Investment Brief Vehizero S.A. Final Report March 19, 2002 Prepared for Mr. Sean O’Hea by the Fuqua Team Fuqua Faculty Advisor: Campbell Harvey Fuqua Team:

Investment BriefVehizero S.A.

Final ReportMarch 19, 2002

Prepared for Mr. Sean O’Heaby the Fuqua Team

Fuqua Faculty Advisor:Campbell Harvey

Fuqua Team:Carlos Montalvan

Jill NaughtonBrian O’ConnorOleg OsipenkoJeremy Rogers

Page 2

Outline of the Material

• The project team undertook several material research activities to understand the

attractiveness of Vehizero for potential investors

• Overall Hybrid Vehicle Market does not look attractive, however the small delivery

truck segment looks promising

• Our valuation of Vehizero sets a range between $ –3.3 million to $ 10.2 million, while

the project’s IRR is estimated to be 14%

• Based on the characteristics of the project, Vehizero is more likely to attract socially-

oriented investors than strictly financial investors

• Thus, we recommend that Vehizero launch an exploratory effort in the U.S. and other

countries internationally, first targeting international development agencies and

socially-oriented VC firms, then approach wealthy individuals as project reaches the

next development stage

Page 3


• The project team undertook several material research activities to understand the attractiveness of Vehizero for potential investors

– Overview of the work done

• Overall Hybrid Vehicle Market does not look attractive, however the small delivery truck segment looks promising

• Our valuation of Vehizero sets a range between $ –3.3 million and $ 10.2 million, while the project’s IRR is estimated to be 14%

• Based on the characteristics of the project, Vehizero is more likely to attract socially-oriented investors than strictly financial investors

• Thus, we recommend that Vehizero launch an exploratory effort in the U.S. and other countries internationally, first targeting international development agencies and socially-oriented VC firms, then approach wealthy individuals as project reaches the next development stage

Page 4

Overview of the Work Done

• The project team undertook several material research activities to understand

the attractiveness of Vehizero for potential investors

– Researched web and literature to:

• Understand overall trends in global hybrid vehicle market

• Understand Mexico automotive market

– Evaluated project Vehizero: company valuation

• Identified key variables to be analyzed as key variables (Tornado Simulation)

• Looked at different scenarios and their probabilities

• Estimated the cash flows

• Calculated the cost of capital

• Evaluated the imbedded options of the project

– Analyzed the attractiveness of different types of investors to Vehizero

• Research of investment policies and objectives

– Interviewed VC specialists and academics

– Discussed the future of carbon trading with Chicago Exchange

Page 5




– Overall Automotive trends point toward intensifying competition, however, the truck segment appears to be attractive

– Moreover, the hybrid vehicle segment offers niche opportunity for small players like Vehizero

– Although Mexican labor costs are rising sharply, the country will continue to have cost advantage in foreseeable future

• Our valuation of Vehizero sets a range between $ –3.3 million and $ 10.2 million, while the project’s IRR is estimated to be 14%



Page 6

Overall automotive trends suggest intensifying competition

• Automotive Trends in Mexico and worldwide point toward increased competition

– Increased competition. In 2004, local content rules within NAFTA will be eliminated. Experts

believe competition will intensify as a result, and margins of domestic producers will decrease

– Toyota enters the market. Toyota will start production of the light trucks in Mexico in year

2004 with full production taking effect in 2006

– Contraband. There are about 2 million illegal vehicles – or auto chocolates – of the total 14

million cars in Mexico. Trucks assembled from the used parts cost legitimate truck producers

1/3 of their sales

– Hybrids for Emerging Markets. Big Automakers start focusing on producing simplified

models for emerging markets. In 2003, the world will see 9 models specifically developed for

emerging markets

Source: Automotive News International /Mexican Truck Producer Association/Automotive News Europe

These trends indicate that taxi market will be much more difficult to penetrate than delivery truck market

MARKET OVERVIEW

Page 7

However trucking industry appears to be attractive segment

• The Mexican truck fleet is large. Estimated to be 450,000 units

• Growing. At approximately 3% p.a.

