Corporate reconstruction and re-organisation

SECTION B - ADVISORY REPORT This question is worth 25 marks. AgriLogix Group is a diversified agricultural logistics and warehousing conglomerate. Over the past two years, the company has faced severe liquidity issues, primarily driven by its failing cold-storage division, which has suffered from outdated technology and loss of key contracts. The company is currently in breach of its debt covenants and faces the threat of immediate liquidation by its bondholders. The Board of Directors has proposed a financial reconstruction scheme to save the viable parts of the business (the dry-bulk logistics division) and avoid liquidation. Exhibit 1: Current Statement of Financial Position (Extracts, $ millions) Assets: Non-current assets (Dry-bulk): 120 Non-current assets (Cold-storage): 40 Current assets: 30 Total Assets: 190 Equity and Liabilities: Ordinary Share Capital ($1 shares): 50 Retained Earnings: (20) 8% Secured Bonds: 100 Current Liabilities: 60 Total Equity and Liabilities: 190 Exhibit 2: Proposed Reconstruction Scheme 1. The cold-storage division will be spun off into a separate entity and sold to a private equity firm for $25 million in cash. This cash will be used immediately to pay down current liabilities. 2. The 8% Secured Bondholders are asked to accept a debt-for-equity swap. They will exchange $40 million of their bonds for 60 million newly issued ordinary shares in AgriLogix Group. The remaining $60 million of bonds will have their interest rate increased to 9% to compensate for the increased risk. 3. Existing shareholders will retain their 50 million shares but will suffer dilution. Exhibit 3: Post-Reconstruction Valuation and Liquidation If the reconstruction is successful, the remaining dry-bulk division is expected to generate a sustainable annual Free Cash Flow to Firm (FCFF) of $12 million indefinitely. The company's post-reconstruction Weighted Average Cost of Capital (WACC) is estimated to be 10%. If the company is forced into liquidation today, the estimated realizable values are: - Dry-bulk assets: $70 million - Cold-storage assets: $15 million - Current assets: $20 million Liquidation costs would amount to $5 million. Secured bondholders have first charge over all non-current assets. REQUIREMENTS: (a) Evaluate the financial impact of the proposed reconstruction scheme on both the existing shareholders and the 8% Secured Bondholders. Your evaluation must include a comparison of the value of their investments under the reconstruction scheme versus the immediate liquidation scenario. (14 marks) (b) Discuss the strategic implications of spinning off the cold-storage division, and evaluate whether a Management Buyout (MBO) of the cold-storage division might have been a viable alternative to the private equity sale. (11 marks)

SECTION B: ADVISORY REPORT OmniRetail Group (ORG) operates a large chain of traditional brick-and-mortar department stores. Due to changing consumer habits, ORG has suffered declining revenues and is currently facing a severe liquidity crisis. The Board wishes to pivot the business model entirely to an e-commerce platform, which requires an immediate capital injection of $40 million. ORG is currently in breach of its debt covenants. The current capital structure is as follows: - Equity: 20 million ordinary shares trading at $1.50 per share. - Debt: $80 million of 8% unsecured bonds, currently trading at $60 per $100 nominal value. Current Annual Earnings Before Interest and Tax (EBIT) is $10 million. The corporate tax rate is 20%. The Board has proposed the following Capital Reconstruction Scheme: 1. Debt-for-Equity Swap: Bondholders will be asked to exchange 50% of their nominal bond holdings ($40 million) for 25 million newly issued ordinary shares. 2. Rights Issue: Following the swap, a rights issue will be launched to raise the required $40 million for the e-commerce pivot. The rights issue will be offered at a 20% discount to the theoretical ex-swap share price. The Board estimates that the $40 million investment in e-commerce will increase annual EBIT by $6 million immediately. REQUIREMENTS: (a) Calculate the current Earnings Per Share (EPS) and the current gearing ratio (Debt / (Debt + Equity)) using market values. (4 marks) (b) Assuming the reconstruction scheme is fully implemented: (i) Calculate the theoretical share price immediately after the debt-for-equity swap. (ii) Calculate the issue price of the rights shares and the number of shares to be issued. (iii) Calculate the revised EPS and the revised market value gearing ratio. (12 marks) (c) Evaluate the acceptability of the proposed reconstruction scheme from the perspective of: (i) The existing bondholders. (ii) The existing shareholders. (9 marks)