Prepared for:

Adnan Habib (ANB)

Lecturer,
School of Business,
North South University.

Course: FIN 440

Section: 2
Date of submission: 3rd August 2016
Prepared By:

Md.Zishanul Haque ID # 151 1488 630

Kazi Sadi Mamud ID # 142 1563 030
Abrarul Islam Labib ID # 141 0970 030
Md.Shahariar Hossain ID # 132 1314 030
TABLE OF CONTENTS
Page no.
01 Acknowledgement 03

02 Letter of transmittal 04

03 Company Description 05

04 Ratio analysis 07

05 Pro-forma statements of both company 07

06 WACC 09

07 Value of the company 13

08 About merger & sources of synergy 15

09 conclusion 16

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ACKNOWLEDGEMENT

A successful project can never be prepared by the single effort or the person to whom project is
assigned, but it also demand the help and guardianship of some conversant person who helps in
the undersigned actively or passively in the completion of successful project.

The success and final outcome of this project required the guidance and assistance from some
people and we are extremely fortunate to have got this all along the completion of our project.
Whatever we have done is only due to such guidance and assistance and we would not forget to
thank them. We respect and thank our honorable course instructor ADNAN HABIB for giving us
the opportunity to do this project and providing us all support and guidance which made me
complete the assignment on time, we extremely thankful to him for providing such a nice support
and guidance.

We are really grateful because we managed to complete this project within the time given by our
instructor. This is a group project and it cannot be completed without the effort and co-operation
from all group members. Finally we would like to express our heart-felt gratitude to all the people
for their suggestions, guidance and help to complete our project.

This project has indeed help us to explore more knowledgeable avenues related to the topic and
we are sure it will help us in our future.

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 LETTER OF SUBMISSION
August 03, 2016
Adnan Habib (ANB)
Course Teacher
Lecturer,
School of Business,
North South University.

Subject: Submission of FINAL GROUP PROJECT “Potential Merger Analysis”.

Dear Sir,
We are pleased to submit the Finance Report on Potential Merger Analysis that you have asked.
We tried to find the scope of this project and its prospect from a pragmatic point of view. We
have faced many obstacles in preparing the report. But at the end we have successfully
accomplished preparing the document.

Therefore, we request you to accept this report. We believe that you will find it in order. We
are eagerly expecting your feedback on the overall report.

Yours sincerely.
Md.Zishanul Haque
ID # 151 1488 630
Kazi Sadi Mamud
ID # 142 1563 030
Abrarul Islam Labib
ID # 141 0970 030
Md.Shahariar Hossain
ID # 132 1314 030

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Company Description
The report for our project consists of the companies Renata Limited and GlaxoSmithKline,
Bangladesh. These two companies are evaluated through different financial methods to
determine the value of the companies in the year of 2014. Throughout the report we would show
how we have projected the PROFORMA and FREE CASHFLOW of the two companies using the
historical data analysis of the companies 3 years’ data. After determining the numbers we have
calculated the share price of each of the company and compared it with the actual share price
that is listed in the DSE Index to estimate whether the company’s share price is over or
undervalued.

An Overview of Renata Limited:

Renata Limited (formerly Pfizer Limited) is one of the leading and fastest growing pharmaceutical
and animal health product companies in Bangladesh. The company started its operations in 1972
as Pfizer (Bangladesh) Limited. In 1993, Pfizer transferred the ownership of its Bangladesh
operations to local shareholders and the name of the company was changed to Renata Limited.

The core businesses of Renata Limited are human pharmaceuticals and animal health products.
In Bangladesh it is the 4th largest pharmaceutical company and the market leader in animal
health products. In addition, Renata products are exported to Afghanistan, Belize, Cambodia,
Ethiopia, Guyana, Honduras, Hong Kong, Kenya, Malaysia, Myanmar, Nepal, Philippines, Sri
Lanka, Thailand, United Kingdom, and Vietnam. The Company is listed on the Dhaka Stock
Exchange with market capitalization of approximately Taka 50 billion.

The Company has eight manufacturing facilities spread over three manufacturing sites. In
addition Renata Oncology Limited has two manufacturing facilities. Distribution of products is
carried out by 19 depots across the country.

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An Overview of GlaxoSmithKline:

GlaxoSmithKline (GSK) Bangladesh Limited carries with it an enviable image and reputation for
the past 6 decades. A subsidiary of GlaxoSmithKline plc.- one of the world's leading research-
based pharmaceutical and healthcare companies GSK Bangladesh, continues to be committed to
improving the quality of human life by enabling people to do more, feel better and live longer.
The Company’s principle activities include secondary manufacture of pharmaceutical
products and marketing of vaccines, pharmaceutical healthcare products and health food drinks

In 1949 the Company commenced its journey in Bangladesh with its’ corporate identity as Glaxo
in Chittagong as an importer of products from the Glaxo Group Companies. It started spreading
its spectrum from being an importer to a manufacturer by establishing its own manufacturing
unit at Chittagong in 1967. The facility till date is considered as one of the Centers of Excellence
in Global Manufacturing & Supply Network of the Group.