• Old. Average fleet age is 16.3 years

• Not concentrated. There are some 5,000 trucking firms in Mexico city, plus

large number of owners who own only a truck or two

• And partially illegal. Approximately 20,000 trucks enter Mexico illegally

Source: U.S. Commercial Service. International Market Insight, 1999

Truck segment appears to offer some niche opportunities to Vehizero

MARKET OVERVIEW

Page 8

Hybrid vehicle offers opportunity

Several trends in the global hybrid vehicle market indicate that this segment will

remain an attractive niche for small players like Vehizero

– Different strategies. Different countries are pursuing different strategies in the search of a

cleaner car. Japan is focusing on hybrid compact cars, Europe on fuel cell technology (i.e. pure

electric vehicles), and US is focusing on hybrid trucks

– Top priority in the US. President Bush recently requested that Congress approve tax breaks of

up to $ 4,000 per hybrid car and up to $ 8,000 per fuel cell car

– Its everybody’s game. Large numbers of small firms are involved production around the world

– Emerging markets have local players. India and Brazil are known to have domestic

electric/hybrid vehicle manufacturers

– Big guns move in. Every automaker is either already engaged in production of electric/hybrid

vehicles or announced a program to introduce the first models in 2003-2004. As a result, the US

hybrid market alone is estimated to reach 500,000 in 5 years.

– Hybrid cars are still expensive. Hybrid compact cars are sold by Honda and Toyota in the range

of $ 20,000 and hybrid trucks are priced at a $5,000 premium to their gasoline equivalent

Hybrid vehicles segment offers opportunity for small players but the window of opportunity is closing rapidly.

MARKET OVERVIEW

Page 9

Competition is coming from Big Automakers, but not in trucks segment

Honda Insight The Insight is the first gasoline-electric hybrid vehicle to be sold in the United States. This two-seat coupe gets 70 miles per gallon (mpg), and meets California’s stringent ultra low emission vehicle (ULEV) standards. It was endorsed by the Sierra Club and heralded in the ACEEE's Green Book. Priced under $20,000, it is available through Honda dealers nationwide. The 2002 model is available with continuously variable transmission. www.honda.com

The Toyota Prius is a five-seat hybrid-electric sedan that combines the range and performance of a gasoline engine with the silence, efficiency, and clean running of an electric motor. The vehicle never requires external source recharging. It meets California's Super-Ultra-Low Emission Vehicle (SULEV standards. It is sold nation-wide through Toyota dealers for $20,000. www.prius.toyota.com

Even though every global automotive player has at least one “cleaner” model, no company has yet developed a light truck model

Page 10

… And Hybrid Vehicle Market Newcomers

Electric Postal Vehicle by Baker Electromotive, Inc and Ford are producing 5,000 electric postal service vehicles for the US Postal Service. The vehicles are battery powered and can be driven between 50 and 80 miles before recharging. They accelerate from 0 to 50 mph in 12.5 seconds and produce virtually no tailpipe emissions. Email Baker Electromotive, Inc, [email protected].

The Solectria CitiVan: a walk-in delivery van, comes in an all-electric or a hybrid-electric model. Rugged construction assures long vehicle life and low maintenance costs. Powered by the same state-of-the-art Solectria technology found in over 1000 EVs on the road worldwide, the Solectria CitiVan is in service in Massachusetts, California, New York, Canada, and Chile. www.solectria.com

The delivery truck niche is being quickly filled up by relatively unknown newcomers

MARKET OVERVIEW

Page 11

… Heavy/Medium Truck Companies in Mexico

Navistar International, world leader in the manufacture of trucks and buses, is on the vanguard of corporate environmental reform…The company has its own Escobedo Plant in Nuevo Leon... Company has more than 1,100 dealers worldwide, and 9 parts distribution centers

Source: Business Mexico, December 1999

The company is also working with Lockheed Martin to produce Hybrid Electric Vehicles (HEV), which run from a combination of traditional diesel engines and electric battery power. The two are currently test driving a HEV medium truck and are developing HEV school buses and delivery trucks. www.navistar.com

Sources: American Chamber of Commerce of Mexico, A.C. , 1999

Small delivery truck niche could potentially be attacked by the large/medium truck manufacturers

MARKET OVERVIEW

Page 12

Still Mexican companies will retain labor cost advantage over US rivals…

• The 19-day strike earned VW employees a 14.7% increase in wages, from $

25.50/day to $28.50/day plus food coupons…

• …Yet the cost of one union worker in US is $ 120 to $ 190 per day

Daily Wages

020406080

100120140

Mexico - beforestrike

Mexico - afterstrike

United States

Source: Guillermo Valdes, Economists Associates Group, Mexico City

MARKET OVERVIEW

Page 13

… despite quickly rising labor costs

• “Real wages in [the Mexican automotive] industry will increase 33% while productivity will increase by 9% for the period of 2000-2004.”

