KILLER PLC

29 Riller plc #

Assume that it is now November 20X5. -

-

Riller plc is a UK-based building company which constructs residential properties (ie, houses and
zI
- =

apartments). It is listed on the London Stock Exchange.

In common with many other companies that build residential properties, Riller performed poorly
#
-
from 20W8 until 20X2, because of downward pressure
-
on property prices and on sales volumes f- g
-

during the recession. However, Riller has now returned to profit, following an upturn in property
I
-

prices since 20X2 (three years ago).

-

The chief executive of Riller, Gary Griffiths, asked to meet with Laura Lewis, who is a partner in
- - T
- -

Hayes & Scott LLP (HS), a firm of ICAEW Chartered Accountants. You work for HS as a senior in
the advisory department. Riller is a client of= HS, but not an audit client.
-
- -

- -
,

The meeting
Gary opened the meeting. "Riller has been increasingly profitable over the past two years.
-
I
Factors that have helped us return to profitTo
include a reorganisation in 20X2 and also, more
recently, the general improvement in the residential property market. In order to continue this
T
E-
-

growth in profit, however, the board has decided that the company needs to make a strategic -
-

acquisition.
"I have prepared some information about the UK residential property building industry and

#I
market background, including an extract fromI the annual report of Mega plc, one of the UK

→
market leaders (Exhibit 1). I have also provided some background information on Riller
(Exhibit 2). The finance director, Julie Morton, who=
I is an ICAEW Chartered Accountant, has
provided some financial and operating data (Exhibit 3).
-

II
-

"The Riller board has identified a possible target company, Minnen plc, and I have drafted -

=
-

confidential briefing notes relating to its acquisition (Exhibit 4). We would welcome HS's
evaluation of this potential acquisition.
"Financing the acquisition is a key factor. There are two alternative forms of consideration for
-
- -

purchasing Minnen:
(a) Make an offer of a share-for-share exchange; or
(b) FI a cash acquisition.
Issue bonds to finance
"Julie has provided some information about the financing of the acquisition (Exhibit 5).
-
- -

"In addition, if we decide to acquire Minnen, we will need HS to carry out due diligence Z -

procedures.
-

"I appreciate that information is limited at the moment, but I have provided terms of reference

⇒I
for an engagement between Riller and HS whereI I set out more precisely what is required from
your firm (Exhibit 6)."
Engagement partner's briefing
Laura asks to see you after the meeting. She outlines what occurred during the meeting with
I=
-

Gary and gives you the following instructions:

-

"I would like you to provide for me a draft response to the requests made by Gary, the Riller
-

I
- -

chief executive (Exhibit 6).

"In addition, after the meeting, I received a phone call from Julie Morton (Exhibit 7) about an
-
-
-

ethical concern. I would like you to prepare notes setting out the ethical issues arising for all
-

f-I HS and Julie should now take."

--

relevant parties. Your notes should include the actions that

140 Strategic Business Management: Question Bank ICAEW 2020

 Requirement
Respond to the briefing from the engagement partner, Laura, by drafting the required reply to
-

To
I
-

D
Gary (Exhibit 6) and preparing notes on the ethical issues (Exhibit 7).
Total: 60 marks

Exhibit 1 – UK residential property building industry and market background – prepared by

Gary Griffiths I
-

The residential property market comprises two sectors: the new-build sector and the secondary
f- -
-
-
-

market sector. The new-build sector is concerned with the construction and sale by building
=I=The secondary market sector is concerned with the
-

companies of new houses and apartments.

sale by individuals of their homes in private transactions with individual purchasers. Individuals
-

- -

buying a house or apartment normally obtain=a loan to finance the purchase.

The prices of residential properties can fluctuate widely. In particular, there can be periods of

-0
a-
IF
⇒
←=
It*-,I
rapid increases, sometimes as high as 20% in one year in some regions of the UK. However,
prices can also fall, as occurred in the recession from around 20W8 to 20X2. Many residential

-5€
property building companies failed in this period and most suffered losses.

-0¥
FEI
I

see
As property prices started to increase after 20X2, most residential property building companies
- -

that survived the recession showed significant increases in profits. Residential property price

I_②
toes
TET
increases have occurred throughout the UK. However, while the increases have been significant

EEE
in London and the surrounding areas (where property prices have always been significantly
higher than the rest of the UK), there have been smaller price increases in other regions.
The factors influencing residential property prices are varied but include: the level of personal
-

incomes, loan interest rates, availability of credit to house buyers, consumer confidence,

⇐oEE⇐
②#→--0
E-properties.
-

employment levels and available supply of

.EE#e-.Z----
Extract from industry magazine: House Builders Herald – 27 October 20X5
-
- -

The UK's largest residential property building companies will see profits increase significantly
in 20X5. Research shows that the UK's 10 largest companies in the industry own enough land
-

to build around half a million homes. In total, they made pre-tax profits of more than
£2,000 million in 20X4 – a 35% increase on 20X3.
-

Jeff Knight of the House Builders Association, whose members account for 75% of new
residential properties built in the UK, said:=I "Profits in the industry fell very steeply in 20W8 and
- -

the following few years, with most companies making losses and many companies failing.
-_ I
-
-

Those companies surviving the crisis have reorganised, with profits now returning to
- -

pre-recession levels."