The global corporate mergers and acquisitions has seen the evolution of the Company’s identity
in the past 6 decades. In line with mergers and acquisitions the identity changed from Glaxo to
Glaxo Welcome Bangladesh Limited following the Burroughs Welcome acquisition in 1995 and
finally to GlaxoSmithKline Bangladesh Limited during 2002 after merger with SmithKlineBeecham
in December 2000. The mega merger of the Company enables it to deliver cutting edge
advancements in health care solutions. The relentless commitment, setting of standards of
ethical standards and quality backed leading edge technology of the Company has built a strong
relationship between the stakeholders and GSK Bangladesh. With the ever committed 615
numbers of personnel all over the country GSK Bangladesh, which now comprises of both Pharma
and Consumer, continually strive to meet the GlaxoSmithKline mission to improve the quality of

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human life by ensuring healthcare products, health drinks and different corporate social
responsibility programs.

GSK is committed to developing new and effective healthcare solutions. The values on which the
group was founded have always inspired growth and will continue to do so in times to come.

Ratios
2014 2015 2016 2017
Net Working Capital 1,876,912 2,156,579 2,330,601 2,503,257

Total Debt / Total Asset 53.93% 53.06% 52.61% 53.16%

Retention Ratio 54.29% 37.14% 21.68% 21.68%

Interest expense / Total -12.48% -12.48% -12.48% -12.48%

interest bearing debt

Price / Earnings ratio 21.2535 18.9937 17.8151 16.4829

PRO-FORMA STATEMENT
RENATA PHARMACEUTICALS LTD and GSK PHARMACEUTICALS LTD

To make pro-forma statement, we went through the following steps:

1. Collecting the latest three years (2012-2014) of financial statements (income statement
& balance sheet).
2. Using “Forecast” function in excel, we predicted the forecasted sales figure for the next
three years (2015-2017) on the basis of previous years’ sales figure.

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GSK
Year SALES
2012 5,553,812.00
2013 6,774,872.00
2014 7,187,225.00
2015 8,138,716.00 13.24%
2016 8,730,781.67 7.27%
2017 9,562,464.22 9.53%

Renata Ltd.
YEAR SALES
2012 7,858,515,209
2013 9,130,607,862
2014 11,432,554,648
2015 13,047,932,012 14.13%
2016 15,121,022,324 15.89%
2017 16,888,970,671 11.69%

3. We created pro-forma income statements for both the companies (3 to 5 years) assuming
sales growth rate each year is the rate at which all the other major components will
increase except interest expense and depreciation. Depreciation, of the all the years,
remained constant but interest expense changed later.
4. Then moving on to the balance sheet, we increased all current assets & fixed assets of all
forecasted years in line with sales growth rate. In that similar way, we increased short-
term non-interest bearing debt as well which includes trade payables, cost accruals,
provisions and other liabilities, unclaimed dividend, provision for taxation. But we kept all
the interest bearing debt constant.
5. Then to figure out retained earnings in the balance sheet of the forecasted years, I had to
multiply the net income of that specific forecasted year with company’s retention ratio,
and then I added it up with previous year’s retained earnings. In this way, I found the total
retained earnings of the forecasted years.
6. Now there is an inequality between total assets and total liability and equity.
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 The EFN of Renata of the three forecasted years 2015, 2016, 2017 were respectively
497193799, 994635090, and 654196313.
The EFN of GSK of the three forecasted years 2015, 2016, 2017 were respectively -
164528000, -158133000, and 71796000.
7. So To fund EFN of Renata Ltd, we had to increase short term interest bearing liabilities
and long term debt for 2015 and 2016. For 2017, we needed to increase short term
interest bearing liabilities only to fund EFN. While doing this we tried to keep the debt
ratio of each year close to each other. But in case of GSK the EFN of 2015 and 2016 were
negative and retained earnings were enough to fund EFN. Moreover, the 2017 EFN was
positive which was funded with short-term debt.