Armando Soto, Ciemex-Wefa economic consultancy

• "It's no longer an easy answer to produce cars in Mexico… labor costs in the industry have risen 50% in dollar terms since the end of 1998”

Economist Rogelio Ramirez de la O

• “Output per head is about a quarter of what is achieved in the United States … given cooked and tested technology and fairly simple production lines, Mexico can match U.S. productivity rates for some vehicles,"

Sean McAlinden, analyst, University of Michigan

• Labor Unions are quite strong. Recent strike at Volkswagen plant in Pueblo, ended with 14.7% wages increase

MARKET OVERVIEW

Labor costs are rising sharply …but still much lower than US level

Page 14






• Our valuation of Vehizero sets a range between $ –3.3 million and $ 10.2 million, while


– Valuation

– Risk assessment

– Imbedded options



• Thus, we recommend that Vehizero launch an exploratory effort in the U.S. and other

countries internationally, first targeting international development agencies and

socially-oriented VC firms, then approach wealthy individuals as project reaches the

next development stage

Page 15

Funding Requirements appear to be higher than initially estimated

• Funding requirements range from $4.1M to 6.9M

• Recommended funding: $5.5M– capital outlay of $3.4M

• $300K for prototypes

• $3.1M to build plant and WC

– $2.1M to sustain losses for 3 years

• expected accumulative accounting losses for three years is $2.1M

VALUATION

Page 16

Approach to valuation

• Key variables – Tornado chart identifies key variables to analyze and monitor

– Probabilities and ranges

– Crystal Ball simulation

• Trucks Only– Price, COGS, sales in full production

• Taxi Cab option– Market size, price of taxis (assumed margin), 1st year penetration, growth

during following years, cost of expansion

VALUATION

Page 17

11,739

265

7.0%

9,000

1%

220

300

33,623

15,000

3.0%

30,000

0.5%

13,300

13,695

420

13.0%

45,000

5%

350

450

49,313

36,000

7.0%

90,000

1.5%

($10,000,000.00) ($5,000,000.00) $0.00 $5,000,000.00 $10,000,000.00

COGS next Years (post-plant)

Price US$

Expanded production (Y5Q1 - Y6Q3)

% increase in Working Capital

Advertising (maintenance advertising)

Other revenues (as % of same Q last year sales)

Factory at fulll production (Y3Q2 - Y4Q4)

Quarterly sales Terminal (Y6Q4)

Overhead

R&D (post plant)

Sales Commisions (as % of gross margin)

Advertising (penetration strategy)

% increase in required cash balance

Quarterly sales 1st Year (Y1Q3 - Y2Q2)

COGS 1st Year (pre-plant)

Commis. (gnral)

R&D (pre plant)

2nd Factory Quarter (Y2Q4)

3rd Factory Quarter (Y3Q1)

1st Factory Quarter (Y2Q3)

Commis. (sales mgrs)

Direct and indirect labor

Time to complete the construction (Qs)

Raw material (per vehicle)

Depreciation $80K - equipment for Mexico City office

Raw material (per vehicle)

Direct and indirect labor

Depreciation $1,080K - factory and all equipment (5 years)

Other

1- Tax rate

Key Variables used in the valuation

• Tornado chart to identify impact of variables

9,500

VALUATION

Page 18

Simulated Key variables

VALUATION

HYBRID TRUCKS DATA

Price

Post Plant Truck COGS

Terminal Quarterly Sales Rate

TAXI OPTION DATA

Price

Penetration (i.e. Market Share) – 1st Year of Taxi Sales

Penetration Growth Rate (from 1st Year Market Share)

Quarterly Market Size for Taxis – 1st Year of Taxi Sales

Plant Expansion Costs

Page 19

Cost of Capital

• Cost of Capital: 17.9%

• ICCRC (International Cost of Capital Risk Calculator): 18.9%

– Based on a risk free rate of 5%

– Risk premium of 5%

– Anchored to the US

• Adjustments: -1%

– Vehizero has mitigated some risks because you are aligned with government and environmental initiatives

– Company exposed to most standard risks in Mexico

ICCRC calculates the cost of capital for 135 international capital markets. It provides an alternative calculation to the CAPM and other traditional approaches that are less accurate for emerging markets. The ICCRC return reflects countries’ risk premiums based on a comprehensive methodology with strong economic foundations. The ICCRC accounts for risks such as a country’s economic and political stability. It is also anchored to the U.S. rate, so that the country rates are calibrated from that of the US. The intent is to adjust the denominator for countrywide affects.

