Case 041Event-driven and merger arbitrageHard

Tavrin Logistics (EPS Rs 40, P/E 20, 10 crore shares) buys Coastel Freight, which earns Rs 80 crore, for Rs 1,200 crore, paid half in new Tavrin shares and half in debt at 8% pre-tax with a 25% tax rate. Is the deal accretive, and how would you expect Tavrin's shares to trade on the news?

Point72New York · 2025

The situation

Tavrin Logistics earns Rs 400 crore on 10 crore shares, EPS of Rs 40, and trades at Rs 800, a P/E of 20. It has agreed to buy Coastel Freight, which earns Rs 80 crore, for Rs 1,200 crore, 15x earnings. Before the bid, Coastel's shares valued it at Rs 1,000 crore, so Tavrin is paying a 20% premium.

Half the price, Rs 600 crore, is paid in new Tavrin shares issued at Rs 800; the other half is borrowed at 8% before tax. The tax rate is 25%. Management has not given a synergy figure, and the deal is announced before the market opens.

Your task

Is the deal accretive to Tavrin's EPS, and by how much? Where would you expect Tavrin's share price to settle, and why is that a different question?

Quick check

Before any synergies, what happens to Tavrin's EPS?

Worked solution

Try it on paper, then open one step at a time.

30-second answerThe answer to give first

EPS rises about 3.3%, from Rs 40.00 to Rs 41.30, because Coastel earns 6.7% on its price against a 5.5% blended cost of stock and debt. That does not mean the shares should rise. If Coastel was worth its Rs 1,000 crore undisturbed value, Tavrin has given away Rs 200 crore, and the price should settle nearer Rs 781, a lower P/E on higher EPS. Only synergies worth more than the premium justify a higher price.

Step 1What is the quick test for accretion?

A shop that borrows at 5.5% to buy a stall earning 6.7% has more profit next year. A deal adds to EPS when the target's earnings yield is above the blended after-tax cost of the money used to buy it. Coastel's earnings yieldEarnings divided by the price paid, the inverse of the P/E. Paying 15x earnings is an earnings yield of 6.7%. is 80 over 1,200, 6.7%. New Tavrin shares cost Tavrin its own earnings yield, 1 over 20, 5.0%; debt costs 8% less a quarter in tax, 6.0%; half and half is 5.5%. So the deal is accretive before a single rupee of synergy.

Step 2What do the full numbers give?

New shares: Rs 600 crore at Rs 800 is 0.75 crore shares, taking the count to 10.75 crore. New debt: Rs 600 crore at 8% is Rs 48 crore of interest, Rs 36 crore after tax. Combined earnings are 400 plus 80 minus 36, Rs 444 crore, over 10.75 crore shares: Rs 41.30, up 3.3%. The waterfall shows the order people lose track of: Coastel adds Rs 8.00 a share, interest takes Rs 3.60, and spreading the result over more shares takes Rs 3.10.

Tavrin's EPS rises from Rs 40.00 to Rs 41.30: Coastel's earnings add Rs 8.00 a share, after-tax interest takes Rs 3.60 and the 0.75 crore new shares take Rs 3.10, because Coastel earns 6.7% on its price against a 5.5% cost of money.

Rs crore	Tavrin alone	Pro forma
Tavrin earnings	400.0	400.0
Coastel earnings		80.0
Interest on Rs 600 crore, after tax		(36.0)
Earnings	400.0	444.0
Shares, crore	10.00	10.75
EPS, Rs	40.00	41.30

Pro forma earnings of Rs 444 crore over 10.75 crore shares give EPS of Rs 41.30, 3.3% above Tavrin's standalone Rs 40.00, before any synergies.

Step 3Why does accretion not tell you where the shares will trade?

Because the market prices value, not EPS. Tavrin's shareholders own Rs 8,000 crore of Tavrin, plus Coastel, less the Rs 600 crore of new debt, spread over 10.75 crore shares. If Coastel is worth exactly the Rs 1,200 crore paid, that is Rs 8,600 crore, or Rs 800 a share: no change in price, and the P/E quietly falls from 20 to 19.4 because the new earnings are riskier and bought at a lower multiple. If Coastel is worth only its undisturbed Rs 1,000 crore, Tavrin has paid Rs 200 crore too much, and the shares should settle near Rs 781, down 2.3%, even as EPS rises 3.3%.

If the market kept a 20x P/E on the new EPS Tavrin would trade at Rs 826, but valuing what was bought gives Rs 800 if Coastel is worth the price paid, Rs 781 if it is worth its undisturbed value, and Rs 795 with Rs 150 crore of synergies.

Step 4How would an event-driven desk trade the announcement?

Start from the premium. Tavrin's shares hold their value only if synergies are worth at least the Rs 200 crore premium; with none announced, the fair reaction is down, not up. Two flows usually push the same way: merger arbitrage funds buy Coastel and short Tavrin to hedge the stock half of the deal, and some holders sell an acquirer that has just taken on Rs 600 crore of debt. A desk that believed in synergies of Rs 150 crore would still expect Tavrin near Rs 795. Say the limit: markets often mark acquirers down further than this arithmetic on doubts about integration, and the gap between the two is where an event-driven analyst looks for a trade.

Where candidates lose it

The costly shortcut is saying accretive, so the shares go up. Accretion only says the target earns more than the money costs; it says nothing about whether Tavrin paid more than Coastel is worth, which is what moves the price.

The arithmetic trap is forgetting the tax shield on interest, using 8% instead of 6% for the debt, or forgetting to add the 0.75 crore new shares to the denominator. Either one turns the answer from 3.3% accretive into something else.

What the interviewer asks next

What pre-tax synergy figure keeps Tavrin's share price at Rs 800?
If the deal were all stock, would it still be accretive, and why?
Tavrin's P/E were 12 instead of 20. Which funding mix is now most accretive?
How would you set up a merger arbitrage position on this deal?

Asked at Point72, Transportation, New York, 2025 (Wall Street Oasis): In-person case study, 3 hours time on a company with no background/familiary. Was a 3hr acc/dil

Company names and figures are illustrative.