6.2 Week 6 – Lesson 2 (BLOG)

Advice to the Board of Directors of XYZ Plc

Based on the current valuation of XYZ Plc, the company is trading at a P/E ratio of 10 and an EBITDA multiple of 3.75. To ensure that the acquisition of DL Ltd does not increase either of these valuation multiples for the combined group, the maximum acquisition price must be set using the most restrictive of the two constraints.

When applying the P/E ratio constraint, the maximum price that XYZ Plc can pay for 100% of DL Ltd without increasing the group P/E ratio is £300 million. Applying the EBITDA multiple constraint allows for a higher maximum price of £375 million.

Since the P/E ratio is the binding constraint, the Board should not offer more than £300 million for the shares of DL Ltd. Any price above this level would increase the valuation multiples of the combined group and dilute shareholder value.