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International Conference on Education For Economics, ISSN (Print) 2540-8372 Business, and Finance (ICEEBF) 2016 ISSN (Online) 2540-7481
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ANALYSIS MERGER OF PETROCHINA COMPANY
LIMITED AND SINOPEC LIMITED USING
DISCOUNTED CASH FLOW METHOD
Marissa Ramadhana1, Subiakto Soekarno2
1. School of Business and Management, Bandung Institute of Technology, Indonesia
2. School of Business and Management, Bandung Institute of Technology, Indonesia
E-mail : marissa.r@sbm-itb.ac.id , subiakto@sbm-itb.ac.id
Abstract
In the past decades, we have been using oil as our first resource of energy, however, there is a new resource of energy that has been developed in America which is shale oil, due to
that, the demand of oil is decreasing compared to these last decades and it made oil price decreased dramatically. PetroChina Company Limited and Sinopec Limited are one of
several successful company in oil & gas fields based in China, but due to the crisis, they need to decrease its cost such as labor cost also decrease a budget to open a new drilling area in order to have a profit. Thus, one of a solution for the company is to be merged with another
company in order to decrease its cost and increase company profit and shares also being merger with another company could increase the company power. Therefore, the author wants know the impact for both companies if they are being merge with each other whether
it will increase its power on China Oil as well as decreasing the production cost and increase its income or not. The author will use data of both companies from Annual Report and Capital Market Data of PetroChina Company Limited and Sinopec Limited from year 2010 – 2014
to help the author calculate the synergy of both companies after being merger and to find the valuation of the two companies by using discounted cash flow, this method is a preferred
approach to valuing a company. The findings suggest PetroChina Company Limited and Sinopec Limited to be merge since its create synergies. Based on three scenarios, the synergies which created in pessimistic, most- likely and optimistic scenarios are
¥820.832,78, ¥844.294,71 and ¥ 1.344.618,97.
Keywords: Merger, Acquisitions, Valuation, Oil Company, Oil Price, Discounted Cash Flow, Synergy, Shale Oil
I. Introduction
Oil is our biggest source of oil, especially in America. However, America has found a new technology, which can cultivate sediIIImentation from rocks and contains a
large amount of Kerogen, called shale oil. Consequently, America start to develop
shale oil and decrease its demand towards raw oil. In Japan, they started to develop
a new resource of energy, which can save a large amount of money other than import
raw oil overseas and since America is the largest importer of oil it made oil demand
is decreasing since July of 2014.
Middle East and Dubai are one of the biggest exporters in oil & gas field and currently spends considerable amount of money to develop their country. Both
country biggest incomes are from exporting oil. Due to that, they start to sell their
oil cheaper than shale oil to make America re-considered of buying oil rather than
shale oil to make an income for their country. This action made a lot of oil & gas
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company start to lowered they price below Middle East and Dubai oil price because
if they did not lowering the price, oil & gas company will go broke.
Figure 1.1: Daily Crude Oil Prices, June 2015 - June 2015
Over the past decades, PetroChina Company Limited and Sinopec Limited are one
of several successful company in oil & gas fields based in China, but due to the
crisis, they have a decrease in income, with the uncertainty of oil price, if they
still want to get a profit income they should decrease its cost such as labor cost also
decrease a budget to open a new drilling area in order to have a profit.
Looking at the situation of both
company, there is a huge
probability the both company
being merger to decrease its
outcome and also increase its
revenue as the news in Wall
Street Journal on Feb 18th
,
2015, but until now Chinese
Government has not give any
confirmation regarding the
merger of both company issue.
There is a lot of talk about the
two company wants to be
merger. Therefore, the author wants to analysis both company to make them
sure if the both company being merge it will create a synergy by using valuation
discounted cash flow.
