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 …show more content…
The fees related to the rights issue amounts to a total of £36.50 million, which includes underwriting, legal and advisory fees. Total underwriting costs are £19.50, since we assume the acquisition is conducted and successful. Since everyone is fully informed about these costs, we need to deduct the total costs from the market cap because these costs would reduce the current market value of equity following the announcement. Note that the dilution effect from the discount issue price will not have any (theoretical) effect on the share price on August 3 since the issue is not placed before September 28.
Blue Arrow's bid on Manpower is £831.8 million, which is far above the company's market cap per August 3 of £629 million. This may imply that there are positive synergy effects to gain from the acquisition or possible that the company is actually undervalued. But since these possible NPVs would already be included in the acquisition price and the total amount raised from the issue, the NPV in our base case scenario is therefore assumed to be zero.
b) Estimating the risk free rate and volatility
The risk free rate was obtained from the homepage of England's central bank; "Bank of England". The 3M Treasury bill, Sterling, as of 31 July 1987 was 8.49% per annum, resulting in an annualized risk free rate of 8.76%.
The volatility of the equity (or share price) were estimated using the given daily historical share prices from