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    Catco: Valuation Comparables for merger

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    The CEO of CatCo (a feline products company) is (believe it or not) in a friendly merger discussion with the CEO of DogCo (a canine products company). As one would predict, CatCo wants to be the acquirer and is willing to pay a premium (more than current market value) for DogCo because CatCo believes substantial revenue and cost synergies can be achieved by merging these two businesses. Here are CatCo's forecast of the how the firms would perform with and without the merger:
    CatCo DogCo Cat'n'DogCo
    Revenues 200 150 400
    Cost of Good Sold* 120 90 240
    Gross Margin 80 60 160
    Selling, Gen & Adm Exp* 50 40 80
    Operating Income 30 20 80
    *Includes Depreciation
    Expenses Totaling 40 30 60

    Layman Brothers, the investment banking firm providing M&A advisory services to CatCo, has done a "comparable public companies" analysis and concluded that firms comparable to both CatCo and DogCo sell for approximately 7 time EBITDA (based on the median of a sample of TEV to EBITDA ratios).

    (a) What are the values of Catco and Dogco on a stand-alone basis?

    (b) What is the value of the combined Cat'n'Dog Co?

    (c) What is the estimated value of the synergies if CatCo and DogCo are merged?

    (d) DogCo has no debt. If Catco paid a 20 percent premium for Dogco, what fraction of the estimated value of the synergies would accrue to Dogco shareholders?

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    Solution Preview

    a. 280 210

    b. 700

    c. 210 (= 700 - (280+210))

    d. 20% ...

    Solution Summary

    The responses are contained in an Excel spreadsheet in addition to a short narrative statement.