ML plc is an expanding clothes retailing company.

ML plc is an expanding clothes retailing company.

ML plc is an expanding clothes retailing company. It is all equity-financed by ordinary share
capital of £10 million in shares of 50p nominal. The company’s results to the end of march
1999 have just been announced. Pre-tax
profits were £4.6 million. The
Chairman’s statement included a forecast that earnings might be expected to
rise by 5% p.a. in the coming year and for the foreseeable future.

Co plc, a children’s clothes group, has an issued
ordinary share capital of £33 million in £1 shares. Pre-tax profits for the year to 31 March 1999
were £5.2 million. Because of a recent
programme of re-organisation and rationalisation, no growth is forecast for the
current year but subsequently constant growth in earnings of approximately 6%
p.a. is predicted. Co plc has had an
erratic growth and earnings record in the past and has not always achieved its
often-ambitions forecasts.

ML plc has approached the shareholders of Co plc with a
bid of 2 new shares in ML plc for every 3 CO plc shares. There is a cash alternative of 135 pence per

Following the announcement of the bid, the market price
of ML plc shares fell while the price of shares in CO plc rose. Statistics for ML plc, CO plc and two other
listed companies in the same industry immediately prior to the bid announcement
are shown below. All share prices are in

1998 Company Dividend yield P/E

High Low %

225 185 ML
plc 3.4 15

145 115 CO
plc 3.6 13

187 122 HR
plc 6.0 12

230 159 SZ
plc 2.4 17

Both ML plc and CO plc
pay tax at 33%.

ML plc’s cost of capital
is 12% p.a. and CO plc’s is 11% p.a.


Assume you are a
financial analyst with a major fund manager.
You have funds invested in both ML plc and CO plc.

· Assess whether the proposed
share-for-share offer is likely to be beneficial to the shareholders in ML plc
and CO plc, and recommend an investment strategy based on your calculations.

· Comment on other information that
would be useful in your assessment of the bid.
Assume that the estimates of growth given above are achieved and that
the new company plans no further issues of equity.

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