WACC

To figure out WACC Of both companies, we went through the following steps:

1. we copied the daily closing prices and the DSE General Index (later changed to DSE-X
Index) from the stock exchange of 7 years (2008-2014) and put those on excel file.
2. Then we figured out the annual rates of return and the index using the formula (last day
of year price – first day of year price) / first day of year price
3. We found out the beta coefficients using the annual rate of return and the market rate of
return using a formula in excel.
4. To determine CAPM, we found out the risk free rate of the latest year which is actually
the Treasury bill rate and then used the latest year market return in CAPM formula.
5. This required rate of return is the cost of equity. Now we have both the cost of equity and
the cost of debt (Interest Expense / Total Interest bearing debt). We multiplied both the
cost of equity and the cost of debt with their respective weights and deducted the tax
amount (only for debt).
6. Then finally we added up the two amounts and figured out the WACC of the latest year
which is for Renata 11.4% and for GSK 12.30%.

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Renata Ltd.

Cost of Equity
To identify Cost of Equity we have to find the annual rate of return. And for this we have to find
the BETA, and required rate of return of Renata Ltd.

From the chart below, we need to calculate the value of BETA first. The formula we have used
in the excel work sheet is = =SLOPE (C5:C18, E5:E18)

So the amount of BETA we have found

BETA= 0.8194313

The company has lower systematic risk

Risk free rate of market is 8.3%. So the Cost of Equity using CAPM model is

Required Rate= Rf + β* (Rm-Rf) = 6.7%

We can see that Cost of Equity is positive. Condition of the company is good because of positive
required rate of return.

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 TRADE DATE CLSPRICE DGEN/DSE-
X

01-01-2008 7793.75
3,008.91
30-12-2008 7,789.25 -0.000577386
2,795.34 (0.07)
01-01-2009 7,748.25
2,807.61
30-12-2009 12,051.50 0.555383474
4,535.53 0.62
03-01-2010 12009.75
4,568.40
30-12-2010 12942.75 0.077686879
8,290.41 0.81
02/01/2011 12,420.25
8,304.59
29-12-2011 1,205.00 -0.902981019
5,257.61 (0.37)
01-01-2012 1,264.30
5,351.75
30-12-2012 739.50 -0.415091355
4,219.31 (0.21)
01-01-2013 736.30
4,190.99
30-12-2013 -0.019421431
722.00 4,266.55 0.02
01-01-2014 722.40
4,286.15
30-12-2014 984.00 0.362126246
4,864.96 0.14

Cost of Debt

After applying the formula for WACC, which is,

Weighted Average Cost of Capital = Weight of Equity*Cost of Equity + Weight of Debt*Cost of
Debt*(1- Corporate Tax Rate), we found WACC to be 11.4%.

Thus, the WACC for Renata Ltd.is positive and the required return will be positive.

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GSK

Cost of Equity
To identify Cost of Equity we have to find the annual rate of return. And for this we have to find
the BETA, and required rate of return of GSK.

From the chart below, we need to calculate the value of BETA first. The formula we have used
in the excel work sheet is = =SLOPE (C3:C15, E3:E15)

So the amount of BETA we have found

BETA= 0.852405471

The company has lower systematic risk

Risk free rate of market is 6.50%. So the Cost of Equity using CAPM model is

Required Rate= Rf + β* (Rm-Rf) = 12.33%

We can see that Cost of Equity is positive. Condition of the company is good because of positive
required rate of return.

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 TRADEDATE CLSPRC DGEN/DSE-X
01-01-2008 191.10 3,008.91
30-12-2008 330.10 72.74% 2,795.34 -7.10%
01-01-2009 327 2,807.61
30-12-2009 725.10 121.74% 4,535.53 61.54%
03-01-2010 747.90 4,568.40
30-12-2010 1,129.60 51.04% 8,290.41 81.47%
02/01/2011 1,141.60 8,304.59
29/12/2011 664.50 -41.79% 5,257.61 -36.69%
01-01-2012 665.50 5,351.75
30-12-2012 570.00 -14.35% 4,219.31 -21.16%
01-01-2013 537.30 4,190.99
30-12-2013 955.70 77.87% 4,266.55 1.80%
01-01-2014 999.70 4,286.15
30-12-2014 1512.00 51.25% 4,864.96 13.50%
Average 13.34%

Cost of Debt

GSK has total debt on its balance sheet worth of TK. 24775000. We have taken this amount
from the company’s base year 2014. The cost of debt for GSK is calculated by adding up the
short term and the long term debt.

After applying the formula for WACC, which is Weighted Average Cost of Capital = Weight of
Equity*Cost of Equity + Weight of Debt*Cost of Debt*(1- Corporate Tax Rate), we found WACC
to be 12.30%.

Thus, the WACC for GSK is also positive and the required return will be higher.

VALUE OF THE COMPANY

RENATA PHARMACEUTICALS LTD and GSK LTD.

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RENATA LTD.

