On the 31st July 2012, Aer Lingus Group plc, an Irish airline, wrote to shareholders outlining its reasons for recommending that shareholders reject Ryanair Holdings plc’s offer to purchase the company. The offer valued Aer Lingus Group plc at €694 million (£561 million).
The board of directors of Aer Lingus Group plcwere unanimous in the view that Ryanair’s offer fundamentally undervalued the company.
Ryanair already owns a 29.82% stake in Aer Lingus Group plc, which was built up during two previous unsuccessful attempts to buy the airline in 2006 and 2008.
Ryanair’s offer is to be investigated by the European Commission over competition worries.
The requirements of the report are detailed as follows:
In your role as Finance Director of Aer Lingus Group plc, fellow board members have asked you to produce a report to assist the company in its defence of the hostile bid from Ryanair Holdings plc.
Valuation Model (20 marks)
1. Produce a company valuation using a free cash flow valuation model. The model should incorporate estimates of the following;
(i) Return on invested capital (ROIC)
(ii) Cost of capital
(iii) Horizon or competitive advantage period
(iv) Expected future cash flow
(v) Growth in future cash flow
(vi) Reinvestment required
This section of the report should be included as an Appendix to the written element of the report. Students may wish to use Excel to produce the model.
The written element of the report should contain three distinct sections.
Section A (20 marks)
In your role as Finance Director;
(a) You will comment on the valuation you have produced, relative to the value of the hostile bid, and;
(b) You will be expected to fully justify the estimates used in your model with regard to the following key elements;
(i) The horizon period chosen
(ii) The difference (spread) between ROIC and the Cost of Capital both during and after the horizon period
The expected future growth
You will be required to justify the estimates used in respect of;
(i) the risk free rate
(ii) the risk premium
Issues surrounding the model (CAPM) and the difficulties in estimating inputs to the model should be fully explored withreference to relevant theoretical literature.
Students will be required to base any figures or estimates used on Aer Lingus Group plc.
Students should assume, for the purposes of the assignment, that Aer Lingus Groupplc is all equity financed.