Figure 1.2 : PetroChina and Sinopec Profit
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II. Teoritic›al Framework
PEST Analysis and SWOT Analysis PEST Analysis and SWOT Analysis is used in the research to define and identify
the external as well as internal environment of PetroChina and Sinopec Company
itself. PEST Analysis is focusing on external environment and China’s politic,
economy, social and technology condition while SWOT Analysis is focusing on
internal company to identify each companies strenght, weakness, opportunity and
threat among other oil&gas company.
Merger and Acquisitions The combining of two or more companies, generally by offering the stockholders
of one company securities in the acquiring company in exchange for the surrender
of their stock by making one new company and both of the company are having an
agreement. In this research we use Horizontal Merger due to PetroChina and
Sinopec produces and sells an identical or similar product in the same geographic
area could encourage cost efficiency. The benefit of the merger is to eliminates
the competitor of both firms as well as increase its market share, revenue and profit.
However, an acquisition is when one company wants to buy more than 50% of the
target’s company ownership stakes to control the target firm. The purpose of
acquisitions is to increase the company growth and it is more beneficial to acquire
an existing firm rather ran expanding our company ourselves. The payment in
acquisitions usually paid in cash and the acquiring company’s stock or the
combination of both. The acquiring company used to offers to buy the premium
price of the target firm’s stock price in order to the stakeholder of the target firm
wants to sell. (Investopedia 2013)
Discounted Cash Flow Discounted Cash Flow is estimating the expected future cash flows,
which discounted to the present value or we used to call it time value of money.
(Wikipedia 2015). The step to valuate using discounted cash flow as follows,
1. Estimate future cash flow from investment
2. Consider the riskiness of cash flows and interest rate in capital market
3. Estimate a reasonable discount rate
4. Calculate the present value of the future cash flow
Following is the formula of Discounted Cash Flow,
V = CF1 / (1+k) + CF2 / (1+k)2
+ [TCF / (k - g)] / (1+k)n-1
To calculate the value of firm, the expected cash flow should be discounted due to
any payments to either debt or equity holders, at the weighted average cost of
capital, which is the cost of different components of financing used for the firm.
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Where,
PV = Present Value CFi = Cash Flow in Year i k = Discount Rate
TCF = The terminal year cash flow g = Growth rate assumption in perpetuity beyond terminal year n = The number of periods in the valuation model including the terminal year
Following is the formula to calculate value of firm,
Where,
CF to Firmt = Expected Cash Flow to firm in period t, WACC = Weighted average vost of capital, T = time period
Free Cash Flow
Free Cash Flow represents the cash in the company and able to generate after
laying out the money required to maintain or expand its asset base. Free Cash Flow
is important because it allows a company to pursue opportunities that enhance
shareholder value (Wikipedia 2015).
The formula of standard statement of cash flows,
FCF = EBIT(1-Tax Rate) + Depreciation&Amortization – Change in Net Working Capital – Capital Expenditure
The formula if net profit and tax rate applicable are given,
FCF = Net Profit + Interest Expense – Net Capital Expenditure – Net changes in Working Capital – Tax shield on Interest Expense
Where,
Net Capital Expenditure (CAPEX) = Capex – Depreciation & Amortization
Tax Shield = Net Interest Expense x Effective Tax Rate
Investors think that Free Cash Flow is giving them much clearer view of the ability
to generate cash and profit, also if the Free Cash Flow is negative it doesn’t mean
bad, it could be the company is making an investment. (Investopedia 2015)
Terminal Value
Terminal Value is use for an approach that involves making some assumptions
about long-term cash flow growth. To determine terminal value (Investopedia
2015), we use Gordon Growth Model and the model uses this formula,
Terminal Value = Final Projected Year Cash Flow x (1 + Long-Term Cash Flow Growth Rate)(Discount Rate – Long-Term Cash Flow Growth Rate)
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Discount Rate
WACC (Weighted Average Cost of Capital, is the calculation of a firm’s cost
of capital which each category of capital is proportionately weighted. The
resource of this capital includes common stock, preferred stock, bonds and other
long-term debt. The WACC of the firm would increases along with the beta
and rate of return on equity increase, while WACC increasing, there’s a decrease
in valuation and would increase the risk (Investopedia 2015).