FREE CASH FLOW

2015 2016 2017
Operating cash flow 2,606,770,469 3,008,621,855 3,334,115,623
Net capital spending 1,309,565,391 1,586,825,661 1,254,267,654
Change in NWC 30,000,000 28,808,467 263,450,292
FREE CASH FLOW 1,267,205,078 1,392,987,727 1,816,397,676

PRESENT VALUE OF FCF 1,137,621,980 1,122,663,053 1,314,208,125

GSK LTD.
FREE CASH FLOW 2015 2016 2017
Taka'000 Taka'000 Taka'000
Operating cash flow 839,378.47 902,836.68 994,441.39
Net capital spending 76,559 47,639 66,919
Change in NWC 279,667 174,023 172,656
FREE CASH FLOW 483,152.29 681,174.80 754,865.97

PRESENT VALUE OF FCF 430,252 540,177 533,073

To figure out the value of the company, we had to do the following things:

1. Firstly, we calculated the free cash flow of the forecasted years- 2015, 2016 and 2017
using the formula (OCF-Net capital spending-Change in NWC). Then we figured out the
present value of those cash flows using WACC as discount rate in the same excel sheet.
2. Assuming the P/E ratio is constant in the forecasted year, we multiplied the P/E ratio with
EPS of 2017 to figure out the stock price.
3. Then we calculated the Enterprise value. To find this first we had to calculate market
capitalization (number of shares multiplied by market price) of year 2017. Then using this
value, we figured out the Enterprise value of the company in according to the formula:
(Market capitalization+ all interest bearing outstanding debt- cash). Then we had to figure
out the present value of Enterprise.

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 RENATA LTD.

COMPANY VALUE
2014 2015 2016 2017
Price/Earning ratio 25.7413074 25.7413074 25.7413074 25.7413074
EPS 59.40521823
Market price of stock 1529.167984

Market capitalization 67,479,016,221

All interest bearing outstanding debt 5,881,906,478
Cash 401,975,735

ENTERPRISE VALUE 72,958,946,964

PRESENT VALUE OF ENTERPRISE 52,787,581,774

VALUE OF THE COMPANY 56,362,074,932

GSK LTD.
2014 2015 2016 2017
Price/Earning ratio 21.25348732 21.25348732 21.25348732 21.25348732
EPS 91.75
Market price of Stock 1,949.99

Market capitalization 23,490,502,195

All interest bearing outstanding debt 24,775,000
Cash 2,537,032

ENTERPRISE VALUE 23,512,740,163

PRESENT VALUE OF ENTERPRISE 16,604,270,738

VALUE OF THE COMPANY 16,605,774,240

4. Finally, we added up the present value of those cash flows with the present value of
Enterprise and figured out the total value of Renata Ltd. and GSK Ltd.

MERGER AND SOURCES OF SYNERGY

GSK is considered as world's one of the leading pharmaceutical companies because of its
performance. Efficient, capable and honest workforce. GSK has intense demand of their product
nationally and internationally which helps them to inflate their business. Considerable financial
resources to grow the business. Proprietary technology and importance patents. Ability to take
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advantage of economies of scale if it merges with Renata ltd. Better product quality relative to
rivals. Goodwill of the company Follows GMR-Good Manufacturing Practice and greater
economies of scale can be gained. GSK as a multinational company has opportunity for expand
its investment and has potential growth in Bangladeshi market but Renata has captured large
percentage of the pharmaceuticals market. So merging would be favorable for GSK. Moreover,
Renata has strong financial position and a strong brand image and effective advertising and
promotional strategies, expanding the company’s product line to meet a broader range of
customer needs. Market is significantly large and growing. Availability of natural resources is the
most lucrative opportunity for GSK to merge with Renata ltd.

Adverse shifts in foreign exchange rates and trade policies of government. Aggressive movement
of rivals. Slowdown in market growth. Growing bargaining power of the end consumers, thus
high priced medicine are inconvenient for them. Costly new regulatory requirements.
Competitors’ lower prices are increasing threats from local competitors. Underutilized plant
capacity. Higher unit cost relative to key competitors. Group compliance due to group policy the
company has to import raw materials form UK rather from neighbor countries (other than those
which are produces locally) resulting in higher cost of production. Lack of variety in products. Low
pack size. Lack of sufficient promotional effort. GSK has weaker distribution network and sales
force are relatively low compare to competitors. All of the above threats can only be transformed
with opportunities if GSK merges with Renata.

CONCLUSION
The experience of preparing the pro-forma statements of Renata Ltd. and GlaxoSmithKline has
given us the tools to apply the financial tools and techniques we are learning in the course in real-
world scenarios. We have learned a lot while finding out the relevant data from the financial
reports and stock market related websites. We have gained useful insights into the important

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task of valuing a company, which we will use in our professional and personal careers to
determine whether a particular stock is undervalued or overvalued.

THANK YOU!

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