Today I learn something from my mentor. One of the key counters which I am holding on made an announcement that together with other two parent companies will acquire a company in Australia. The parent companies and the counter will hold 40%, 40% and 20% respectively. On the surface, paying AUD 7 billion for a very high gearing company (approximately 6b in total debt) does not justify the rationale of acquisition.
I was told to look up the Average Cost of Debts of the 3 companies, one of the parent company has an Average Cost of Debts at about 5% taking into consideration of 2016 debentures and perpetual securities. The Average Cost of Debts for Acquiree is about 6%. The ROA is using Net Operating Income over Total Assets as a ratio is about 2.6% for the acquiree. We are trying to investigate whether it is a situation of trying to use their reputations to get a low cost of finance which can inevitably reduce finance cost for every 1% equates to another 100m.
The cost of acquisition is AUD 7 billion less AUD 1 billion of cash.
Another possible reason is to diversify its core UK-centric business to Australia and shift its currencies as well.
If it is only a $5/share special dividend plus this year dividend of say $2.9 (3% increase) will be a total of $7.9/share. A dividend yield will be approximately 10.8%. It is a disappointing situation where I thought more special dividend will be issued.