The formula of Weighted Average Cost of Capital as follows,
Where:
Re =Cost of Equity
Rd = Cost of Debt
E = Market value of the firm's equity
D = Market value of the firm's debt
V = E + D = Total market value of the firm’s financing (equity and debt)
E/V = Percentage of financing that is equity
D/V = Percentage of financing that is debt
Tc = Corporate tax rate
Cost of Equity is the return a firm theoretically pays to its equity investors,
shareholders, to compensate for the risk they undertake by investing their capital
(Wikipedia 2015).
The formula of Cost of Equity,
Where,
Rs = Cost of Equity
Rs = Rf + Beta x (Rm – Rf)
B = Beta Coefficient, measure of systematic risk of a firm’s common stock
Rm-Rf = The expected market risk premium for China
Synergy
Synergy is the source of benefit to stockholders. The concept of synergy is
when the value and performance of two company combined will be greater
rather the total of the separate individual parts. The purpose of synergy is
combining two companies could lead to a greater financial result than they
ever achieve alone. (Jaffe 2013)
Synergy = VAB – (VA + VB) VA = The value of firm A
VB = The value of firm B
VAB = Difference between the value of the combined firm
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Synergy came from the increases in cash flow that could create a value. We
calculate ΔCFt as the difference between Cash Flow when the two firms combined
and the sum of the separate individual parts.
ΔCFt = ΔRevt - ΔCostst - ΔTaxest - ΔCapital Requirementst
ΔRevt = Incremental revenue of the acquisitions
ΔCostst = Incremental cost of the acquisitions
ΔTaxest = Incremental acquisitions of taxes
ΔCapital Requirementst
and fixed assets
= Incremental new investment required in
working capital
Therefore, the synergy is be possible if the revenue increasing, cost reducing,
lowered tax and low capital investment or at least one of four categories
make an improvements we could call it synergy. (Jaffe 2013)
III. Research Methods
The author will analyze the synergy of both company, which are PetroChina and
Sinopec Company by calculate their valuation without synergy as well as
combine firm of these companies with synergy and compared them. Afterwards,
the author will give recommendation for both companies also the China’s
government to make a merger decisions.
The research would use secondary data from PT PetroChina and PT Sinopec main
website. Following are the data which author will use,
1. PT PetroChina Annual Report from year 2010 – 2014
2. PT Sinopec Annual Report from year 2010 – 2014
These four data would be use to analysis the merger/acquisition also the synergy of
both companies.
The data which already collect before, being analyze using Discounted Cash
Flow, also we need to determine the synergy of both company and calculate
PetroChina and Sinopec Company growth if they combined together using the
method and formula in literature review. PEST and SWOT Analysis are also use
for the research, PEST Analysis is to identify and analyze macro environment
around both companies and SWOT Analysis to identify internal and external
situations.
The step to conduct the data analysis, followings:
1. Calculate each of the company’s value of firm. The valuation method
which the author use is discounted cash flow with free cash flow
2. Calculate the value of combined firms with no synergy by adding the
value of firm which the author already calculate in the first step
3. Estimate the effects of synergy using expected growth rates and cash
flows also the author will calculate the value of the combined firms with
synergy
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IV. Result and Discussion Industry Overview The industrial Overview will be used for the fundamental in determining the
future projection of both companies and combined firm. The analysis will use
PESTEL analysis for the oil and gas industry situation in China and worldwide also
SWOT analysis for both companies which are Petrochina and Sinopec Company.
PEST Analysis PEST Analysis is a framework of macro-environmental factors to scan
the environment component of company’s strategic management. PEST
consists of Politic, Economy, Social and Technology.
In the term of Politic, the most influence factor for the government regulation in
China, not only for the government regulation that could impact oil and gas
companies in China but also geopolitical conflicts also political instability.