Extract from Mega plc's annual report for the year ended 30 September 20X5
-

Mega continues to be one of the UK's leading residential property building companies.
During the current financial year, Mega's total sales volumes grew by 24% to 3,785 residential
-

properties. In the same period, the average selling price of our properties increased by 15%.
The substantial increase in the number of properties sold, combined with property price inflation
E- margin from 20.7% to 22.8%.
-

in excess of build cost inflation, improved our gross

ICAEW 2020 Question Bank 141

 I a
Exhibit 2 – Riller company background – prepared by Gary Griffiths
-

Riller was established over 50 years ago. It grew by developing a good reputation for building
I on
-

residential properties and obtained a listing

-
e- the London Stock Exchange 14 years ago (in
20W1). The properties built by Riller are positioned above mid-market in terms of size and
quality. It has focused its building activity in=
I large
-

-
= towns and cities in the north of England.
The company has survived by adopting a prudent policy of acquiring a significant landbank
(land on which houses can be built in future) To I unlike many companies that failed in the
-

=-
and,
=
recession, its financial gearing is relatively low. -

In common with many companies in the industry, Riller's profit has increased significantly in the
-
so
-

past two years as a result of rising property prices and increased sales volumes. Industry profit
Ie
growth is expected to continue for three more
to zero growth. I
I years at about=10% per annum, before stabilising

In the UK residential property building industry, Riller is in the top 25 largest companies, but it is
-
-
-
-

outside the top 10 companies which dominate the industry.

III

To
@
E-
IT
T
Riller has a large central depot from which it operates in the north of England. It does not have a -

depot in the south of England, as it seldom has building projects in that area.
-
- -
- -

Riller's houses and apartments have proved popular because of its good reputation for quality
building, and also as a result of carefulIT
IIselection of the location of the land it acquires.
Riller purchases land a long time before it needs to build on the land and it therefore has a

#T@
substantial landbank in inventories. A key reason for the recent increase in profit has been that

TEIFI
land was acquired at low cost during the recession. Increases in the value of land over the past

T_~-
three years have made recent land purchases significantly more expensive than was previously
the case.
Inventories are the company's major asset and comprise primarily the landbank, but also
- - -

building materials, work-in-progress on partially completed houses and unsold completed

-
- -
-

houses. -

Revenue is recognised on legal completion of the sale of each house.

As -
2-

Riller's share capital is owned 27% by Financial First (a private equity company) and the
= I institutions.
-

remaining shares by a number of financial

Riller does not currently have any subsidiaries.
-

Exhibit 3 – Riller financial and operating data – prepared by Julie Morton

-

::I
Riller: Summary statements of profit or loss for the years ended 30 September
20X5 20X4
- -
•

£'000 £'000

22.7€
set
#-)
Revenue 285,300 232,500
Cost of sales • (218,900) (189,400)
Gross profit 66,400 43,100
Distribution and administration costs (28,500) (21,200)
Operating profit 37,900 21,900
Net finance costs
Profit before tax
(10,200)
27,700 135gal
(9,300)
12,600 .

.at#oFl420Oz.g6timg-
Income tax expense (6,100) (2,700)
Profit for the year 21,600 9,900

142 Strategic Business Management: Question Bank ICAEW 2020

 Riller: Summary statement of financial position at 30 September 20X5
£'000
Non-current assets
Property, plant and equipment 3,700
Current assets
Inventories 566,300
Trade and other receivables 4,700
Cash 29,600

Tg
⑧
0 gearing
.

-80
Total assets 604,300
Equity
£1 ordinary shares 32,000
Share premium
Retained earnings
108,500
66,300 6217*0

-556
Non-current liabilities
Loans 260,000

ag&
Current liabilities
Trade and other payables 137,500

-0
Total equity and liabilities 604,300

206*0,82
.MIL#..,.
Exhibit 4 – Potential acquisition of Minnen plc – confidential briefing notes prepared by Gary
-
#
Griffiths
Negotiations
-

Preliminary negotiations have taken place with the Minnen board about the possibility of Riller
#I of Minnen on 30 September 20X6.
acquiring 100% of the ordinary share capital
The Minnen board believes that an appropriate bid price would be ②
- -
-
£4 per share and it would be
willing to recommend that the shareholders accept an offer from- Riller at this price. This would
= £80 million.
-

give a total proposed consideration of

-

Minnen company background

-

Minnen is an AIM-listed company which builds residential properties mainly in the south of
= f-I in the south east of England.
-

England, including London. Minnen has its main depot

② in the top 25 largest UK housebuilding companies, but it has an excellent
Minnen is not
- -

reputation for quality.

