NOTE: This project is purely to apply concepts that I have learned from courses and certifications completed and not a formal, independent analyst opinion of any kind.
Find the model here. Any feedback is welcome.
Overview
Stepping away from three statement models and trying my hand at an accretion and dilution model. To try and apply it to something real rather than hypothetical I’ve played around with numbers from BHP and S32 in an imaginary scenario BHP reacquires S32 because I thought it would be funny.
It is more or less the same template within the WSP module but with different numbers, some taken from BHP and S32’s financial statements so I’m playing around with something real, some made up numbers just to have numbers to play with and understand the mechanics of such a model.
The results based on a 50% cash 50% offer with some completely baseless assumptions around costs of debt, transaction fees, etc. is that this deal would be dilutive. Sense checking against P/E ratios of the two confirms this, as BHP is around 0.27 based on FY25 FS and current share price (at the time of writing), compared to 0.93 for S32 on the same basis. Also considering shares being issued as part of consideration, the growth rate of shares outstanding (~4%) from issue as part of transaction vs super simple growth assumptions on acquiree net income (~2.5%) is also dilutive in the first year.
Takeaways
- Very high level and simply speaking on the mechanics, the whole exercise is just:
- Figuring out the consideration – shares, cash – and how much of this cash is going to be financed (including if the acquiree’s debt will be refinanced and included in this amount) (sources and uses of funds)
- Working out the purchase price allocation – writing up or down / off assets and liabilities as necessary, difference between the fair value of acquiree’s assets and liabilities then goes to goodwill
- Overlaying all of this on the combined financials of the acquirer and acquiree
- Determining the resulting pro forma entries going forward – incremental depreciation, financing costs, etc
- Using the above to inform an expected EPS (flowing through overlaid changes to the balance sheet and expected transactions going forward through the profit or loss) and determine whether or not the acquisition is accretive or dilutive
- The course I completed was very much based on a United States perspective in respect of tax and accounting treatment (US GAAP) – I am unsure how exactly a lot of the concepts translate to an Australian context and if what I have followed is technically correct. I will have to research, I think (or learn on the job when I get one!)
- One part where I got tripped up was my journals / adjustments didn’t balance first time around. The course I used had a simplified balance sheet which only had share capital as an equity line item. In reality all equity line items should be eliminated, in theory. I don’t know if in practice what I have done is technically correct in simply zeroing out the equity line items for the acquiree. In terms of learning mechanics I think mission accomplished, technicality in the context of S32 maybe not, but I’m happy with this simple application from a perspective of learning.
- Also used a very basic % growth rate on pro forma EBITDA / EPS to keep things moving. Contemplated doing a three statement model projection to have some interesting numbers to play with but maybe next time. Just going for mechanics / concepts for an accretion / dilution model on this iteration. On the next reps I will use three statement model projections.