PetroChina and Sinopec Company are both oil and gas national companies in China,
therefor they both have exclusive right for Sino-foreign co-operation in the CBM
(Coal-bed Methane). Sino-foreign is a joint venture, which can be form into equity
joint ventures as well as cooperative joint venture. However, in Chinese Law only
Chinese companies can become shareholders of joint venture.
In term of Economic, China is a global hub for manufacturing as well as the largest
manufacturing economy and exporter of goods in the world. According to IMF,
China’s the world largest economy by purchasing power party. Based on The World
Bank, China has a GDP growth of 6,7% on 2014, however since 2010 up till 2015,
data shows China experience a decrease for the last five year. York (Analyst of
Woods Mackenzie) state, by 2020 China will be second only to the U.S for the total
fleet of personal auto vehicles in use. From 2005 – 2020, China will see the number
of vehicles rise from 20 million to 160 million, which means the demand of
domestic oil demand growth due to cars and commercial ground transportation.
In term of Social, United Nations predicts China’s population projection by the
end of 2020 is 1,387,792,000. This will be a huge advantage for national oil
company to generate it sales on gasoline or petrol for cars and commercial ground
transportation. According to trading economics, the labor cost in China will be
stable up to 2020, thus it will be an advantage for national companies to increase its
supply to reach demand.
In term of technology, China made an R&D with SASOL which is a chemical
company based in South Africa, to establish coal to liquid fuel capabilities in China,
since it will improve economics of china as well as the environment itself.
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SWOT Analysis Below are the SWOT Analysis for both Companies, Petrochina Company Limited
SWOT Analysis,
Strengths
• Strong Foothold in China à controlled
and owned by China National Petroleum
• Research and Development Activities
• Biggest oil producer in China
• Well-known company
Weakness
• Lacking offshore presence in China
• Declined Liquidity
• Operating Loss
Opportunities
• Growth in Asia-Pasific Refining
Capacities
• Growth Initiatives à explore market outside China
• Positive outlook of petrochemical industry
Threats
• Fluctuations in the oil & gas prices
• High competitions
• Government regulations
• Environmental Laws
• Stringent Policies and Regulations
Table 4.1 : PetroChina Company Limited SWOT Analysis
Sinopec Company Limited SWOT Analysis
Strengths
• Strong name in China
• One of the top companies in terms of sales
• Operations include oil & gas refining, exploration, marketing, storage, and
pipeline transportation
• Largest Oil refiner in Asia by annual
volume
Weakness
• Dependence on third party
crude oil suppliers
• Lack of geographical diversification
• Decline in crude oil reserves
Opportunities
• Growth through joint venture and
alliances
Threats
• Intense competition
• Government regulations
• Environmental Laws
Table 4.2: Sinopec Company Limited SWOT Analysis
Financial Performance Analysis Financial performance analysis is a subjective measure of how well a firm can
use assets from its, primary mode of business and generate revenues (Investopedia,
2016). To conduct financial performance analysis for PetroChina Company
Limited and Sinopec Company Limited, the author calculate liquidity, activity,
debt, and profitability analysis. This analysis is conducted from 2010 – 2014
also only use time-series due to the cross – analysis since the benchmark is only
available on 2015.
