On the 31st July 2013, Aerlingus wrote to shareholders outlining its reasons for recommending that shareholders reject Ryanair offer to purchase the company. The offer valued Aer Lingus at 694 euro million.
SCENARIO
On the 31st July 2013, Aer Lingus Group plc, an Irish airline, wrote to shareholders outlining its reasons for recommending that shareholders reject Ryanair Holdings plc’s offer to purchase the company. The offer valued Aer Lingus Group plc at €694 million (£561 million).
The board of directors of Aer Lingus Group plcwere unanimous in the view that Ryanair’s offer fundamentally undervalued the company.
Ryanair already owns a 29.82% stake in Aer Lingus Group plc, which was built up during two previous unsuccessful attempts to buy the airline in 2006 and 2008.
Ryanair’s offer is to be investigated by the European Commission over competition worries.
REQUIRED
The requirements of the report are detailed as follows:
In your role as Finance Director of Aer Lingus Group plc, fellow board members have asked youto produce a report to assist the company in its defence of the hostile bid from Ryanair Holdings plc.
Valuation Model (20 marks)
1. Produce a company valuation using a free cash flow valuation model. The model should incorporate estimates of the following;
(i) Return on invested capital (ROIC)
(ii) Cost of capital
(iii) Horizon or competitive advantage period
(iv) Expected future cash flow
(v) Growth in future cash flow
(vi) Reinvestment required
This section of the report should be included as an Appendix to the written element of the report. Students may wish to use Excel to produce the model.
Report
The written element of the report should contain three distinct sections.
Section A (20 marks)
In your role as Finance Director;
(a) You will comment on the valuation you have produced, relative to the value of the hostile bid, and;
(b) You will be expected to fully justify the estimates used in your model with regard to the following key elements;
(i) The horizon period chosen
(ii) The difference (spread) between ROIC and the Cost of Capital both during and after the horizon period
(iii) The expected future growth
Section B (30 marks)
In your role as Finance Director, you will be required to justify the choice of valuation model employed (e.g. free cash flow valuation model), relative to any other potential valuation methods available. Justification should be made with reference to relevant theoretical literature.
Section C (30 marks)
In your role as Finance Director;
(a) You will be required to justify the choice of model used to estimate the Cost of Capital (CAPM) and;
(b) You will be required to justify the estimates used in respect of;
(i) the risk free rate
(ii) the risk premium
(iii) Beta
Issues surrounding the model (CAPM) and the difficulties in estimating inputs to the model should be fully explored withreference to relevant theoretical literature.
Specific requirements
Students will be required to base any figures or estimates used on Aer Lingus Group plc.
Students should assume, for the purposes of the assignment, that Aer Lingus Groupplc is all equity financed.
When constructing the valuation model students should carry out some sensitivity analysis to assess the impact that any changes in estimates will have on their valuation. Evidence of sensitivity analysis should be included in the form of additional valuation models included as appendices.
Students may wish to structure the report as follows:
Section A – 300 words (25% of total word count)
Section B & C – 1000 words (75% of total word count)
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