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Corporate Finance – SMM125

2010–2011, Term 2

The module’s coursework consists of group work leading to presentations and written reports
a case study. Students will have to prepare a presentation and a written report on either “Debt
Policy at UST Inc.” or “Vodafone AirTouch’s Bid for Mannesmann.” Presentations are worth
5% of the final mark. The written report is worth 20% of the final mark.
The deadlines for handing in the written report to the course office are as follows:
• Groups assigned to the UST case: 8 March 2011

• Groups assigned to the Vodafone-Mannesmann case: 22 March 2011

General advice on case studies’ preparation


Probably the most important warning about case studies is that there are no right answers
to a case, but many wrong ones. The material covered in the lectures should help you avoid
the many wrong answers. In sum your objective when preparing for a case is not to find the
correct solution, but rather to discuss the issues raised by the case, and assess the pros and
cons of alternative solutions.

Advice on how to write the case report


Each group will have to prepare a written report for its assigned case. The report should
be no longer than 8 pages, typed and double spaced font 12pt. Get to the main problem
quickly and state the main questions clearly. In presenting your recommendations: state the
alternatives, discuss the pros and cons of each alternative, and argue convincingly in favour of
your proposed recommendation.

Advice on presentations
In addition to preparing a written report, each group will have to prepare a presentation
on one of the questions addressed in the report. You will have ten minutes, including
questions, for your presentation. Hence, follow the golden rule of a successful presentation:
no more than three/four slides for ten minutes. Prepare slides with few points. Organise and
communicate clearly your arguments. Anticipate others’ questions and be prepared to provide
strong arguments based on the information you have on the case. Respond to the questions in
a clear and convincing manner, capitalising on the remarks coming from the audience.
To sum up, your case report will have to demonstrate your ability to ponder the pros and
cons of alternative solutions, relying on both the course material and the information provided in
the case. Conversely, your group’s presentation will mainly be assessed based on your ability to
organise your speech, put forward your arguments in a convincing manner, and reply effectively
to comments and questions raised by the audience.
Note that in writing the report your group will have to tackle a mix of technical and
qualitative questions, irrespectively of your assigned presentation.

Assignment for debt policy at UST Inc.

1. How would you characterise the economics of UST’s business? What are the primary
business risks associated with UST Inc [hint: try and compile a list of factors that a
credit analyst would take into account when evaluating the proposed recapitalisation]?

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2. Could UST undertake the proposed $1 billion recapitalisation if it wanted to? Prepare
pro-forma income statements for fiscal year 1999 to analyse whether UST would be able
to make interest payments [hint: using different interest rates from Exhibit 8 compute
coverage ratios corresponding to A, BBB and BB ratings]. Assume that the EBIT/sales
ratio will remain constant at its 1998 level, and recover the forecasted growth rate for
sales from Exhibit 3. For questions 2 and 3, assume the $1 billion in new debt is constant
and perpetual.

3. Why do you think UST Inc. is considering a leveraged recapitalisation after such a long
history of conservative debt policy? What would be the incremental effect on UST’s
value of the recapitalisation (assuming that the entire recapitalisation was implemented
on January 1, 1999)? Assume that UST faces a 38% tax rate, and that there are no other
market imperfections in the sense of Modigliani and Miller.

4. What other factors, beyond interest tax shields, should UST consider in assessing the
valuation of the recapitalisation plan?

Assignment for Vodafone AirTouch’s bid for Mannesmann

1. What was the strategic and economic rationale for Mannesmann’s acquisition of Orange?
Did Mannesmann overpay for Orange?

2. Vodafone AirTouch proposed that each Mannesmann share would receive 53.7 Vodafone
AirTouch shares, so that in aggregate Mannesmann shareholders would own 47.2% of the
equity of the new combined firm.
Describe the stock swap. As of December 17 what was the market value of Mannesmann’s
contribution to the combined firm? As a Mannesmann shareholder, would you accept the
current offer? As a Vodafone shareholder, would you support the proposed transaction?

3. On December 17, 1999, based on the stock price of the two firms it seemed that the market
estimated the probability of Vodafone AirTouch successfully acquiring Mannesmann at
around 60%. Under the assumption that if the bid fails both firms would trade at prices
prevailing on October 21, 1999, can you infer the market’s estimate of the value of implied
synergies from the deal?

4. Why was Gent so eager to do the deal? Why was Esser fighting the deal so hard despite
the terms being so favourable for Mannesmann’s shareholders?