Page 6 - CIMA SCS Workbook August 2018 - Day 2 Suggested Solutions

SUGGESTED SOLUTIONS

company’s business risk; bigger organisations tend to be seen as less likely to fail, and so are
considered safer businesses to invest in.

Secondly, the addition of so many new titles in one transaction may appeal greatly to those who
like to advertise nationally in newspapers. We would hopefully be able to persuade the existing
advertisers of both FNG and DST to commit their expenditure to all 68 titles in the enlarged
portfolio, thereby enjoying economies produced from cross-selling.

Thirdly, it would appear that Alan Finch is proposing to rationalise the company’s activities, from
the existing 2 print factories for the 40 FNG titles to just 1 print factory for all 68 titles. This would
undoubtedly produce economies in the printing function. Furthermore, the location of the DST
factory, in the centre of the country, makes it more feasible for FNG to continue to offer a daily
service throughout Borland.

Furthermore, the initial acquisition will not be a drain on FNG resources. We will be acquiring 28
new titles, a state of the art print factory, access to new markets, and a fully functional business
without having to reduce the company’s cash levels significantly or raise new external finance.
Large growth can therefore be achieved, in the short term, for negligible investment.

Risks

There are, however, a large number of risks that should be considered.

Most importantly, acquiring the entire share capital of DST would mean taking on that company’s
debts as well as its assets. DST needs to repay or restructure its loan of $15m in 12 months’ time,
and clearly does not have the resources to do this. In his email, Alan seems to infer that the threat
to DST’s solvency comes from the impending repayment and, were FNG to acquire that company,
would have to find that sum in 1 years’ time. FNG does not have the cash resources to do this; it
currently has $3.7m of cash, and generated $1.7m of net cash in the most recent financial period.
It would therefore be most likely that FNG would have to raise either further equity or fresh debt
if it cannot restructure the DST debt.

Given the current state of the newspaper industry, it is unlikely that fresh equity investment can
be found; the Finch family have seen dividend returns fall significantly over the last 5 years and
are unlikely to be willing to put more of their personal wealth into the company. They may also
resist the dilution of their holdings should an external investor be found.

In addition, FNG has been looking to reduce its debt in recent years, and a further $5.7m is due to
be repaid over the next 12 months. Taking on further debt to meet DST’s liabilities would
therefore be a reversal of this financial strategy.

Secondly, acquiring 28 new newspaper titles is not addressing the strategic position of FNG; we
would simply be a bigger printer of hard copy news, when the industry as a whole is moving much
more towards digital platforms. The strategy of growing by acquisition would therefore not be a
suitable means of addressing the company’s problems.

Thirdly, it must be questioned exactly how much cost saving can be produced from switching
production of FNG titles to the DST print factory. How much spare capacity is there at this
factory? Our two facilities are operating at near full capacity to produce 40 titles, and there must
surely be some doubt about the ability to switch such printing straight to one central location.

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