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Below is PetroChina’s financial performance analysis,
Data 2010 2011 2012 2013 2014 Time - Series Overall
Liquidity
Current Ratio 0,66 0,64 0,64 0,67 0,79 Poor Poor
Quick Ratio 0,33 0,29 0,27 0,29 0,48 Poor Poor
Activity
Average
Collection Period
5,52
3,72
3,15
4,20
4,18
Good
Good
Average
Payable Period
155,90
127,81
115,85
125,04
100,97
Good
Good
Total Asset
Turnover
0,72
0,83
0,77
0,74
0,76
OK
OK
Inventory
Turnover
6,09
6,54
6,02
5,80
8,65
Poor
Poor
Debt
Debt Ratio 35,88% 39,50% 43,70% 42,40% 40,79% OK OK
Debt to Equity
Ratio
55,96%
65,30%
77,61%
73,61%
68,90%
Poor
Poor
Profitability
Gross Profit
Margin
33,99%
27,09%
25,20%
26,25%
23,89%
Poor
Poor
Operating Profit
Margin
15,20%
10,08%
7,67%
7,85%
6,49%
Net Profit
Margin
13,42%
9,82%
7,73%
9,86%
6,87%
Poor
Poor
Earnings per
share
¥0,72
¥0,69
¥0,57
¥0,73
¥0,53
Poor
Poor
Return on Total
Assets
9,72%
8,19%
5,94%
7,29%
5,21%
Poor
Poor
Return on
Equity
15,16%
13,54%
10,55%
12,65%
8,80%
Poor
Poor
Table 4.3 : PetroChina's Financial Performance Analysis
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Data
2010
2011
2012
2013
2014
Time -
Series
Overall
Liquidity
Current Ratio 0,69 0,67 0,61 0,55 0,82 Poor Poor
Quick Ratio 0,29 0,26 0,21 0,25 0,63 Poor Poor
Activity
Average
Collection Period
16,95
14,86
14,46
19,59
67,62
OK
OK
Average
Payable Period
113,14
102,06
117,90
130,44
173,51
Good
Good
Total Asset
Turnover
1,41
1,60
1,58
1,42
1,13
Good
Good
Inventory
Turnover
8,73
8,47
8,70
9,40
13,03
Poor
Poor
Debt
Debt Ratio 54,14% 55,06% 54,24% 53,89% 50,16% Good Good
Debt to Equity
Ratio
118,03%
122,50%
118,51%
116,88%
100,65%
Poor
Poor
Profitability
Gross Profit
Margin
24,24%
20,77%
20,42%
19,77%
20,42%
Poor
Poor
Operating
Profit Margin
6,75%
5,02%
4,72%
4,28%
2,92%
Net Profit
Margin
5,62%
4,25%
3,90%
3,52%
2,63%
Poor
Poor
Earnings per share
¥5,52
¥5,41
¥5,24
¥4,74
¥2,66
Poor
Poor
Return on
Total Assets
7,95%
6,81%
6,15%
5,01%
2,97%
Poor
Poor
Return on
Equity
17,33%
15,15%
13,44%
10,87%
5,97%
Poor
Poor
Table 4.4 : Sinopec's Financial Performance Analysis
Liquidity Ratio Liquidity is a firm’s ability to satisfy its short-term obligations as they come due.
It refers to the wealth of the company’s overall financial position, which it can pay
its bills. The ratio above can shows early signs of cash flow problem and impeding
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business failure. PetroChina and Sinopec’s main business is in petroleum as well as
chemical field, PetroChina is focusing on upstream are which are drilling and
finding new place to drill while Sinopec is focusing on downstream such as
production of its oil from crude oil to gasoline. PetroChina and Sinopec inventory
of its firm cannot be easily sold because they are partially special-purpose items
due to that its liquidity ratio (current & quick ratio) is poor. Based on time-series
analysis, both companies liquidity ratio is inconsistence. Basically, PetroChina and
Sinopec’s liquidity ratio shows both firms is in poor performances.
Activity Ratio Activity ratios measure activity ratios measure how efficiently a firm operates
along a variety of dimensions such as inventory management, disbursements, and
collections. Based on the calculation, PetroChina took four days (average) to collect
its account receivable while Sinopec took 20 days (average) to collect its average
collection, however on 2014, Sinopec average collection period is 64,62. In term of
average payment, PetroChina experience a fluctuates condition due to oil price’s
condition while for Sinopec in year 2011 – 2014 experience an increase in
its average payment. PetroChina efficiency on using its assets to generate sales
considered as ok since its average is on 0,76 while Sinopec considered as good since
its average is 1,43. Hence, both companies shows an efficiency on its assets.
