The Acquisition of Gooderson Leisure Corporation (gooderson) by Grand Parade Investment (grande Parade)

written by Secunda and Johannesburg grooup for MBL 2

Contents

1. Executive Summary 3

2. Introduction 4

3. Analysis 5

3.1. Synergies between Gooderson and Grand Parade 5

3.2. The effect on board members of both companies 6

3.3. The effect on major shareholders 7

3.4. Grand Parade's price offer for Gooderson 7

3.5. Acquisition funding 8

3.6. The effect on shareholders ROE 9

3.7. The effect on shareholder debt-equity ratio 9

3.8. The effect on shareholders' market capitalisation 9

3.9. The effect on shareholder value 10

3.10. The effect on expected earnings per share (EPS) 10

3.11. The effect on expected dividend per share (DPS) 10

3.12. The effect on book value per share (BVPS) 11

3.13. The effect on Weighted Average Cost of Capital (WACC) 11

3.14. The effect on Weighted Economic Value Add (EVA) 11

4. Recommendations 12

5. References 13

ANNEXURE A 14

ANNEXURE B 16

ANNEXURE C 18

ANNEXURE D 20

ANNEXURE E 21

1. Executive Summary

The objective of this report is to investigate whether the acquisition of Gooderson Leisure Corporation (Gooderson) by Grand Parade Investment (Grande Parade) makes sense and whether it will increase shareholder value for both companies. The two companies are in the leisure and tourism industry. If the acquisition takes place, it will result to the following benefits for both companies.

* An immediate and obvious synergy between Gooderson and Grande Parade should be the market share growth, which should help Grand Parade improve its national foot print in the leisure and tourism industry.

* Increased fixed assets of Grand Parade, because Gooderson has increased its fixed assets by 31% in 2009 through buying and refurbishing lodges.

* Cost savings of about 25% of Gooderson headline earnings as a result of cut in executive salaries.

* Increased earnings per share and payout ratio, if Grand Parade dividend policy is unchanged

* Increase in Grand Parade book value as Gooderson is offered a price less than the fair value.

* Increase in return on equity (ROE), increase in liquidity ratio and growth in market capitalization.

* Reduce Grand Parade Weighted Average Cost of Capital (WACC) from 12.40% to 12.05% by funding Gooderson with 100% debt

* The intrinsic price of Gooderson calculated using both the Nett Asset Value method and discounted cash flow method is 108c and 106c respectively,

* Created a value of 15c per share for Gooderson shareholders and a value of 6.4c per share for the shareholders of Grand Parade

We suggest that Grand Parade offers Gooderson a price of 85c per share for 100% acquisition of the company at a total value of R106,250,000 and this transaction must be finance through 100% debt.

The purchase will add value to both company's shareholders, as Godersoon will sell their shares at a premium of more than 21% and Grand Parade economic value add will grow by about R9,500,000 and also improve market capitalization as the price of Grand Parade is expected to rise as they will be paying less than the fair value for Gooderson shares.

2. Introduction

This report seeks to investigate whether it make sense for Grand Parade to purchase Gooderson and at what acceptable price must they offer the management of Gooderson.

Grand Parade is a Western Cape-based black owned and controlled holding company having investments in the South African gaming and leisure industry. The Grand Parade group comprises Grand Parade and its four wholly-owned subsidiaries, BVI 575 (Pty) Ltd, Utish Investments (Pty) Ltd, Wild Rush Trading 97 (Pty) Ltd and GPI Slots, as well as investments in Western Cape Manco, SunWest, Worcester Casino (Golden Valley), Thuo Gaming,(Grandslots), Akhona GPI and RAH. The group also provides management services to the gaming industry.

Gooderson is an investment and holding company and operates in the leisure industry as well. Through investments in subsidiaries, the group operates hotels, a management company, game lodges, touring ventures and timeshare development ventures. Both these companies are listed on the Johannesburg Stock Exchange (JSE).

3. Analysis

A number of sources have been used in gathering the information used in analysing the main areas of focus on this report, these include the companies financial reports, companies websites, I-net bridges, etc.

3.1. Synergies between Gooderson and Grand Parade

A synergy is a force that allows for enhanced cost efficiencies of the new business when two companies merge or one acquires the other. A synergy takes the form of revenue enhancement and cost savings. By merging, the companies hope to benefit from:

1) Staff reduction, in the case of Gooderson and Grand Parade there is no major change anticipated in the staff complement at the operation level. However, there are expectations for Grand Parade to disband the executive and other functions like finance and marketing. This should reduce the total cost on salaries of top management of Gooderson by over R4,000,000 more 25% of headline earnings (Annexure E).

2) Improved market reach and industry visibility, Grand Parade through acquiring Gooderson will access new markets and grow revenues and earnings. Grand Parade is Western Cape based while Gooderson is Kwa-Zulu-Natal based. Gooderson headline earnings, though only 9.3% (R15,991,000) of Grand Parade's, they should help improve Grand Parade earnings which were down 77% in 2009.

3) Operating economies, Gooderson has increased its fixed assets by 31% resulting to the company improving its total assets by 28%. They have also addressed