The directors of Minnen own 20% of its ordinary shares, with financial institutions holding the
remaining shares.
Minnen: Extracts from statements of profit or loss for years ended 30 September
cos 20X5 20X4
£'000 £'000

¥8
IF
Revenue
Gross profit
133,400
16,100
130,800
15,500 In
!
Operating profit 8,100 7,750
5%
u
Profit before tax 7,000 6,700
Fingertips Profit for the year 5,600 5,300

5.61£

ICAEW 2020 Question Bank 143

 Assets Assets
-.y
Net = .

58 =
top
Minnen: Summary statement of financial position at 30 September 20X5

€0
⑧.
-
-
£'000
Non-current assets

⑤
Ig
✓

=&
Property, plant and equipment 2,200

E-
T
-_
⇒*•f
e
•

Current assets

FE
- Inventories 184,800

⑥_
Trade and other receivables 2,300

I Cash
②
Total assets
1,300
190,600 gearing
Equity

EEE
£1 ordinary shares 20,000

FEE
Retained earnings 22,000
Non-current liabilities
Loan (redeemable in 20Y0) 87,000

ICE-T
Current liabilities 61,600
Total equity and liabilities 190,600 .

÷÷÷÷÷
Notes

§E⑧⑧¥②
⇐Et-eEEo
1 Inventories are measured at the lower of cost and net realisable value.
2 The fair value of Minnen's net assets, excluding internally-generated intangibles, is
£58 million.

IEaEIE÷÷÷E
Comparison of operating data – Riller and Minnen
Riller Minnen
20X5 20X4 20X5
Number of houses sold in year ended 30 September 765 820 242
Number of 'plots' of land held in landbank at
- -

30 September 5,550 4,600 1,600

Synergies from the acquisition
The commercial and operating synergies, after tax, for the enlarged group which could arise
-

from the acquisition, are:

-

=L 283,5-36
overhead efficiency savings of £200,000 per annum;
material and subcontractor procurement gains from scale economies amounting to
£100,000 per annum; and
other cost savings amounting to £50,000 per annum.
Working assumptions
The acquisition would take place on 30 September 20X6.
In the absence of an acquisition, Minnen's profit after tax will increase by 10% per annum
over the three years from 30 September 20X5, before stabilising to zero growth thereafter.
An annual discount rate of 10% is to be used to evaluate the acquisition.
Operating cash flows arise at the end of the year to which they relate.
One 'plot' of land is used to build one residential property.
-

144 Strategic Business Management: Question Bank ICAEW 2020

 ←#*t-I
s¥¥÷÷÷÷

IT
-1
-#
a-
Share prices .

③
E-
A-
Current quoted share prices on the London Stock Exchange are:
Riller £7.20
Minnen £3.20

=#
These prices have remained around the same level since 30 September 20X5.

--=
-
- t
no

Post-acquisition integration
-

2-8
It has not yet been decided whether Riller would retain the Minnen brand name after acquisition

TIF
or rebrand all its operations under thezI Riller brand.
-

SIT
-2A
Financial reporting concerns of the Riller board

-2-2
The Riller board has a number of concerns about the impact of an acquisition of Minnen on the
-
- - -

Riller group financial statements.

-
- -

The Riller board's specific concerns about the acquisition are:

-20dg
✓ the impact of the acquisition on the group statement of financial position, including the
treatment of the Minnen brand name.

-⑧⑥②tf
the financial reporting implications of each of the two methods of financing the acquisition
(Exhibit 5).

--ETF⑤E@
-I¥F-EoE@
Exhibit 5 – Financing the acquisition of Minnen plc – prepared by Julie Morton

---#a%eTqt→E¥
As a working assumption, the bid value for Minnen is unlikely to be affected by the method of

--£g-*=I#IEE-¥¥•
financing the acquisition.
I
The acquisition can be implemented by two alternative methods of financing: a share-for-share
-
-
exchange; or cash raised from the issue of a 10-year bond.
The amount under either method would be equal to the full amount of the consideration paid
for 100% of the share capital of Minnen.

②
(a) Share-for-share exchange
Acquire 100% of the ordinary shares of Minnen through a share-for-share exchange using
newly-issued Riller ordinary shares.
The Riller board has specific concerns about the impact of the share-for-share exchange on
Riller's share price and about any other implications for its existing shareholders.
(b) 10-year bonds
Issue 10-year bonds at a fixed annual rate of interest of 5%. The funds raised will be used to
make a cash acquisition of 100% of the ordinary shares of Minnen.
The Riller board is confident that market interest rates and expectations will remain stable
until 30 September 20X6. However, the Riller board has specific concerns about how
subsequent changes in market interest rates will affect the fair value of the bonds and about
the implications of this for Riller.

