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American Chemical Corporate HBS
Case Background
The Collinsville opportunity
Appropriate cost of capital for valuation Estimate cash-flows for Collinsville plan
Estimate cash-flows for laminate technology
Valuation of the opportunity Strategic implications
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American Chemical
Large diversified chemical company
1979 announces tender offer toacquire Universal Paper Corp
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Universal Paper corporation
Fibers in wood pulp
Paper and pulp company
Opposed takeover (anti trust law) Both firms were competitors in the
Southeastern U.S. market as both engaged inproduction of sodium chlorate
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Court Resolution
American Chemical Corporation will divest itssodium chlorate plant located near Collinsville,Alabama
In October 1979, American began looking for abuyer for its plant.
Several potential buyers were approachedincluding Dixon Corporation a specialty
chemicals corporation Dixon agreed to purchase net assets of the
Collinsville plant for $12 million.
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Product: Sodium Chlorate
The main commercial use of Sodium chlorate
is making chlorine dioxide then used inbleaching of pulp to produce paper
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Market for Sodium Chlorate
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Growth in sales/capacity
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1970 1972 1974 1976 1978 1980
sales growth
capacity growth
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Average price
0
50
100
150
200
250
300
350
400
450
1970 1972 1974 1976 1978 1980
$/ton
$/ton
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The Collinsville Plant
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The Collinsville Plant
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The laminate technology
Use of this laminate would eliminate
graphite costs and reduce power needs by
15% to 20%
Could be installed in the Collinsville plant
Technology offered at price $2.5 million
(could be depreciated over 10 years)
Installation scheduled for December 1980
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Cost of capital for valuation
Find comparable firms
Estimate the project FCFs beta
Calculate WACC for the Collinsville plant
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Finding comparable firms
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Comparable firms
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Estimating projects beta
For each firm we calculate D/E ratio
We take beta debt to be zero
Beta equity from table
Calculate beta assets for each firm
Use the average for beta assets of the
Collinsville project
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The Dixon Corporation
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Estimating projects WACC
obtain D/E ratio for Dixon corporation
Use beta assets and beta debt to estimate
beta equity for Collinsville project Use CAMP to calculate r equity and r debt for
the Collinsville project
Long-term Treasure bills carry 9.5% interest Historical equity premium is about 6-7%
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Estimating future FCFs (1980-84)
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Estimating future FCFs (1980-84)
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Estimating future FCFs (1980-84)
Downward price pressure due to increasedcompetition (entry & new technology)
Increased variable/fixed costs (estimated)
Stationary CapEx Continuation value (predict growth in FCFs)
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Conclusions and Strategic implications
Valuation
Reduced selling costs and cheap TVA power together with laminatetechnology lead to positive NPV
Reconsider deal terms Attractiveness relies on Laminate technology
Risks and opportunities
Commodity business Requires low production costs and large scale
Currently controls 13% of regional market. But entry into the industryis expected.
Metal electrodes produce savings of 30% relative to 17.5%. Introducesa cost disadvantage.
Collinsville as method of entry into the sodium chlorate industry Cheap way to enter, acquire customers and market share without
competing with existing players
The laminate technology limits the potential damage form newtechnology deployed