Inventory turnover calculates the activity or liquidity of a firm’s inventory, and for
both firms inventory turnover is considered as poor. Hence, overall condition
for both firms is still in good performances.
Debt Ratio The debt position of a firm indicates the amount of other people’s money being
used to generate profits. PetroChina and Sinopec is doing good on debt ratio since
the calculation above indicates that the company has financed close to half of its
assets with debt. However, both PetroChina and Sinopec experience a decrease in
its indebtness from 2013 – 2015. Based on calculation, debt to equity ratio
on PetroChina shows it has lower debt rather than its equity while for Sinopec its
equity is higher than debt. It could be dangerous for Sinopec because it could affect
the firm itself if its debt increasing while its revenue is decreasing.
Profitability Ratio In this section, PetroChina and Sinopec profitability ratio is decreasing each years.
However, both companies is still having an increase on its operating income each
year. Hence, the earnings per share of PetroChina is fluctuate while for Sinopec is
decreasing on each year. Basically, the profitability ratio on both companies is still
near-stable condition.
Key Assumptions To calculate PetroChina Company Limited and Sinopec Company Limited by
using Discounted Cash Flow Method, the author made an assumption to projecting the discount rate, perpetuity growth and the corporate tax of the company. These
assumptions are made by the historical data, market data and actual data.
The assumptions for both companies valuation are given in the table below,
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No Description Value Information 1 Risk Free Rate (Rf) 4,22% Nominal Rate of The People’s Bank of China on
2014
2 Market Retrurn (Rm – Rf) 5,33% Implied Market Risk Premia for China, based on
Fenebris. 3 Perpetuity Growth 2% Inflation Rate on 2014 in China based on The
World Bank 4 Corporate Tax 25% Company’s effective tax rate under the Income
Tax Table 4.5 : Assumptions for Valuation
Following is the summary of valuation results of both PetroChina and Sinopec
Company,
Summary PT PetroChina Company Limited
Pessimistic Most-Likely Optimistic
Beta 0,255157227 0,255157227 0,255157227
Pretax cost of debt 5,72% 5,72% 5,72%
Tax Rate 25% 25% 25%
After-tax cost of debt 4,29% 4,29% 4,29%
Cost of Equity 4,23502% 4,23502% 4,23502%
Cost of Capital 5,34% 5,34% 5,34%
Debt to Capital ratio 0,18224347 0,182243466 0,182243466
Terminal Value ¥22.622.543,58 ¥32.991.712,98 ¥34.808.744,88
Value of firm ¥20.224.897,86 ¥28.483.699,17 ¥30.059.177,27
Pretax return on capital 16,07% 16,07% 16,07%
After-tax return on capital 12,05% 12,05% 12,05%
CAGR -9,85% 9,44% 16,06%
Length of growth period 6years 6years 6years
Expected growth rate -9,85% 9,44% 16,04%
Perpetuity growth rate 2% 2% 2%
Summary
PT Sinopec Company Limited
Pessimistic Most-Likely Optimistic
Beta 0,063547312 0,063547312 0,063547312
Pretax cost of debt 6,72% 6,72% 6,72%
Tax Rate 25,00% 25,00% 25,00%
After-tax cost of debt 5,04% 5,04% 5,04%
Cost of Equity 4,239082% 4,239082% 4,239082%
Cost of Capital 4,79% 4,79% 4,79%
Debt to Capital ratio 0,473835866 0,473835866 0,473835866
Terminal Value ¥2.440.576,46 ¥4.544.895,76 ¥6.650.747,93
Value of firm ¥3.137.501,74 ¥4.838.412,92 ¥6.594.068,49
Pretax return on capital 11,17% 11,17% 11,17%
After-tax return on capital 8,38% 8,38% 8,38%
CAGR -18,59% 0,70% 7,30%
Length of growth period 6years 6years 6years
Expected growth rate -18,59% 0,70% 7,30%
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Perpetuity growth rate 2% 2% 2%
Following is the result valuation of combined company,
Cost of Equity Combined Firm
Rf 4,22%
Beta 0,22918195
Risk Premium 5,33%
Re 5,44%