VALUATION

Page 20

Internal Rate of Return of the Project is around 14%

• We have performed 25 runs of the model to determine the IRR for both taxi and truck markets. The results are summarized below:

VALUATION

Forecast Draw Trucks Taxis Combined1 31.55% 7.34% 30.63%2 -50.00% 0.00% -50.00%3 -33.00% 0.00% -33.00%4 24.17% 38.04% 25.02%5 30.56% 25.91% 29.89%6 34.63% 30.94% 33.97%7 32.59% 0.30% 32.29%8 3.04% 26.27% 6.75%9 24.15% 3.50% 23.22%10 55.80% 7.86% 52.39%11 1.86% 29.30% 6.47%12 29.78% -0.34% 27.97%13 22.12% 44.73% 24.35%14 1.20% 19.92% 4.29%15 40.09% 32.07% 39.37%16 -50.00% 0.00% -50.00%17 28.52% 21.79% 28.25%18 9.61% 37.81% 12.59%19 -3.28% 0.00% -3.28%20 -20.00% 0.00% 20.00%21 -25.00% 0.00% -25.00%22 23.89% 15.62% 23.03%23 24.14% 39.29% 25.21%24 55.90% 33.11% 53.65%25 -33.00% 0.00% -0.33%

AVERAGE 10.37% 16.54% 13.51%

Page 21

NPV of the trucks only ranges from $ –3.3 million to $ 9.6 millionVALUATIO

N

Cumulative Chart

US Dollars

.000

.250

.500

.750

1.000

0

250

500

750

1000

($3,299,546) ($70,341) $3,158,865 $6,388,070 $9,617,276

1,000 Trials 984 Displayed

Forecast: NPV - trucks only

Mean $1.02 M

Entire Range -$3.3 M to $9.6 M

Page 22

NPV of the project ranges from $ –3.3 million to $ 10.2 millionVALUATIO

N

Frequency Chart

US Dollars

.000

.018

.035

.053

.070

0

17.5

35

52.5

70

($3,299,546) $86,703 $3,472,953 $6,859,203 $10,245,453

1,000 Tr ials 985 Displayed

Forecast: COMBINED NPV

Mean $1.30 M

Entire Range -$3.3 M to $10.2 M

Page 23

Cost of Capital

Review financial model

VALUATION

Page 24

Taxi option increases the upside but does not mitigate the downside

Cumulative Comparison

.000

.250

.500

.750

1.000

($5,000,000) ($625,000) $3,750,000 $8,125,000 $12,500,000

NPV - trucks only

NPV - Taxi Option

COMBINED NPV

Ove rlay Chart

Taxi option is attractive only if truck market is a success. Thus, taxi option does nothing to mitigate the downside risk for the investor

Page 25

Each variable is affected by variety of economic factors

• Price fluctuations– Competition

– Increased cost of labor

– Ability to shift all supply purchases to Mexico

– Economic crisis / recession / inflation

• Sales– On time production development

– Ability to produce and sell at full capacity

– Dependence on price fluctuations

– Competition

• Taxi option– Execute option to expand into taxi market

– Ability to penetrate market

RISK ASSESSMENT

Page 26

Sovereign risk is lowRISK

ASSESSMENT

Sovereign Risk

Impact

Risk Mitigated

Currency exchange and convertibility

Moderate No. Currently, Vehizero is purchasing some parts from the US. Operations and sales will be in Mexico, and they plan to purchase all of their supplies in Mexico as well. As they expand into other countries, this will become a larger risk.

Expropriation Low No. Government is relatively stabilized under Fox, and Mexico is a low risk country for expropriation. Vehizero has small amounts of equity and cash flows making it a low risk target.

Regulatory reforms, legal changes

Low Yes. Incentives aligned with government initiatives to reduce pollution. Incentives also aligned with global initiatives such as the Kyoto Protocol and Chicago Climate Exchange (CCX)

Economic stability Moderate No. Mexico has a long history of high inflation and periodic economic crises. However, President Fox achieved unprecedented financial and economic stability since being elected in 2000.

Corruption Moderate No. Fox issued its most comprehensive anti-corruption plan in 2001. Still ranked 51 out of 91 countries on the 2001 Corruption Perception Index issued by Transparency International.[1]

Page 27

Pre-completion risk is low with certain ability to mitigate it furtherRISK

ASSESSMENT

Pre Completion Risk

Impact

Risk Mitigated

Completed on time Moderate No. Completed before major automakers introduce competitive alternatives. Projected returns delayed if Vehizero does not complete construction on time.

On budget Low Yes. Management and construction team have project and development expertise.

Barriers to entry Low Somewhat. Small niche market and unattractive to large automakers. Product is in line with current government initiatives to reduce air pollution.

Force Majeure Low No. Mexico City is on a fault and experiences periodic earthquakes. Although the probability of this occurring is low, it would have significant financial consequences.

Page 28

Operation risk is moderate with little ability for Vehizero to mitigateRISK

ASSESSMENT

Operation Risk

Impact

Risk Mitigated

Supply interruption Low No. Mexico has a large automotive parts industry in place.

Technology High No. Product quality and competitive advantage depends on their ability to get and enforce patents and develop fuel cell and battery technology.

Labor Quality Low No. There is an abundance of labor qualified to do the job.

