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ACCA Strategic Professional · Advanced Financial Management · Financing acquisitions and mergers

Aldous plc is acquiring Brennan Ltd and offers Brennan's shareholders a convertible loan note instead of a straight cash payment. Which of the following is the main advantage to Aldous of using a convertible loan note as the consideration?

The main advantage is a lower coupon than straight debt, because holders value the conversion option, together with deferred dilution since new shares are issued only on conversion. Dilution is not removed, and redemption is still required if holders do not convert.

  1. AIt carries a lower coupon than straight debt because holders accept a conversion option, and it defers share dilution until conversionCorrect
  2. BIt eliminates any possible dilution of existing shareholders' control
  3. CIt removes the need to repay principal at maturity in all circumstances
  4. DIt gives Brennan's shareholders immediate voting rights in Aldous

Explanation

Convertibles typically pay a lower coupon because investors value the conversion option, and shares are issued only later, so dilution is deferred. Dilution is not eliminated, since conversion creates new shares. Principal must be repaid if holders do not convert, and holders have no votes until they convert.

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