Exhibit 6 – Terms of reference – prepared by Gary Griffiths

g

The Riller board would like HS to prepare a report addressing the issues set out below.

¥=←I÷-=-
(1) With respect to the potential acquisition of Minnen:

Fed
ITT
-4g
-8
ee
a-
analyse and compare the performance and position of Minnen and Riller;
explain the factors that should be considered in deciding whether it would be
# beneficial to acquire Minnen;

Investment

RE
Him
E4x2om=E¥?
=

Magnone
ICAEW 2020 cap .

ma Question Bank 145

7am
-
 To
IF
IT
⇒
⇐
# determine and justify a price per share that should be offered for the acquisition of

age
Minnen, taking into account the proposal of £4 per share by the Minnen board. Use a
variety of models; and

-30g
##⑤
explain the financial reporting implications for the consolidated financial statements of
-

Riller, addressing the specific concerns raised by the Riller board (Exhibit 4).

- (2) With respect to the two alternative methods of financing the acquisition (Exhibit 5):
evaluate the factors that should be considered in deciding which method of financing
should be used. Address the specific concerns of the Riller board (Exhibit 5), but do
not restrict yourself to these; and

TELL-TALE
provide a reasoned recommendation regarding the method of finance that should be
used.

[Link]#EEFIeo-
[Link]#--
(3) Identify and explain the key risks to Riller relating to the acquisition of Minnen which will
need to be assessed during the due diligence process. Set out the due diligence
procedures that HS could undertake to address these risks. I do not need a long list of the
-

standard due diligence procedures, just those relevant to the key risks.

Exhibit 7 – Note of telephone conversation with Julie Morton – prepared by Laura Lewis -
-

The finance director of Riller, Julie Morton, called me confidentially today to raise an ethical
-
- .

concern.
Julie said that some of the Minnen directors have informally indicated that they might be
I = shareholders. This would depend on Riller
-

prepared to recommend a lower bid price to Minnen

guaranteeing that they would retain their positions as directors after the acquisition, with their
= current
-

=
-

remuneration packages remaining at their levels.

-

Julie explained that Gary is keen to minimise the cost of the acquisition and would therefore like
==
-
-

to consider this suggestion, but she has concerns

= and would like some advice from HS.

30 Kinn plc
Kinn plc is a listed engineering company operating through three divisions: Mechanical,
Electrical and Civil.
Kinn has performed poorly in recent years and, following a review of the business, it intends to
restructure. The board is therefore seeking advice from Giplin and Linthwatt LLP (GL), a firm of
ICAEW Chartered Accountants. You are a senior working in the business advisory department of
GL.
Aisha Ashton, a partner in GL, has received an email from the Kinn finance director, Roger Reed,
which she has forwarded to you.
To: Aisha Ashton
From: Roger Reed
Date: 3 November 20X5
Subject: Sale of Electrical Division
Dear Aisha,
The Kinn board needs GL's help.
As you have not previously worked on an engagement for Kinn, I have provided some
background notes about the company (Exhibit 1).
Some segments of our business have not been performing well. In particular, we entered the
electrical engineering market a few years ago, opening an Electrical Division in a newly-built

146 Strategic Business Management: Question Bank ICAEW 2020

 Ritter

227
prices is better as Ritter plc increased 227 Administration
by
't
average
.

G Ritter G showed in
prices 315% G Distribution cost
of fixed
increase is
Comparison
a
Analysis of ,

Minner whereas plc showed cost Er it do t

performance Mega growth of usually
Revenue
Analysis
Ritter
Performance
15%
prices changes by such
high percentage
.

in
of
.

Revenue Ritter has increased Gross However it be due to

pic
g by Profiles
may
-

It due to Gross Ritter increased number Plots

't 20×5
of
in is increase in
majorly profit margin of
-
.

demand residential property 18.5T to It due held killer 20.6%

mainly
in
increasing 23.2%
by
is
from by
. .
.

houses sold to house

Gearing
segment
Number
of by rise in
selling price of average
.

River have declined 6.7% bot sold at compared to Killer currently

by
as is
a
pace Gearing
, greater of
the market cost construction at 5561 structure It
increasing prices in
change
in
of capital is
.

of
.

have supported its in revenue Riker has properties bit but

purchased
high percentage
-

growth
a
long a
-

residential time recession result

growth killer
Average price property during
as

of ago ,
a
considering in

increased
Ritter has is not
sold
by 3154 it it concern
enjoying higher gp margins
is a
by
.

profits
.
.

in x4 €232,500.000 €283,536 In terms Ritter plc Riker 's Finance cost increased
Aug price
I

of gp margin
. -

820 9-61 due

x5= has
outperformed
market leader also
by ,
which
may
be

in E 285.300.000 £372,941 its increased loans However despite

Aug price as
margins by greater to new .
.