Market risk: Price of vehicle

Moderate No. Strong competitors. Major automakers have large market share and production efficiencies. Lowering prices will have a significant adverse impact on Vehizero.

Market risk: Quantity of vehicles

Moderate No. The quantity risk is dependent on the substitution effect. Although Vehizero has a unique market niche as a producer of one-ton hybrid electric vehicles, large automakers pose a viable threat by providing competitive substitutes.

Environmental Low Yes. The company meets environmental standards in their production and paint process. They use lead-acid batteries that are 100% recyclable.

Management Moderate No. Weak incentives make management more likely to leave the company.

Page 29

High financial risk with no clear opportunity to mitigateRISK

ASSESSMENT

Financing Risk

Impact

Risk Mitigated

Funding High No. Financial return on the project is likely to be insufficient to attract pure financial investor. The company is likely to revert to limited pool of socially conscience investors.

Interest rate Moderate No. Although inflation is stabilized under the current government, Mexico has a long history of economic crises and is vulnerable to monetary policy changes if new government takes office. Such events could cause significant interest rate spikes.

Page 30

Carbon trading option is not viable

• The possibility to trade carbon emissions quotas is extremely unlikely:

– Although Mexico ratified the Kyoto Protocol no clear carbon bond valuation has been

established

– Although alternatives to the Kyoto Protocol are being discussed in various sectors of the world

community, they face the same challenges as Kyoto Protocol.

• Given Vehizero’s size, value of the carbon bond would be minimal

“CREATION OF THE CARBON BONDS TRADING MARKET IN THE

IMMEDIATE FUTURE IS UNLIKELY”

Source in the Chicago Carbon Emissions Exchange

The creation of the carbon emission market seems will not be viable for the next few years

IMBEDDED OPTIONS

Page 31

Latin America expansion option is difficult

• Other Latin American Cities are much less polluted than Mexico City

– Of all Latin American Cities, only Mexico City made it top # 10 most polluted world cities

– Mexico City pollution level is 2 times higher than any other Latin American City

• Some Latin American Countries already have local competition

– Solectria already operates in Chile

– Brazil has its own electric vehicle manufacturer that specializes in buses

• Public transportation systems in Latin America are at different stages of

development

• Different per capita incomes as well as different gasoline vehicle prices will

influence the possibility of expanding into other Latin American Cities

The possibility of success of Latin American expansion option seems less likely than possibility of success in the Mexico City, as some cities in Latin America have already established players.

IMBEDDED OPTIONS

Page 32

Mexico City remains among the world’s dirtiest cities

1 India Delhi 11,695 415

2 China Beijing 10,839 377

3 India Calcutta 12,918 375

4 China Tianjin 9,156 306

5 Mexico Mexico City 18,131 279

6 Indonesia Jakarta 11,018 271

7 Iran, Islamic Rep. Tehran 7,225 248

8 China Shanghai 13,584 246

9 India Bombay 18,066 240

10 Thailand Bangkok 7,281 223

11 Philippines Manila 10,870 200

12 Bulgaria Sofia 1,192 195

13 Greece Athens 3,116 178

14 Ecuador Quito 1,754 175

15 Italy Torino 1,294 151

16 Brazil Rio de Janeiro 10,582 139

17 Ghana Accra 1,976 137

18 Ecuador Guayaquil 2,293 127

19 Colombia Bogota 6,288 120

20 Spain Barcelona 2,819 117

Total Suspended Particlesmicrogram per cu. m.

1995 yearCountry City

City Populationthousands2000 year

Source: World Bank, World Development Indicators, 1998; Air pollution

Mexico City has a highest air pollution level among Latin American Cities. As a result,

the government effort to clean the environment is one of the strongest in Latin America

IMBEDDED OPTIONS

Page 33






• Our valuation of Vehizero sets a range between $ –3.3 million and $ 10.2 million, while




– Identified 5 groups of potential investor

– Developed a rating system to evaluate the capital opportunities

– Evaluated the probability of securing funds from each group

• Thus, we recommend that Vehizero launch an exploratory effort in the U.S. and

internationally, first targeting international development agencies and socially-

oriented VC firms, then approach wealthy individuals as project reaches the next

development stage

Page 34

Identified 5 groups of potential investors

• Development Agencies– International organizations such as World Bank, International Finance Corporation, USAID,

and others

• Social Venture Capital– Private Capital pursuing dual objectives of financial return and social benefit

– Publicly traded mutual funds that invest in socially responsible enterprises

• Wealth Individuals– Wealthy Individuals that donate money to various social causes

• Bank debt– Traditional bank loans

• Traditional Venture Capital – Private capital seeking financial returns

POTENTIAL INVESTORS

Page 35

Developed Rating System to Evaluate Capital Opportunities

– Does the current Vehizero management retain control over strategic decisions?

