Bistro 7 and Cafe Bleu: Merger Valuation

problem · Bistro 7, a Portland restaurant group, wants to buy Cafe Bleu, a chain of 10 restaurants in New York. What's the least the seller should accept, the most the buyer should pay, and what's fair?

approach & results

Built the valuation in Excel with a dividend discount model, using CAPM for the cost of equity, for Cafe Bleu on its own and after the merger.
On its own Cafe Bleu is worth $11.32 a share. With the merger's savings and growth, it's worth $29.89. Splitting the gains evenly puts a fair price at $20.61.
Tested what happens if the merger underdelivers. Every point the cost savings fall short takes about $1.20 off the share value.
Recommended offering $17.00 a share in cash plus a $4.00 earn out, paid only if the targets are hit, and walking away above $25.00.