Accretion/Dilution and Synergy Phasing in a 50/50 Cash-and-Stock Deal
Ravenhill Corp. trades at $64.00 with 100 million shares, $320 million of net income, and a 20x P/E. It has agreed to acquire Talbert Industries - 30 million shares, $45 million of net income, and $300 million of existing debt at 6.0% - for $48.00 per share, or $1.44 billion. Consideration is split 50/50 cash and stock. The cash portion is funded with new debt at 6.5%, and Talbert's existing debt is refinanced at 6.5%. Announced run-rate pre-tax synergies are $40 million; transaction fees of $25 million are expensed. The tax rate is 30%. Management phases synergies at $15 million in year 1, $30 million in year 2, and $40 million in year 3. A preliminary purchase price allocation estimates $300 million of identifiable intangibles amortized over 10 years.
1. Compute year-1 and run-rate pro forma EPS, the accretion/dilution in dollars and percent, and the breakeven synergy level.
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Consideration $1.44B, 50/50:
- Stock: $720M / $64.00 = 11.25M new shares, so 111.25M pro forma
- Cash funding: $720M at 6.5% = $46.80M interest, $32.76M after tax
- Refinancing: $300M at 6.5% = $19.50M versus $18.00M existing, so $1.50M pre-tax / $1.05M after tax incremental
- Amortization: $300M / 10 = $30.00M pre-tax, $21.00M after tax
- Year-1 synergies: $15M pre-tax, $10.50M after tax
Year-1 net income = 320.0 + 45.0 + 10.5 - 32.76 - 1.05 - 21.0 = $320.69M Year-1 EPS = 320.69 / 111.25 = $2.883, which is $0.317 below $3.20, or -9.9%
Year-3 (full synergies) = 320.0 + 45.0 + 28.0 - 32.76 - 1.05 - 21.0 = $338.19M = $3.040, or -5.0%
Breakeven: 3.20 x 111.25 = $356.0M of net income. At $40M of synergies the company reaches only $338.19M, a gap of $17.81M after tax, or $25.4M pre-tax. Breakeven pre-tax synergies are about $65.4M, roughly 64% above the announced number. The deal is dilutive at every level management has modeled.
2. The fairness book shows the deal as 'accretive to cash EPS.' Evaluate that presentation and what the board should be told.
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The cash-EPS figure adds back the $21.0M after-tax amortization: (338.19 + 21.0) / 111.25 = $3.229, or +0.9%.
It is a legitimate supplementary metric - amortization is non-cash and the $300M is a purchase-accounting artifact - but it cannot be the headline:
- GAAP EPS is dilutive by $0.16 at run-rate and $0.32 in year 1.
- GAAP EPS is what the company reports and what consensus is built on.
- The $30M annual amortization is real for covenant and tax purposes even though it is non-cash.
What the board should receive: both measures side by side, the add-back labeled and reconciled to GAAP, the synergies phasing disclosed, and a sensitivity showing EPS at zero, half, and full synergies. Presenting only cash EPS for a deal that is GAAP-dilutive at every synergy level invites a disclosure and process challenge.
3. The exchange ratio is fixed. What happens to both parties if Ravenhill trades at $52.00 before closing, and what protections should Talbert have negotiated?
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Fixed ratio: $720M / $64.00 = 11.25M shares, or 0.375 Ravenhill shares plus $24.00 cash per Talbert share.
At $52.00: 0.375 x $52.00 = $19.50 + $24.00 = $43.50 per Talbert share, which is 9.4% below the $48.00 negotiated value.
Ravenhill's share count is locked at 11.25M, so its pro forma EPS is unchanged - the entire price decline is borne by Talbert's holders. That asymmetry is the point of a fixed ratio and why targets negotiate protection.
Talbert's board must reassess whether $43.50 still clears its fairness threshold. Standard protections it should have sought:
- A collar around the exchange ratio, re-cutting outside a band (for example $58-$70)
- A walk-away right below a stated value per share
- A renegotiated cash/stock mix to restore the headline value
Without one of these Talbert has no contractual remedy and can only rely on the fiduciary out - which itself is constrained by any matching rights Ravenhill negotiated.