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Blue Arrow

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Submitted By StarCluster
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Executive summary

Blue Arrow is a publicly held firm and the leading UK employment agency. The management is thinking about expanding further in to the US by buying the largest temporary help company in the world, Manpower. The bid was to be made by a cash tender offer funded by a fully underwritten rights issue of £837 million. In this report we calculate the value of one right and the value of the underwriter's put as of August 3 by using the Black-Scholes and put-call parity valuation approach. In addition we assess the sensitivity and validity regarding these calculations, and discuss the fee charged by the underwriter.
The detailed assumptions regarding our calculations are: o The rights are issued on August 3; one right can be converted into 2.5 shares with an issue price of £1.66 per share. o The rights issue closes on September 28 o Everyone is fully informed about the issue and acquisition
Assuming a successful acquisition price of $82.50 per share, or £51.56 per share, we end up with the following estimates for the value of one right and the underwriter's put. In our calculation we have adjusted the market value of equity as of August 3 by subtracting total issuing fees. Since our calculations depend critically on the NPV of the Manpower acquisition, we also calculated different values assuming reasonable NPV for the acquisition.
Our valuation technique, the Black-Scholes model, is furthermore sensitive to changes in volatility, time to maturity (or risky days), risk free rate and the issue price. All of these variables, except the volatility, are set and there is therefore little uncertainty connected with them.
The underwriting costs amounts to a total of £19.5 million assuming a successful acquisition. Our base case scenario (NPV = 0 and σ = 30.4%) gives us an estimate of these costs, or the value of the underwriter's put, of only

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