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Medimedia International Limited Case Solution & Answer

Medimedia International Limited Case Solution

Executive Summary

Medimedia International Inc. is a company established in London, which specializes in publishing magazines related to medicine and pharmaceutical products. The company doesn’t only work on its publication but also on its more than 70 products, which are also marketed in almost 25 countries. Currently, the chairman of the company:  Dr. Martin Steinmeyer, is eagerly waiting to make the company public and wants to do it by leverage buyout. The three top financers are the mezzanine debtors, managers who are interested to pay for the equity financing and senior creditors. The purchase price is estimated to be $64.8 million; whereas, the equity value has been calculated to be $57.3 million approximately, showing that the transaction has been oversubscribed and has been fruitful for the seller. Though, it has been recommended to use mezzanine debt financing as it actually supports the senior credit and equity financing, but due to higher risk, it demands greater return in the form of higher interest rates. Moreover, it provides an improved asset coverage, giving the company a huge amount of capital which would make the senior debt much safer.

Introduction

The medical journal publishing company:Medimedia International, Ltd, operates in 25 countries and hasit’s headquarter in London. Other than publishing the medical journal; the company produces over 70 products. The major revenue generation of the firms comes from the European region as a major part of the business is in this region. The large scale production made it the best pharmaceutical promotional company across the globe. It maintains a healthy competitive edge by hiring editorial staff with thorough pharmaceutical knowledge. The writers primarily focus on forming data bases for different directories and commissioning the journal article.

In the year 1991, the company’s manager decided to privatize the multinational corporation in a leveraged buyout (LBO). The LBO was to be be financed by debt denominated in European currency units (ECU) plus the equity financed by the managers made it quite unique. Currently, the chairman is confused regarding the purchase price and the structure of debt financing. The main finances of the deal comprise of different players like mezzanine investors; BHF and KB.The management team provides equity capital, and lastly, the senior creditors Dun and Bradstreet,examine the returns nurtured by the deal.In addition to this, the uncertainties brought by the LBO would be a point of concern for the investors as well as the company’s CEO Dr Martin Steinmeyer.

Problem Statement

As discussed above, the management team showed curiosity to invest in equity financing for the leverage buyout. With this, some senior creditors like Dun and Bradstreet put their weights on LBO. However, the debt being denominated in ECU also brought unusual twist to the transaction. The highly low coupons offered on the vendor note made it more interesting for the analysts to ask some important questions.

The observers wanted to know about the attractiveness created by the transaction for mezzanine lenders, management team and senior creditors, contributing with the huge debt. The prospective for sellers was also one of the point of concerns for analysts who were keenly looking forward to the outcome of the transaction. Apart from this, the analysts were also anxious to know the factors that led to the unusual features of the transaction and how they had the tendency to make the transaction beneficial for all the stakeholders.

Equity Value

Equity value of Medimedia International Inc. can also be referred as market capitalization of the company. It is the total value which the equity investors attribute to the firm. The DCF model has been used to calculate the total valuation of the firm. The cash is added to the enterprise value after subtracting the debt equivalents and debt, preferred stock and non-controlling interest. The discounted free cash flow can be calculated by subtracting tax expense from operating income, to get free cash flow and then discounting it by weighted average cost of capital, shown in exhibit 1. The calculations have been performed from 1991 to 1998, giving us 8 periods. Continuing with it, the NPV of cash flow is taken by adding up all the discounted cash flows for eight years. Further, the NPV of terminal value is added to the NPV of cash flow in order to get the total enterprise value of $111.27 million. The total cash for the initial period of $4.58 million is added to the enterprise value after subtracting the total debt of $58.46 million, giving us the total equity value of $57.39 million. The DCF model is shown in exhibit 2 and the equity value calculations are shown in exhibit 3……………………….

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