Market of Value Equity ¥1.362.144,61
Cost of Debt
Interest Coverage Ratio 4,138691838
Rating BBB
Typical Default Spread 1,50%
Company Tax Rate 25,00%
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After Tax Cost of Debt 4,29%
WACC
Wd 0,203171461
We 0,796828539
Rd 4,29%
Re 5,44%
WACC 5,21%
Based on the calculation and assumption above, the author use discounted cash flow method to estimate the combined firm value as well as PetroChina and Sinopec
Company value itself. However, PetroChina as the acquirer will experience a
decrease growth in combined firm, for pessimistic, most-likely and optimistic
here are the calculation below,
Growth PetroChina Combined
Firm Pessimistic -9,85% -11,41%
Most-Likely 9,44% 7,
8
8%
Optimistic 16,06% 14,4921%
The situation above happen due to PT Sinopec has a low growth rate compared to PetroChina as the acquirer, which is 0,70%, while PetroChina has 9,44%. However,
according to the calculation, which the author did for the research, combined firm
have a higher value rather than PetroChina itself as the acquirer without having
merger with Sinopec. The combined firm also has a lower cost of capital for 5,21%
rather than PetroChina with 5,34%. Sum of both companies value also lower than
the value of combined firm itself, the value for combined firm for pessimistic, most-
likely and optimistic are ¥24.183.232,38, ¥34.166.406,79 and ¥37.997.864,73
where the sum of PetroChina and Sinopec’s value for pessimistic, most-likely and
optimistic are ¥23.362.399,6, ¥33.322.112,08 and ¥36.653.245,76. Based on the
calculation above, merger of PetroChina and Sinopec will create a synergy based
on the value. The synergy can be known by subtracting combined firm and sum of
PetroChina and Sinopec value for pessimistic, most-likely and optimistic which
are
¥820.832,78, ¥844.294,71 and ¥ 1.344.618,97.
Stock Exchange Ratio
Exchange Ratio is the relative number of new shares, which will be given to existing shareholders of a company that has been acquired or has merged with
another.
Following is the summary of PetroChina and Sinopec Company stock,
PetroChina Sinopec
Earnings after tax ¥96.864,00 ¥32.145,00
No of shares 183021 12107
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Price/Earning Ratio ¥13,39599 ¥2,00825
EPS ¥0,53 2,65504926
Price ¥7,08984 ¥5,33200
To calculate the new shares outstanding for PT Sinopec after being acquired by PetroChina is by using stock exchange ratio, which is comparing PetroChina’s price
stock with PT Sinopec.
Based on the calculation above, every 0,752062197 share of PetroChina equals to1
share of Sinopec. Below is the calculation for Sinopec’s new shares of outstanding
post-merger,
[0,75206197 x 12,107 shares] = 9.105,31 new shares outstanding ≈ 9.106
Therefore, PetroChina will issue 9106 new shares of outstanding to acquire Sinopec. To know the accuracy of the calculation for this merger, the author will
calculate by subtracting combined firm value with debt and divide it with new total
shares then multiply it again with the new total shares. If the value of combined
company equals with value of PetroChina, Sinopec and additional synergy,
basically the calculation the author use in this research is accurate.
Value Combined Company ¥34.166.406,79
Debt ¥347.313,00
New Total Shares 192126
New Price ¥176,03
Value of Combined Company (minus debt) ¥33.819.093,79
Value PetroCina + Sinopec + Synergy (minus debt)
¥33.819.093,79
For the new share ownership and the structure based on the weight calculation by dividing the PetroChina shares with total new shares of outstanding,
PetroChina will owns 95,261% of combined firm, while Sinopec owns 4,739% of
the new combined firm. Basically, PetroChina will be responsible for making
operation, financial and company decisions.
