Case Study
The Ashanti-Bogoso Merger

Prof. Ian Giddy, New York University

As part of the consolidation of transportation services in Ghana, the Ashanti Freight Company and Bogoso Rapid Delivery Ltd are planning a merger. Ashanti has proposed to acquire Bogoso through an exchange of shares, with Ashanti paying 1.4 shares for each share of Bogoso. Bogoso shares are currently trading at Cedi50, while Ashanti shares are priced at Cedi40. Ashanti has agreed to retain all the top management and directors of Bogoso, and to rename the merged firm Ashanti-Bogoso Company.

The following are the details of the two potential merger candidates, based on estimates for the forthcoming year (Cedi figures in millions):

Bogoso Ashanti
Revenues Cedi4,800 Cedi3,325
Cost of Goods Sold 
(w/o Depreciation)
as % of Revenue 
87.50% 89.00%
Depreciation Cedi200.00 Cedi74.00
Tax Rate 32.00% 32.00%
Working Capital 10% of
9% of 
Market Value of 
Cedi1,700 Cedi1,600
Outstanding debt Cedi360 Cedi450

Both firms are in a steady state. Bogoso is expected to grow at 5% a year in the long term, and Ashanti at 5.5%. Capital spending is expected to be 90% of depreciation in both companies. The beta for Bogoso is 1.7, and for Ashanti 1.5, and both firms are rated BBB, with an interest rate on their debt of 9.5%. The US government bond rate is 6%. Ghanaian bonds yield approzimately 2% over US government bonds. The market return is about 7% over the risk-free rate.

As a result of consolidating their routes and overhead expenses, the combined firm is expected to have a cost of goods sold of only 86% of total revenues. Ashanti is hoping to raise the merged company's growth rate to 5.5%. On the other hand the merger is expected to involve additional costs of Cedi200 million in the first year, and 100 million and 50 million cedis in the second and third year after the merger, respectively. The combined firm does not plan to borrow additional debt.

Estimate the value of Bogoso and of Ashanti, operating independently. Then estimate their combined value, assuming no synergies. If it does not increase debt, the combined firm's rating will be A+ (with an interest rate of 8.75%)

Now estimate the value of the merged company, assuming synergies.

Finally, assume that, following the merger, the Ashanti-Bogoso Company's debt ratio increases to 20% of total capital from current levels. (At that level of debt, the combined firm will have an A rating, with an interest rate on its debt of 9.0%.)


Download the ashanti-bogoso.xls spreadsheet, and play with the numbers.

From the spreadsheet,

1. What is the equity value of Bogoso on its own? Of Ashanti?

2. What is the value of the combined firm's equity without synergies?

3. What is the value of the combined firm's equity with synergies?

Team Assignments:

1. From the point of view of an advisor to Bogoso's shareholders, what should they expect to gain from the merger? How should the price be paid? What other terms and conditions would they want before agreeing to the deal?
2. From the point of view of an advisor to Ashanti's shareholders, what price should they be willing to pay? How should the price be paid -- in cash or shares? How would the payment influence their control of the combined company? What other terms and conditions would they want to incorporate into a Memorandum of Understanding?
3. Please complete and hand in the Merger Term Sheet. | | | | contact
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