765 to Market leader this Killer has improved

percentage in 20×5 as
compared
of
Decline in Riker plc volume 67 't is
plc its interest times
by mega Profit margin Mega pic cover
from
2.35
.

of
not a indicator as residential increased 20.77 to 228% to 3.71 times
good from
.
.
.

market is in volumes Administration Er Distribution cost

growth
'

a
showing
Market Leader Distribution showed
Mega pic has Administration G cost

reported a
growth in volumes
of
an increase
of 34%
,
which is a

24 't However in Riker Pk that

.

growth greater
rise
, considering revenue
only
 earned
Market leader Pk River G
Comparison
a
Minnan
Analysis of Performance Mega gross of
Revenue 228% in 20×5 It Minnan
profit margin of Performance
.

Revenue have shown

improved 20.71 in 20×4
Profit Ritter has reported
margins
a
plc
Minner a
of plc from
. -

1-9 't
only which is Minnan didnt show
good growth much better as
slight growth of ,
of performance

,
considering despite that in London G in South
compared to Minner
plc despite
a
disappointing growth of
residential property market England prices Residential the that Minner
plc operates
selling of fact
in .

good years
better market south
Market leader
pic reported property
have shown a
greater
rise in
Mega
.

a
of
which includes market
growth
in volumes
of
251 G price Operating profit of England
.

showed showed increase 451 London also River reported

of
151 Minner only Operating profits of of
. .

growth
.
.

indicator 22-71
rise in revenue
of
1-9 't which is which is a positive considering revenue
growth of ,
whereas

to that it 1-9 't This reported

low also due rise shows Minner
just growth
a
fact of
v. a in revenue
.

booth cost control 191 Revenue 227

improvement 't
of
in
operates of England where in
growth of
.
.

residential have Riker despite the that

properties fact
is
prices of Gearing of
of at

67
increased Minner 67 't it sold 't lesser houses in
significantly
.

Gearing plc is v.
high
Minner has to sell structure debt to compared to 20×4 Growth
failed of Capital ANI equity 20×5 as
Apparently
.

houses in 20×5 as a ratio is also at 207 't in revenue was due to 315%
sufficient v.
high High gearing
.

that this
result
growth
in revenue is less .

is a concern
,
but
considering a
fact rise in
prices .

considering
land bank
Current
growth
in revenue can
easily Miners holds a
significant Minner volumes must have shown

be attributed to SP it 1600 which cost decline -9-1

against plots I in
increasing
a
of as
growth
. .

Gross Profits [Link] Debt is $87 it can revenue is even less than
of
m
,

Gross Profit easily pay debt in case

problem expected price rises 20×5
margins Minner in
of of
.

.
.

are v. low at 12-1 .

which only -

However it also needs to

Showed a rise Oil 't in 20×5 be considered that Ritter

of
-
 is a much Co as compared G construct it later This be Factors to consider while
fact
can
bigger
. on .

to Mirren Ritter Net assets at Cost

of average property sold decision to acquire
from making
.
seen a

book value worth 152068M whereas which is£286,143 Ritter SP Minner

for against
$42 In Cost
of worth £372,941 Minner is
Expansion
of
'm
Minner
they only case
of Geographical of
.
.

Ritter G is SP Ritter
£484,710
southof
If Minner £551,239 In is
ageist of
in
Performance case
England
.

of
.

basis killer Cost the that

compared

compared
less positive
of is as
factor
on one
year year of
on v.

then Ritter has Minner to BP because Ritter Purchases land needs to be considered in
outperformed
extent time its construction In acquisition of Minnan Ritter is
by greater long before
.
.

Gross Current situation killer to North

Profit is
enjoying high currently confined of
GP Ritter much it land times market E 's
-

margin of
is
higher margins
as purchased in
England
Minne

Ritter
as
compared to Minner as recession acquisition will enable it to
of
,
.

has GP enter South market

Gearing
a whereas
of England
23.2%
margin of
.

have
Minner Minner is Ritter G Minner both
Gearing
as
only generated margin of of higher good

to Killer Minner 's capital structure construction

125 .

It is also
arguable
that Minner
compared .

reputation for quality

have includes debt OT not
should 67 't whereas Minner
acquisition will
a case
higher
in
margin
as
of ,

to Ritter the basis killer 's aim

compared , on Rimer it is 55.6%
High gearing in clash
strategic
.

of
.

that Minner properties have Residential Property industry is

not Ritter will to its
higher a
big be able use

South both hold land

selling price in
of England
.
concern as
companies a
experience G expertise
for
Minner sp is £551,239 bank this debt In current times both
property average against growth of
Minner as
, they
.

that Ritter is E- 372,941 land trend ? to

industry
whereas value
of of
is in
increasing belong same
a
.