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V. Conclusion and Recommendation
Conclusion
Based on the calculations, fundamental and analysis in the previous section, the
author concludes the financial performance of PetroChina and Sinopec, both firm
are in their poor condition. However, the ctivity ratio for both firm are in
good condition due which means they are efficient on operating its own firm as well
as the debt ratio, both firms experience good conditions. However, regarding of the
poor financial condition both firms have, if PetroChina and Sinopec Company are
being merged there will be a synergy created. Based on the discounted cash flow
method all three scenarios (pessimistic, most-likely and optimistic scenarios) are
creating synergy which are ¥24.183.232,38, ¥34.166.406,79 and ¥37.997.864,73.
The calculation of combined firm value have a higher results compared to the
sum of both companies, and here are the additional synergy value which created by
using discounted cash flow model for pessimistic, most-likely and optimistic
scenarios,
¥820.832,78, ¥844.294,71 and ¥ 1.344.618,97.
The author also made PEST Analysis and SWOT Analysis, these firms has a benefit due to the economy condition in China since in the future China’s usage of vehicle
is predicted to rise from 20 million to 160 million, which means there will be a high
demand growth for oil as well as developing its company technologies. Combined
firm will experience higher efficiency on cost for oil production (upstream and
downstream) since PetroChina focusing more on upstream area compared to PT
Sinopec which focusing on downstream area, hence, combined firm should
have more efficiency on both area. PetroChina and Sinopec Company also has a
strong foothold in China, therefor if the merger happen, they would be the biggest
oil company in China also an influential for oil price market for the whole globe.
There is also another factors which contribute for a creation of synergy of combined firm, new cost of equity. The new cost of equity for combined firm is lower than
PetroChina itself, new cost of equity for combined firm is around 5,44% while
for the cost of capital for pessimistic, most-likely and optimistic scenarios are
5,22%, 5,21% and 5,18%.
Recommendation
Based on above conclusions, the author suggests PetroChina and Sinopec Company to do a merger. Hence, a merger of between these two companies will
create a larger market shares as well as to make a largest company in China, which
in the future could predominantly affect the market price of oil company.
The author also suggests PetroChina as the biggest company to acquire Sinopec under PetroChina name. The merger could be done for both companies by
exchange it with PetroChina stock, which is for every 0,752062197 shares of
PetroChina is equals to 1 PT Sinopec share. Overall, PetroChina will issue new
shares of outstanding for 9105,307 (9106) new shares. The new combined firm is
also being control by PetroChina since PetroChina has 95% stock of combined
firm, also for the operational structure it will be best if PetroChina still focusing on
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upstream while Sinopec focus on downstream since its what both companies do best
to increase its production activities for combined firm.
In the future, the author suggests to use discounted cash flow method to estimate
companies value as well as calculate the cost of merger and determine the most
advantages and appropriate way to do a merger.
References
(1) About PetroChina: Company Profile PetroChina Company Limited. (2016, April
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http://english.sinopec.com/about_sinopec/
(3) Damodaran, A. 2006. Damodaran on Valuation: SECOND EDITION. Wiley
Finance
(4) Gitman, L.J. 2012, Principles of Managerial Finance: Thirteen Edition. Pearson P.
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ThomasKearney.
(6) Ross, Westerfield, Jaffe. 2012. Corporate Finance: Tenth Edition. McGraw-
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(7) Group, Fitch. (2015, April 30). PetroChina-Sinopec Merger: an Oil Giant in the
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(8) Organization of the Petroleum Exporting Countries. 2015. World Oil Outlook.
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and Charts. Retrieved from https://knoema.com/yxptpab/crude-oil-price-forecast-
long-term-2016-to-2025-data-and-charts.
(10) PetroChina Company Limited. Annual Report 2010. Company Annual Report,
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(14) PetroChina Company Limited. Annual Report 2014. Company Annual Report,
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(15) Sinopec Company Limited. Annual Report 2010. Company Annual Report, China:
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Sinopec Company Limited, 2014.
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