California Plant Protection (CPP) is definitely an very effective security guard firm. Tom Wathen might be the CEO and sole who is the owner of CPP. Pinkerton, later, will be a competitor in the firm with an above average brand image. Wathen wanted to purchase Pinkerton if the was available available. Morgan Stanley represented American Brands inside the purchase as well as the investing in an offer. They'd never pay an offer of under $100 million. He must determine if purchasing Pinkerton was lucrative enough to buy it only at that cost. He's two financing options. They can raise money by whether $75 million at 11.5% interest or possibly a $100 million debt at 13.5% interest. Wathen must decide if you should acquire Pinkerton so when so, the best way to finance the bid. The disposable earnings technique combined while using ongoing value and incremental improvements are employed to assess the choice.
A. All-equity Cost of Capital Based on Wackenhut's Numbers.
B. Projected Pinkerton Free Cash Flows Through 1992
Free cash flowFree cash flow
PV Free cash flow at All-Equity Cost of Capital
Estimated pessimistic value of Pinkerton
Value of 45% of CPP Equity -Expected Cash Flows
Financing the Acquisition
75% Debt100% debt
Debt service requirements,75% debt
Debt service requirements,100% debt
Total FCF - total debt service burdenCumulative excess cash flow
Why is Wathen acquiring Pinkerton’s Inc.? How specifically will he create value? What should his bid strategy be?
What is the proper cost of capital for evaluating this acquisition? Consider this from the standpoint of WACC and APV.
Develop and find the present values of the free cash flows from Pinkerton’s Inc., and also from the CPP margin improvements. Calculate this only on the assumption of a 25-75 equity-debt split.
How will we make our decision on financing choice / capital structure? Consider the issue of meeting debt service requirements.
What is the value of the equity Wathen must give up if he chooses the 25 percent equity alternative?
What are the costs and benefits of the all-debt choice? The debt-equity choice? Which would you recommend and why?
How should Wathen respond to Morgan Stanley?