One the that Ritter debt it will not create a

problem £350,000
of Synergy Savings
reason
against of
- .

has better that they terms

margin
is will be
gained
in
of
land at cheaper rates Cost Further other
purchase operational
.
 needs to Motivation Directors
of
will also be available Minner also
forms of synergy High gearing of of
Financial be considered debt increases Minner
pic
synergies Marketing high
in as
form of ,

Head cost Further has used ↳ directors hold

synergies
3
office synergy . risk
of
co . Minnan
currently
However to consider its finance which 201 shares
of
source
negative up easy
a
factor
.

low will it to Riker to

acquire
is → aims
in
gross profit margin of
make
difficult
raise
funds
Minner 12-1 which less than Cash Minner needs Minner
of
is 100%
future flow forecast of Of
. .

Ritter 's
percentage 235 Low to be considered that how will
they arrange →
Directors lose
profit of may
. .

to construct residential interest

Minner indicates
funds properties on in Minner .

gross profit margin of

its ER expensive purchasing 1600 plots held valuation Minner Share
price
inefficiencies of
.

Ritter consider it Cultural

Share
clashes
of properties price proposed by
.
can -

↳ Inherent need
Minner
as a positive growth potential also risk in acquisition £4
board per
of
-

that its
↳ Ritter G Minner deals to consider Share be evaluated
by deploying strategy of
can

land long time in two markets valuation

purchasing a
before different through different
construction at low it which have
prices can
different models :

may
,

increase Minner also approaches b market share price

profit margins of
.

needs to considered Net asset based valuation

Land bank
of
Minnan
of
1600
plots is
Acquisition price be a
,

that ↳ due to based valuation

a
positive growth potential by may be
high growth
3
, Earning
constructing property on them ,
significant
L in Residential
property market 4, PIE ratio based valuation .

>
IF
↳ May
can be earned as land prices be over valued Market share price
profits of
- -

G these plots Better to acquire when market Minnan is considered £3.2

increasing of
are were

purchased at lower prices settees down pershare then proposal of

.
.

Minnan board th per

of
share is
high They .
are
 premium £08 per It can be that PE ratio Earn is
high
demanding
a v.

of argued of
- .

which 25T be Ritter also be

share
represents premium Minner
from Lastly
Minner
pic
can can
a
different
.
.

,
,

It that it market valued based

is normal acquisition price is as
operates
in a
different
.

through Earning
than market price However £4 at valuation
normal share
accepting proposal
a
higher
,

of
.

142 times PE valuation

but premium ratio

20×6
251 is v. Minner 30
high
a
of high considering
is on
of
.
.

If Price ratio that killer has 30 its

Earning Minner a
higher profit margin September
of if
-

considered at PE ratio cased earning G

is at share
price £32 G operates of
10.6 times
fore synergies
of
.

it is 11.4 times Its If PE ratio Ritter is applied on are considered will be :

of
are
earnings
-

£5 .com G number shares are 20 million Minner then value per PTO
of earnings of T
which EPS €028 Er : share will to -28 x 10.6 £2.91 share
of
be
= .
o

gives =

PE ratio times at share 32 Another valuation method which

off
11.4 price can
.

of
-

In comparison
PE ratio Riker is be used to value Minner pic is
of
106 times its are [Link] its Net asset value fu its net assets
earnings
as
of
.

{ number Shares are 32 million which is E58m G it has 20 million shares which
of ,

PE ratio £291 it
EPS to -675 3 value share However
of of a
gives gives of
.

10.6 times at share price £72 can be can be

argued valuation on the
of
.

-
Minner PE ratio is
already higher basis net assets donet include impact
of
as compared to killer despite that it Minner Brand name
of
.

has lower
margins
.

Proposed - share
price of
¥4
per
share

If proposed share
price this demands brand value -97×2%8
€4Ed :
of
-
-

of
accepted then PE ratio demanded will E 22M which is v. brand value
a
high
.

be 142 times at EPS to -28 Minnan net assets

excluding brand
of pie
.

worth E58m brand value alone

i .

of
 consolidated FS

Discount
Earning factor
GOD Valuation Impact of
Minner acquisition on

-
30 Sep x5 = E5 .com - - -

Minner Net assets will be valued to its FU on

£6.16
£5 date This fu net
16mA
30
Sep x6= .com Hot acquisition expert valuer
- -

x
-

of
m an
by
=
. .

THE
⇒
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①
-

30
Sep EG not E 6776M 0909 £6 'l5m assets acquisition date will deducted
x7=
from
- .
.

-
-

on be

got
- -

- 30 Sep x8= E 6.776mA Hot f- 7.453M 0826 €6 -

15M Cost investment to calculate Goodwill will

of goodwill
- .
.
-

→
-

Perpetuity Et £74 -53M 0.826 £61 5M be consolidated Fs It will be tested

453M x
reported in
=
.

=
.
- .

