Medco Energi Internasional Harvard Case Solution & Analysis

Question 1
Calculate the Ownership and Voting Stakes (and effective control) and wedge for all the shareholders under the two bid scenarios (44.9% and 50.1%).
In order to compute the ownership and the voting stakes and wedge for all the shareholders under the two bid scenarios, we have calculated the valuation of Medco Energi internasional using the leveraged buyout valuation method. The financial statements for the company are shown in case exhibits however, we do not have the pro forma cash flows of the company for the future years. Therefore, the first step was to determine the assumptions on the basis of which the future cash flows of the company would be estimated.
A number of assumptions have been made for forecasting the cash flows of the company for the next four years from 2005 to 2008. These assumptions relate to the sales growth rate, the average tax rate, the WC as a percentage of sales, the CAPEX as a percentage of sales, the EBITDA as a percentage of sales etc. All of these are shown in exhibit 1 in the appendices. Furthermore, using the information of the company’s share price and the market indices, we have computed the beta of the company which is 0.802 as shown in exhibit 1 in the appendices.
Medco Energi Internasional Harvard Case Solution & Analysis

Since, the risk free rate and the return on the market has not been provided therefore, we have taken the risk free rate from economic indicators for 10-year treasury bills constant maturity rate and we have assumed the market rate of return of 4.5% based on historical trend. We have computed the equity beta for Medco using the slope function in excel and then using the current D/E ratio we have computed the unlevered beta for the company. The unlevered cost of equity is 3.30% that has been calculated using the CAPM model formula.
After this, we have computed the interest expenses and the present value of the tax shield for the company for the next four years based on the total financing requirement of the owners of $ 478 million. The present value of tax shield is $ 73.179 million which is shown in exhibit 2 in the appendices. Finally, we have computed the projected cash flows for the next four years, the terminal growth rate has been assumed to be 3% taking a conservative approach.
The free cash flows have been calculated by first computing the levered cash flow and then adding back depreciation and deducting interest expenses to compute the unlevered cash flow. Using the unlevered cost of equity and the terminal value, the value of the company based on the LBO model has been computed to be $ 123.16 million. The current outstanding shares are around $ 310.6 million, thus the intrinsic value per share is $ 3.97 per share. Based on the current market value of the company, the IRR is 196%.
After this, we have computed the ownership percentages and the voting stakes of all the shareholders of the company based on the two bid offers of 44.9% and 50.1%. Based on the bid offer of 44.9%, the ownership of Panigo brothers and Temesek Holdings would be 30.99% and 75.89% respectively and their voting stakes would be 69.01% and 56.85% respectively.............

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