Basic Financial Concepts and Pinkerton Essay

Executive Summary. Wathen is attempting to value the proposed acquisition of Pinkerton in an effort to determine whether bids of $85 million to $100 million is value enhancing for CPP’s shareholders. Additionally, Wathen must choose between two financing options: (1) raising $100 Million via a $75 million debt structure at 11.5% interest rate together with a $25 million equity investment for a 45% stake in the combined company and (2) a $100 million debt facility at 13.5% interest rate. General Assumption. We assumed that Wackenhut is comparable to Pinkerton, and therefore that Wackenhut’s asset beta reflects that of Pinkerton. Additionally, we assumed that Pinkerton’s bond rating is A. As such, we assumed a debt service ratio for …show more content…
This implies that anything worst than pessimistic case would lead to a financing inability for CPP, and hence increasing the likelihood of financial distress. In terms of value to existing shareholders in option 1, investors receive negative premium for 45% of CPP stakes. Thus, the value to existing shareholders is higher when financing with $75 Million debt, and therefore is more preferable choice of financing. Recommendation for CPP. CPP needs to justify which case is more likely to occur in order to determine the appropriate value for Pinkerton. Given that CPP is an expert in security guard business, there should be larger chance that CPP will be able to improve Pinkerton performance and create value for CPP. Given that we agree that the expected case is more likely than the pessimistic case, we believe that Pinkerton will be worth the $100 million asking price. With the conclusion that expected case is more appropriate to value Pinkerton, we recommend that CPP choose to finance $100 million with all debt.
Exhibit 1: Cost of Equity

Exhibit 2: Expected Case: 5 Year Valuation

Exhibit 3: Expected Case: Terminal Value

Exhibit 4: Expected Case: Value Creation to CPP

Exhibit 5: Expected Case: Value from Tax Shield
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Exhibit 6: Expected Case: Total Value of Pinkerton
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Exhibit 7: Expected Case: Financing with $75M Debt
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Exhibit 8: Expected Case: Financing with $100M Debt
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Exhibit 9:

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