Synergy
=
to -35M x
÷ .
. E 35M
for impairment
at each
year
end .
further adjustment
Valuation E773m Excess fu
depreciation will be
required on

of
Assets
Profits of
30
Sep x5 G 30
Sep x6 are
ignored in
adjustment done Minner
- .

on

valuation be made 30593×6 In Consolidated SOFP Minner assets G liabilities

as
acquisition will on -

do that date will valuation will be added with Ritter G its post acquisition
profits after affect
.

Valuation on the basis is £77 .

3m which Share
profit
will be recorded in Consolidated
of earnings
-

,
of
share ( 20 million shares ) Reserves
gives per value
of
£3861 share .

maximum value that can be

offered for
Minner
Impact of
Minner Brand Name

£386 it includes Minner Co brand riot

acquisition
is
per share as name is
recognized currently
- .

G also Minnan 6 soft it their

impact of future growth
in
synergies
in as is
internally generated
earning
.
.

financial brand If River

Reporting Implications
will acquire Minner Co
name .

plc .

Financial Killer board then this brand will net

Reporting implications enquired by
name be
internally
-

include consolidated SOFP brand

impact Minner on ,
generated rather it will be purchased name
of
a
,

treatment brand and financial

reporting in consolidated Fs Purchased brand name will be
of name .

implication two methods consolidated Fb at its fu

of proposed of
acquisition .
shown in on

acquisition date Minner Co Its fu will be

of
.

calculated IFRS B fair valuation In order to

as
per
- .
 value brand per IFRS 13 cannot be estimated then issue Him shares will
yearly
name as be
-

of
three levels data need to be be done recorded in share capital at
of impairment testing will .

considered financial methods

par value El G
Reporting implication of acquisition of
if [Link]
.

In Level I data active value Share

premium

market
share Share
for
in
remaining
-

Exchange
that asset is considered In case In this method Killer will record account
of acquisition plc
-

of
. .

Brand this level data investment Minner with Bonds

of pic
name a
along
in

not available active G Killer Pk record bond

will be as no
corresponding entry in its Share Capital will a
-

market exist Brand names Share Total investment value

of
.

premium .

of
Minner issue
separately by recording
In level 2 data asset valued recorded asset Fs Cash with
- is will be as in individual
receipt of along a

active market similar killer shares issued it be current liability loan

for
values will
of
non
through of against
.
.

assets In Brand name recorded Share capital at G Cash received will be used
of
.
case in par value -

this also not to

level data is
remaining
in Share
premium account
of
killer make Cash acquisition of
usually
available Minner Pk investment
pic by recording
.

In Level 3 data internal valuation Investment recorded individual FS with Cash

in
of along payment
- -
.

models will be used to value Ritter will be cancelled Investment recorded will
plc against be
-

brand to consolidated Fs
name .

Usually
in order value FU
of
Net Assets C
Equity ) of
Minner on cancelled in
against

brand name this level data is used acquisition date in consolidated rs A net assets on acquisition
of
.

as brand names doriot have active For example Investment is done at date
if
-
.

market ooo to be valued Minner Co directors Interest recorded

they
have proposed value
expense will be
-

of
.

internal models then investment will recorded

of Eh
be each bonds issued
through
on
year
.
.

Once the brand is £4 x shares £80 Further

by
zoon m
name
⇒
recognised
= .

in consolidated Fb then it will be Riker Pk will record share

of
issue
,

E 80M¥72 Him This

amortized over its useful life
.

If
life
=
shares .
share
 Factors to consider while Share price River plc Exchange will net
may face profile of
risk
deciding
increase
of
-

method acquisition downward Him Co cost will be

pressure he
fixed
if
a new as

of
new
.

Share shares issued It created

if
share
may happen
are
.

for Exchange
.

If acquisition is done at valuation On the other hand it needs to be

acquisition is done
through
an over - -

⇒ -

Share For considered

Share then
example proposed acquisition price of that Equity issue is an

for exchange if
new
,

issued £4 then Piller Expensive holders

shares will dilute
shareholding
is
agreed plc shares source
of finance ,
as
Equity
downward ¥4 their
percentages of existing shareholders .

may face pressure as demand greater

return
for higher
risk .

that acquisition overvaluation returns doriot attract tax

considering Minnan also
Assuming if goes forward
is an
Equity
market share Net assets fu to debt
on proposed price E4 then River plc price benefit
as
compared returns
of
,
.

have to its Him E it needs to considered that

pic will issue
Earning forecast
.

Lastly be

new shares at share

price €72 further Share
price Ritter also shares once issued canned be cancelled
of may
.

of
Share Share As
compared to this debt holder
[Link]) of for
can
for acquisition price of .

fall
in case
Exchange
Ritter lesser returns
These new him shares will as Co .

SHE
may get be released
by co .

through repayment .

25.5% revised shares due to this share issue Reason Bonds

represent
new
of
.

