What does takeover mean?
In layman’s language, takeover generally means to acquire another company. Takeover generally comes in picture when an acquirer company raises a bid to get the control of another company. In the process of a takeover, the company, which is making bid is known as the acquirer and the company for which it makes a bid is known as the target.
Takeover is to a certain extent similar to mergers; in both takeover and merger, two companies combine into one. In merger, two equal companies are involved while in takeover two unequal companies are involved, i.e. one large company targets another smaller company. Takeovers can be voluntary in case of a mutual agreement between the two companies. It can also be unsolicited; in which case the larger company targets the smaller one without any prior expression of interest. Takeovers are of generally two types:
- Friendly Takeover (in case it is based on mutual agreement)
- Hostile Takeover (in case it is unsolicited)
Key Advantages of Takeover
Generally, there are some key benefits for companies to be a part of acquisition, which are as follows:
- Allows the dynamic firms to take over the inefficient firms and turn them into more efficient and profitable as a combined entity.
- The new firm might benefit from the economies of scale (also known as synergies) and shared competencies.
In this below article, there is an illustration of acquisition in the lithium space in Australia. The ASX-listed consumer discretionary company Wesfarmers Limited is acquiring Kidman Resource Limited through its wholly owned subsidiary company, Wesfarmers Lithium Pty Ltd.
Wesfarmers Limited (ASX: WES) is primarily involved in retailing operations, which include supermarkets, general merchandise and specialty departmental stores. The market capitalization of the company stood at $45.25 billion as on 24th September 2019.
What’s trending with WES?
Wesfarmers Limited, recently, through a release dated 23rd September 2019 updated the market with the execution of Scheme of Arrangement for the acquisition of Kidman Resources Limited.
- As per the Scheme of Arrangement, the wholly owned subsidiary of the company Wesfarmers Lithium Pty Ltd acquired all the issued ordinary shares in Kidman Resources Limited, which is an ASX-listed company (ASX: KDR).
- The company further stated that with the wrap up of the transaction, Wesfarmers holds 50 % interest in the Mt Holland lithium project in a joint venture with Sociedad Quimica y Minera de Chile S.A. (SQM), which is one of the world’s leading producers and marketers of lithium products.
- Turning to the consideration for the acquisition, a cash payment of $1.90 per share is to be paid by WES to Kidman shareholders today.
- Scheme of Arrangement was approved by the Federal Court of Australia as declared by the company in its announcement made on 12th September 2019.
A look at financial performance
Wesfarmers Limited via release dated 27th August 2019, updated the market participants with its operational and financial performance for the financial year 2019:
- For the full year ended 30th June 2019, the company reported a net profit after tax amounting to $5,510 million, which include significant items after tax amounting to $3,171 million, which were related to discontinued operations including receivables on the demerger of Coles as well as disposals of Kmart Tyre and Auto Service (KTAS), Quadrant Energy and Bengalla, wrapped up during 1H FY19.
- It witnessed a rise of 13.5% in net profit after tax from continuing operations (excluding significant items in the prior year), and the figure stood at $1,940 million.
- The company further stated that earnings before interest and tax (EBIT) from continuing operations witnessed a rise of 7.4% in FY19, post adjusting for the contribution amounting to $128 million from WES’s 15% investment in Coles.
- It was mentioned in the release that the Bunnings delivered a robust result that represented the diversity of its customer base as well as the resilience of its product offering.
- When it came to the industrials, it reported ongoing earnings growth in its Energy, Fertilisers and Chemicals businesses, which represented the continued strong demand from key customers.
- The other businesses and corporate overheads reported earnings at $122 million, against a loss of $133 million in FY18.
Cash Flows of the Company
- The free cash flow of the company stood at 2,963 million, reflecting a fall of 13.4% as compared to the previous year. This largely represents the decrease in operating cash flows after the portfolio activity completed during FY19.
- For the financial year ended 30th June 2019, the operating cash flow stood at $2,718 million, reflecting a decline of 33.4% as compared to FY18. This resulted primarily because of the demerger of Coles and disposals of Bengalla, Quadrant Energy and, Kmart Tyre and Auto Service (KTAS).
- The Board of directors of the company declared a fully franked final ordinary dividend amounting to 78 cents per share.
- The full-year ordinary dividend was $1.78 per share and total dividends to shareholders for FY 19 was $2.78, including the fully franked, special dividend of $1.00 per share.
When it comes to the price performance of the stock, Wesfarmers Limited was last traded at a price of A$40.170 per share with a rise of 0.651% on 24th September 2019. It witnessed a rise of 13.93% in the time frame of six months. On Year to date basis, the stock produced a return of 30.19%.
Kidman Resources Limited
Kidman Resources Limited (ASX: KDR) is involved in the business of exploration. As per the release on Australian Securities Exchange dated 24th September 2019, there was an announcement that KDR would be removed from the Official List of ASX Limited at the close of the trading session on 24th September 2019 post-implementation of the scheme of arrangement (As explained above).
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