– Is there financial flexibility regarding the timing of the payout to investors?

– Will investor stick with Vehizero in the long-term

Attractiveness to Vehizero

– Does Vehizero offer attractive returns to this particular type of investor?

– Are the risks inherent to Vehizero project acceptable to investor?

– Is there strategic fit between Vehizero project and investor’s objectives?

Ability to secure funds

CRITERIA RATED AS LOW, FAIR, GOOD OR HIGH

POTENTIAL INVESTORS

Development Agencies Social VC

Wealthy Individuals Bank loan

Traditional VC

Ability to Secure Funds

Attractive returnAcceptable riskStrategic fit

Overall Investor score


Strategic controlFinancial FlexibilityRisk of abandonment

Overall Vehizero score

Page 36

– Attractive return– Low risk– Strategic fit

Low

Developed Matrix to Compare Sources of Financing

Attractiveness To Vehizero

Ab

ility

to

ob

tain

fu

nd

s

HighLow Fair Good

High

Fair

Good

Ability to secure Funds

Excellent Sources

Unattractive Sources

– Strategic Control– Financial Flexibility– Risk of abandonment


The matrix evaluates the attractiveness of the different sources of financing from the prospective of the potential investor and Vehizero using the criteria above

POTENTIAL INVESTORS

Page 37

Development Agencies are a likely group to provide capital to Vehizero

• Accept lower returns. Development Agencies accept lower returns than strictly financial lenders

• Tolerate higher financial risk but very cautious towards social risks. Although Development Agencies may tolerate high financial risks, they are quite cautious of the risk of negative publicity, such as misused funds, negative social or environmental impact. To secure funds, Vehizero must demonstrate the positive environmental effect of the project

• Strategic fit. Development Agencies have very good strategic fit with Vehizero, as both entities are trying to improve the environment

• Strategic control. Although Development Agencies strictly monitor the use of their funds, they usually do not interfere into daily operations of the enterprise

• Financial Flexibility. Most financing from Development Agencies comes in the form of debt, which limits the financial flexibility for Vehizero

• Risk of abandonment. Development Agencies are usually more tolerant towards downside in operational performance and rarely abandon their projects

POTENTIAL INVESTORS

Page 38

Development Agencies are a very likely group to provide capital to Vehizero

WORLD BANK – International Finance Corporation

• Mexico accounts for the second largest in the Bank's disbursed and outstanding

portfolio, totaling US$ 11.1 billion or 9.4 percent of the Bank's total portfolio

• Bank’s Strategy in Mexico involves expansion of the “Air Quality Program” to a

second phase in Mexico City

• Currently, the World Bank studies the granting of a US$ 11.8 million loan for

the Santiago (Chile) plan, whose main objective is to reduce the

emissions of polluting gases in the city. Some money will go the the local

producer of the electric buses.

• Our initial contact with the Bank’s private investment arm – International Finance

Corporation – indicated the possibility of funding

POTENTIAL INVESTORS

Page 39

A related business in Mexico City has already secured funding from IFC

INTERNATIONAL FINANCE CORPORATION

• In year 2001, IFC approved $ 10 million investment to Combustibles Ecologicos

Mexicanos (Ecomex), the only supplier of the compressed natural gas for

vehicles in Mexico City.

• The investment is split between $ 1.5 million quasi-equity and $ 8.5 million debt

• Ecomex has proved to IFC the strong positive environmental effect of the

venture.

POTENTIAL INVESTORS

Page 40

Vehizero may qualify for funding from IFC


• IFC funds different type of projects based on their expected financial

performance and the economic sector in which they are developed.

• IFC invests in either equity or debt.

• The minimum amount of investment is US$10M, which can’t exceed 25% of the

equity of the company. Also, the investment can’t exceed 50% of the project

value.

• However, exceptions can be made on a case-by-case basis.

POTENTIAL INVESTORS

Source: Country Officer IFC Mexico

Page 41

We recommend Vehizero to contact the IFC representative in Mexico


Mr. Manuel Núñez,

Resident Manager

Email: [email protected]

Prado Sur 240, Suite 402

Lomas de Chapultepec

Delegación Miguel Hidalgo

Mexico D.F. 11000, Mexico

Phone: (52-5) 520-6191

Fax: (52-5) 520-5659

POTENTIAL INVESTORS

Ing. Gabriel España Carbajal

Investment Officer/Country Officer

[email protected]

Page 42

Other Development and Government Agencies

Development AgenciesUSAIDProvides Grants and Other Financial Aid to Promote the Environment