¥t3n'
00=255
II. Im
' ' "
) .
This will
being that Minner
pic generates
low -
If Bonds are issued to
finance
dilute shareholder profit margins the acquisition then this will increase
existing percentage
.
.

For financial first Ritter Gearing is

factors
example shareholding However to consider which support Pk further
gearing of
-
.

decline to Share Share include which will

then
high at
271
will
from 2o already 55.61
for exchange high
.

to
If
Shareholders Riker Ritter Pk increase 62.171 acquisition
may not for gearing of pic currently further
.

agree
.

such dilution holds 56.8 't 9 due to Share

done at Eh
in
shareholdings ,
as their
gearing of
is
proposed price of
.

powers Share its will decline

decision making will be
affected for exchange gearing Higher gearing will increase risk
of
.

Ritter

introduced
G interest cost burden
as new
Equity will be in
Pk fixed
.
.

Capital structure Further share Share New interestexpense at 51 interest rate

using for
.
.
 E4m Further
will be
if acquisition price changes
in Fu
of
Bond will also
gearing
is
already too
high Equity
.
issue

£4 i bonds E8om not Riker Pk it redeem their

is
q are
affect
as will will reduce ratio
of gearing
. .

issued to acquisition bonds at

fixed par value Risks Due Procedures
of
E
finance key diligence
.

shares This will reduce Other to consider include that risks to be considered in
key
20M
factors
- -
.

interest times bonds debt holder

existing cover
from
371 are low risk
for acquisition
of
Minnan pic include :

to 2.66 times Interest cover will be : low returns are

paid to them as Valuation Land bank be as
of may
o

wrong
.

still due to to further tax valued at Fs

acceptable high profits compared shares .

benefit currently they are cost in .

Killer also available interest 96.9% total assets

of pic .

is on expense of Land bank represents

of
Riker board bonds ? its valuation
key
be
specific
concern
plc is will risk in
.
-

of
o

that market interest Bonds will be redeemed 10 In to deal

how
changes
in -

after due diligence process .

order

rates will FU bond As G Co not bound with bond with will

affect of years
is this risk procedures
following
.

Ritter bonds interest

plc
fixed holders
forever
are be
performed
.
.

ooo market interest rate However bonds due Review market to

bonds
if riskof data Fu
increase co
verify
- -
.

interest rate to interest lost G redemption burden land

fixed fix land held
increases above
plots in
.

of of
bond 5 't then FU Bonds covenants G bank
Of of ,
of also
bring mortgages
bonds will As in that case
with them which increase risk Review past sale transactions
fall
-

along of of
.

Ritter Pk bonds will not be co similar

plots to FV
verify of
.

attractive However market interest Reasoned Recommendation

if land bank
.
.

rate to below 51 then Riker Bonds advised Physically visit

plots land
Normally
as -

falls
are
of
.
-

pic bonds will have in fu source because to their location G respective

they
a rise a
of finance verify
.

Ritter plc will remain are

cheaper However values
unaffected
source
of finance
- .

due to market interest River

changes
in in case
of plc Equity issue

their
as bonds are
fixed
rate bonds . will be a better
option as
Another to consider is similar Co sold G its valuation Ethical
Key
risk Concern
any
.

Fu net assets t58m whether brand indication Co directors

of
name Minnan
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.

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.

it includes correct Fu all assets valuation brand ↳some evidence

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e

I
.

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of
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exist but valuation brand

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Any contingent liability
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-

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.

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.

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-

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calculating - it is

Fu net assets Minner plc ↳ Minner Directors

in
of tsm Integrity issue in
g ↳
.

Detail cases Growth rate lot is assumed in

self Interest threat
of ongoing of
.

which create
contingent valuation based model It Ritter plc should make sure that they
through earning
a
-
.

dont

valuation
liability is to current make unethical act
a risk as any
.

Market data to Fu 5.6% ↳ Ethical dilema to consider

verify earning
is
factors
-

growth
-
.

PPE Review past trend

of and inventory ⇒
of profit growth Transparency
b

Review loan to that whether Minner has fairness

pic
2
agreements
-

verify valuation liabilities achieved such in past ER 3

Effect
of
,
growth
included in net assets .
not - Julie Morton -
Actions

valuation Brand also e) Review operational ↳ convince not to

get
involved
Gary
is
capacity
name
of
→
of
the risk assumed
↳ Resign
major Minner Minner to support
one
of for pic
↳
pic as
proposed price
asked
by growth
lot Refer legal opinion for reporting
of
.

directors include Review to

major impact data
⇒
a
industry of
Minnan
regulator
.

brand value Relevant procedures Co market segment to

of verify
.

to value it include assumption lot

of growth
: .

Review market data

for
-
-
HS -

Our firm -
Actions

§
not involved
convince
Gary → to
get
Review that no such unethical act is done .

↳
Resign

Refer legal opinion for reporting

to regulator
.