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National Plastics Case Scenario National Plastics Corp. is a leading manufacturer of high-quality injection-molded plastic packaging materials used by various industries, primarily food and bever- age processing and packaging firms. In late November 2012, the company received approval for two important patent applications-one providing for improved tamper protection for plastic containers and another for an improved biodegradable plastic film that allows for better food preservation. On 4 January 2013, Haines Foods and Snacks, Inc., launched a hostile takeover bid for all of the shares of National at $30 per share (a $5 premium in excess of the pre-bid price). Haines Foods is a national distributor of deli and dairy products. If its bid is successful, it plans to continue to operate National as a wholly owned subsidiary. Zenith ThermoPlastics Inc. produces plastic containers and bags that are used by the food and beverage industry. Keith Whelan, who is both chief executive officer and chief financial officer of Zenith, had been in discussions with National to either purchase or license their newly patented technologies. As a possible alternative, in view of the Haines bid, Whelan began to consider having Zenith make its own take- over bid for National Whelan provided National's most recent financial statements, shown in Exhibits 1, 2, and 3, to one of his assistants, Mike Noth, with directions to calculate National's free cash flow using the discounted cash flow approach as a first step in determining the maximum value that Zenith should be willing to pay for National's shares. 61 Exhibit 1 National Plastics Corp. Selected Financial Data, for Year Ending 31 December ($ millions) 2012 Revenues 1,614 Cost of goods sold 841 Selling, general, and administrative expense 436 Earnings before interest, taxes, depreciation, and amortization 337 (EBITDA) Depreciation expense Operating income 276 Interest expense 47 Pretax income 229 Income tax (32%) 73 Net income 156 Share Information Number of outstanding shares (millions) 60 2012 Earnings per share $2.60 2012 Dividends paid (millions) $37 2012 Dividends per share $0.62 2011 315 295 Exhibit 2 National Plastics Corp. Consolidated Balance Sheets ($ millions) At 31 December 2012 Cash and cash equivalents $8 $5 Other current assets Total current assets 323 300 Fixed assets 1,384 1,250 Less Accumulated depreciation 181 120 Fixed assets, net 1,203 1,130 Total assets $1,526 $1,430 Current liabilities Long-term debt Common stockholders' equity Total liabilities and stockholders' equity $696 562 268 $1,526 $670 611 149 $1,430 Exhibit 3 Other Financial Information for National Plastics Corp. as of 31 December 2012 Effective tax rate 32.00% Cost of equity 12.00% Weighted average cost of capital 9.00% Noth soon returns and points out that the free cash flows from National will differ in future years as a result of its new patents-he suggests that, just as Zenith wanted to license the technology, other plastic firms would also be interested. Noth also suggests that because National has a lower debt-to-equity ratio than the rest of the industry, it could support more debt, so he has adjusted the weighted average cost of capital (WACC) accordingly. Noth's projected cash flows and other estimates are provided in Exhibit 4. Exhibit 4 Estimates and Assumptions of Mike Noth Used in Valuing National Plastics as of January 2013 ($ millions except WACC) 2013 2014 2015 2016 Thereafter End-of-year free cash flow 170 165 180 195 Growth at 5% a year to firm WACC Total debt immediately following acquisition 10.50% 650 After a discussion about the appropriate cash flow estimates and discount rates to use in determining the value of National to Zenith, Whelan decides that Zenith should make a mixed offer for all of National's shares at $35 per share, consisting of $23 in cash and Zenith common stock with an exchange ratio of 0.24. The details of the offer are in Exhibit 5. Exhibit 5 Details of Zenith's Planned Tender Offer for All of National Plastics' Common Shares National Plastics Zenith Thermoplastics Pre-merger price $25/share $50/share Shares outstanding 60 million 100 million Tender Offer Post-merger Zenith will pay $35 per share for National, consisting of $23 in cash and Zenith common shares with an exchange ratio of 0.24. Following the merger, Zenith's shares are expected to be priced at $53/share. Zenith believes that most of the synergies arising from the merger will result from National's new patents. Synergies from the merger Because National and Zenith are based in the United States, Whelan also decides to have Noth calculate the pre- and post-acquisition Herfindahl-Hirschman Index (HHI) for the industry. Noth's HHI calculations are 1,910 pre-acquisition and 2,000 post-acquisition. Based on the HHI values, Whelan concludes that (1) the industry is currently highly concentrated, but (2) under applicable US law, an increase in the HHI of less than 100 should not generate any governmental challenges to block the acquisition of National. When Whelan presents Zenith's proposed takeover to the board of directors the following day, one of the directors made the following statements: 1 Although I am certainly in favor of this takeover, I think we would achieve the greatest value from the acquisition if we offered more stock and less cash. 2 If Zenith does not realize the potential synergies of this acquisition in the next five years, I suggest a "spin-off" as a means to recover some of the money lost in this venture. 3 A positive initial market reaction will confirm that we did not overpay for National. 11 If Haines Foods is successful in its attempt to acquire National Plastics, the business combination is best classified as which type of merger? A Vertical, backward B Horizontal, conglomerate (Vertical, forward 12 National's free cash flow to the firm (FCFF) for 2012 is closest to (in millions): A $121. B$182. ($104. 13 Based on Noth's assumptions in Exhibit 4, the most that Zenith should be will- ing to pay per share of National is closest to: A $51. B$40. ($60 14 Based on Zenith's proposed tender offer and information in Exhibit 5, the syn- ergy arising from this merger is closest to (in millions): A $1,063. B $643 ($943. 15 The most accurate interpretation of Whelan's conclusions concerning the pre- and post-acquisition HHI is that they are: A both correct. B incorrect in regard to the industry being highly concentrated. (incorrect in regard to the increase in HHI necessary to trigger a governmen- tal challenge to the acquisition. 16 Which of the statements made by the member of the Board of Directors is most accurate? A Statement 2 B Statement 1 (Statement 3

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