U.S. Agency for International Development Information CenterRonald Reagan BuildingWashington, D.C. 20523-1000Telephone: 202-712-4810 FAX: 202-216-3524

US Environmental Protection Agency (EPA)Works with Private Sector to promote the use of energy-efficient equipment

U.S. Environmental Protection Agency Office of the Comptroller Environmental Finance Program (Mail Code) 2731R Ariel Rios Building 1200 Pennsylvania Ave., NW Washington, D.C 20460

Government AgenciesMéxico City’s Department of the Environment

POTENTIAL INVESTORS

Page 43

Development Agency, and IFC specifically, are attractive option for Vehizero

Good strategic fit indicates the opportunity for Vehizero to attract funds from Development Agencies. However, the small size of the project might be an issue to overcome

POTENTIAL INVESTORS

Development Agencies Bank Loan

Traditional VC Social Funds

Wealthy Individuals


Attractive return GoodAcceptable risk GoodStrategic fit Good

Overall Investor score Good


Strategic control GoodFinancial Flexibility FairRisk of abandonment Good

Overall Vehizero score Good

Page 44

Securing Bank debt is highly unlikely

• Project returns are acceptable. Vehizero’s projected return of 14% will probably be sufficient to guarantee the repayment of the bank’s loan.

• However, the risk is totally unacceptable. There are 2 issues that make risk of Vehizero project to high for the traditional lending institution

– Collateral. Lack of tangible, marketable assets that could be pledged as a collateral increases the risk of negative returns.

– Credit History. Vehizero has not built up a credit history, as a result is considered a highly risky investment

• Poor Strategic fit. Commercial Banks rarely invest in the start-up entities, such as Vehizero.

• Strategic control. Banks rarely interfere in a day-to-day operations of the borrower.

• Financial Flexibility. Strict interest payment, principle repayment schedule, and debt covenants make the bank debt the least flexible category of capital.

• Risk of abandonment. High risk of abandonment as bank can pull out the capital at the first minor violation.

POTENTIAL INVESTORS

Page 45

Securing bank loan seems unlikely

Lack of collateral and credit history, as well as early stage of the development of Vehizero makes obtaining bank loan unlikely

POTENTIAL INVESTORS



Wealthy Individuals


Attractive return Good GoodAcceptable risk Good LowStrategic fit Good Low

Overall Investor score Good Low


Strategic control Good GoodFinancial Flexibility Fair LowRisk of abandonment Good Low

Overall Vehizero score Good Low

Page 46

Traditional Venture Capital Firms are not a good option to pursue

• Vehizero returns are inadequate. Even in the United States VC do not invest in projects that offer less than 25% returns

• Tolerate risk. VC accept the fact that 7-8 of the ventures will eventually fail.

• Strategic fit. Good strategic fit due to the interesting product concept, however, traditional VC do not value the social/environmental impact. In addition, this group will be most concerned with Vehizero exit strategy, which at this point is not clear.

• Strategic control. Depends on the style, could be very hands-on

• Financial Flexibility. Relatively flexible

• Risk of abandonment. Venture Capital firms will sell the investment at first available opportunity

POTENTIAL INVESTORS

Page 47

Venture Capital in Mexico

• Total investment by international private equity funds in Mexico is $ 250 million

• Private equity investors in Latin America will increase Mexico weight from 27% to 37% of the total Latin America portfolio

• The hurdle rate on the Venture Capital investment is 30%-40%

• Investments are made in variety of different sectors

POTENTIAL INVESTORS

Telecommunications19%

Food and beverage17%

Financial Services15%

Media and Entertainment

13%

Retail9%

Construction5%

Information Technology 1%

Other21%

Mexican Private Equity Investment by Sector

Source: Venture Capital Journal March 1, 2001;

Page 48

The supply of foreign venture capital is almost exclusively foreign

Venture Capital Firms in Mexico % of total VC market

Hicks, Muse, Tate & Furst 18%

J.P. Morgan Capital 14%

CVC Latin America 10%

Blackstone Group 10%

Newbridge Latin America 7%

Advent International 6%

Barings Venture Capital <6%

Others 30%

Total 100%

As the local institutional investor base is still underdeveloped, the supply of

venture capital is almost exclusively foreign

Source: Venture Capital Journal March 1, 2001; The Economist Intelligence Unit, Country Finance Report, April 2001

In most cases, Vehizero size will too small for large international players

Page 49

Securing capital from traditional VC firms seems unlikely

Lack of strategic industry fit, small size, and low return make Vehizero extremely unattractive to traditional Venture Capital Firms

POTENTIAL INVESTORS



Wealthy Individuals


Attractive return Good Good LowAcceptable risk Good Low GoodStrategic fit Good Low Fair

