formula we have used in the excel work sheet is = =SLOPE (C3:C15, E3:E15) So the amount of BETA we have found BETA= 0.852405471 The company has lower systematic risk Risk free rate of market is 6.50%. So the Cost of Equity using CAPM model is Required Rate= Rf + β* (Rm-Rf) = 12.33%
We can see that Cost of Equity is positive. Condition of the company is good because of positive required rate of return.
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TRADEDATE 01-01-2008 30-12-2008 01-01-2009 30-12-2009 03-01-2010 30-12-2010 02/01/2011 29/12/2011 01-01-2012 30-12-2012 01-01-2013 30-12-2013 01-01-2014 30-12-2014
CLSPRC 191.10 330.10 327 725.10 747.90 1,129.60 1,141.60 664.50 665.50 570.00 537.30 955.70 999.70 1512.00
72.74% 121.74% 51.04% -41.79% -14.35% 77.87% 51.25%
DGEN/DSE-X 3,008.91 2,795.34 2,807.61 4,535.53 4,568.40 8,290.41 8,304.59 5,257.61 5,351.75 4,219.31 4,190.99 4,266.55 4,286.15 4,864.96 Average
-7.10% 61.54% 81.47% -36.69% -21.16% 1.80% 13.50% 13.34%
Cost of Debt
GSK has total debt on its balance sheet worth of TK. 24775000. We have taken this amount from the company’s base year 2014. The cost of debt for GSK is calculated by adding up the
short term and the long term debt.
After applying the formula for WACC, which is Weighted Average Cost of Capital = Weight of Equity*Cost of Equity + Weight of Debt*Cost of Debt*(1- Corporate Tax Rate), we found WACC to be 12.30%. Thus, the WACC for GSK is also positive and the required return will be higher.
VALUE OF THE COMPANY RENATA PHARMACEUTICALS LTD and GSK LTD.
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RENATA LTD. FREE CASH FLOW 2015
2016
2017
Operating cash flow
2,606,770,469
3,008,621,855
3,334,115,623
Net capital spending
1,309,565,391
1,586,825,661
1,254,267,654
30,000,000
28,808,467
263,450,292
FREE CASH FLOW
1,267,205,078
1,392,987,727
1,816,397,676
PRESENT VALUE OF FCF
1,137,621,980
1,122,663,053
1,314,208,125
Change in NWC
GSK LTD. FREE CASH FLOW
2015
2016
Taka'000
Operating cash flow
Taka'000
FREE CASH FLOW PRESENT VALUE OF FCF
Taka'000
839,378.47
902,836.68
994,441.39
76,559
47,639
66,919
Net capital spending Change in NWC
2017
279,667
174,023
172,656
483,152.29
681,174.80
754,865.97
430,252
540,177
533,073
To figure out the value of the company, we had to do the following things: 1. Firstly, we calculated the free cash flow of the forecasted years- 2015, 2016 and 2017 using the formula (OCF-Net capital spending-Change in NWC). Then we figured out the present value of those cash flows using WACC as discount rate in the same excel sheet. 2. Assuming the P/E ratio is constant in the forecasted year, we multiplied the P/E ratio with EPS of 2017 to figure out the stock price. 3. Then we calculated the Enterprise value. To find this first we had to calculate market capitalization (number of shares multiplied by market price) of y ear 2017. Then using this value, we figured out the Enterprise value of the company in according to the formula: (Market capitalization+ all interest bearing outstanding debt- cash). Then we had to figure out the present value of Enterprise.
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RENATA LTD. COMPANY VALUE 2014
Pri ce /Earni ng rati o EPS Market price of stock
25.7413074
2015
25.7413074
2016
2017
25.7413074
Market capitalization All interest bearing outstanding debt Cash
25.7413074 59.40521823 1529.167984 67,479,016,221 5,881,906,478 401,975,735
ENTERPRISE VALUE
72,958,946,964
PRESENT VALUE OF ENTERPRISE
52,787,581,774
VALUE OF THE COMPANY
56,362,074,932
GSK LTD. 2014
Price/Earning ratio EPS Market price of Stock
21.25348732
2015
21.25348732
2016
21.25348732
2017
21.25348732 91.75 1,949.99
Market capitalization All interest bearing outstanding debt Cash
23,490,502,195 24,775,000 2,537,032
ENTERPRISE VALUE
23,512,740,163
PRESENT VALUE OF ENTERPRISE
16,604,270,738
VALUE OF THE COMPANY
16,605,774,240
4. Finally, we added up the present value of those cash flows with the present value of Enterprise and figured out the total value of Re nata Ltd. and GSK Ltd.
MERGER AND SOURCES OF SYNERGY GSK is considered as world's one of the leading pharmaceutical companies because of its performance. Efficient, capable and honest workforce. GSK has intense demand of their product nationally and internationally which helps them to inflate their business. Considerable financial resources to grow the business. Proprietary technology and importance patents. Ability to take P a g e 15 | 17
advantage of economies of scale if it merges with Renata ltd. Better product quality relative to rivals. Goodwill of the company Follows GMR-Good Manufacturing Practice and greater economies of scale can be gained. GSK as a multinational company has opportunity for expand its investment and has potential growth in Bangladeshi market but Renata has captured large percentage of the pharmaceuticals market. So merging would be favorable for GSK. Moreover, Renata has strong financial position and a strong brand image and effective advertising and promotional strategies, expanding the company’s product line to me et a broader range of customer needs. Market is significantly large and growing. Availability of natural resources is the most lucrative opportunity for GSK to merge with Renata ltd .
Adverse shifts in foreign exchange rates and trade policies of government. Aggressive movement of rivals. Slowdown in market growth. Growing bargaining power of the end consumers, thus high priced medicine are inconvenient for them. Costly new regulatory requirements. Competitors’ lower prices are increasing threats from local competitors. Underutilized plant capacity. Higher unit cost relative to key competitors. Group compliance due to group policy the company has to import raw materials form UK rather from neighbor countries (other than those which are produces locally) resulting in higher cost of production. Lack of variety in products. Low pack size. Lack of sufficient promotional effort. GSK has weaker distribution network and sales force are relatively low compare to competitors. All of the above threats can only be transformed with opportunities if GSK merges with Renata.
CONCLUSION The experience of preparing the pro-forma statements of Renata Ltd. and GlaxoSmithKline has given us the tools to apply the financial tools and techniques we are learning in the course in realworld scenarios. We have learned a lot while finding out the relevant data from the financial reports and stock market related websites. We have gained useful insights into the important
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task of valuing a company, which we will use in our professional and personal careers to determine whether a particular stock is undervalued or overvalued.
THANK YOU!
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