Reference no: EM132969850

Boston Brewery (BB)plc and My bottling experience (MBE) Plc are firms which are involved in the brewing and retailing of Spirits and Alcohol. Boston Brewery is a brewery and (MBE) is responsible for the bottling and distribution network of various drinks. Boston Brewery has 5.6m shares and MBE has 7.8m. Both firms are financed entirely by equity.

• Boston Brewery is considering launching a bid to acquire all the share capital of MBE, which is currently valued at £34,800,000 in the equity market. Boston Brewery has share price of £6.84 and today paid a dividend of 45p [D0] per share. The firm has an historic dividend growth rate of 4% per annum.
• Savings through the two companies cash flows been brought together, are expected to amount to £920,000 per annum, starting in one year. The firm's due diligence, which cost, Boston Brewery Plc. £28,900, identifies that through the sale of redundant assets the firm should expect cash flows of £328,000 in year 4 and then £640,000 in year 5. In terms of costs, the firm is expected to identify £570,000 by the end of the first year.
• The due diligence completed, expects that the shareholders of MBE would be willing to sell their equity to the management of Boston Brewery for a bid premium of 34p per share.

Problem 1: Using the information classify the type of merger and then evaluate typically how these mergers deliver wealth to shareholders.  Calculate an appropriate discount rate for the merger (The answer should be rounded to XX.X% i.e. 12.8%)