Overall Investor score Good Low Fair/Low


Strategic control Good Good FairFinancial Flexibility Fair Low GoodRisk of abandonment Good Low Fair

Overall Vehizero score Good Low Fair

Page 50

Social Investment Funds offer the opportunity of raising some capital

• Accept lower returns. Social Investment Funds accept lower returns than strictly financial lenders

• Tolerate higher financial risk but very cautious towards social risks. Just like Development Agencies, Social Investment Funds may tolerate high financial risks, they are quite cautious of the risk of negative publicity, such as misused funds, negative social or environmental impact. To secure funds, Vehizero must demonstrate the positive environmental effect of the project

• Strategic fit. Social Investment Fund have very good strategic fit with Vehizero, although they prefer to fund expansion phase, not seed/start-up phase.

• Strategic control. Usually exercise laissez-faire approach to investment

• Financial Flexibility. Very flexible

• Risk of abandonment. Rarely abandon their projects, however, the financial viability of the funds themselves is sometimes a question.

POTENTIAL INVESTORS

Page 51

Social Funds Universe

POTENTIAL INVESTORS

• Socially oriented VC firms– Calvert Social Venture Partners

• Publicly traded mutual funds that invest in socially-oriented enterprises– UBS Warburg (Lux) Equity Fund – Eco Performance

– The Calvert Social Investment Fund

– Green Century

– Pax World

• Funds in Latin America– NAEF (Ventana)

– Corporación Financiera Ambiental, S.A.-CFA

– E&Co.

– EcoEnterprises Fund

Page 52

Publicly traded mutual funds

POTENTIAL INVESTORS

UBS Warburg (Lux) Equity Fund – Eco PerformanceEco Performance is an environmental fund which fulfils the requirements of a broadly diversified global investment fund. It also represents an alternative to global investment funds, bringing an additional ecological benefit.

http://www.ubs.com/e/investmentfunds/ecoperformance.htmlTel: +41-1-235 36 36Fax: +41-1-234 93 20

The Calvert Social Investment FundCalvert has been in the mutual fund business for 25 years and manages approximately $7.8 billion in assets in 27 screened and non-screened portfolios for over 220,000 shareholders.

http://www.calvertgroup.com/sri_654.htmlDavid Mallery or Stephen MoodyVenture PrincipalsE-mail: [email protected]: 301/961-4786

Page 53

Calvert Social Investing

POTENTIAL INVESTORS

Portfolio at a Glance (9/30/01)

Active Investments: 30 unique, direct investments, one of which is common to both funds; 25 unique, intermediated investments in other private equity funds and financial institutions, two of which are common to both funds

Areas of Investment: environment, education, health, energy, minority enterprise, community/economic development

Investment Size: $100,000 - $750,000 (direct investments), $100,000 - $1,000,000 (other funds)

Types of Investment: equity, convertible debt, limited partnership interests

Preferred Investment Role: prefer participation with other institutions; generally not a lead investor

Stage of Investment: early-to-expansion stage; generally not a seed or start-up investor

Page 54

Publicly traded mutual funds

POTENTIAL INVESTORS

Green CenturyThe Green Century Equity Fund's objective is to achieve long-term total return which matches the performance of an index composed of the stocks of 400 companies selected based on social and environmental criteria.

http://www.greencentury.com/GCEF.htm29 Temple Place Boston, Massachusetts 02111 1-800-93-GREEN [email protected]

Pax WorldAnother socially responsible fundhttp://www.paxfund.com/index.htmPax World Funds222 State StreetPortsmouth, NH 03801 1-800-767-1729

Page 55

Latin American Funds

POTENTIAL INVESTORS

E&CoE&Co was established in 1994 as an independent non-profit organization with the strategy of providing enterprise development services and modest amounts of money ($50,000 or less to $250,000)—in the form of loans and equity investments—to economically, socially and environmentally sustainable energy enterprises in developing countries.

http://www.energyhouse.com/http://www.iadb.org/mif/investment_page/english/eandco.html383 Franklin StreetBloomfield, New Jersey 07003 USAPh: (973) 680 9100Fax: (973) 680 8066E-mail: [email protected]

Page 56


POTENTIAL INVESTORS

The EcoEnterprises FundThe $10 million EcoEnterprises Fund offers venture capital to environmentally and socially responsible businesses in Latin America and the Caribbean. The Fund invests in ventures at all stages of development with sales revenues up to $3 million. Investment size ranges from $50,000 to $800,000, with an average investment of $225,000. The Fund will finance up to 50 percent of project costs, using a variety of equity or debt instruments. The Fund is able to provide flexible financing to promote long-term success.

http://www.iadb.org/mif/investment_page/english/eandco.htmlThe Nature Conservancy 4245 North Fairfax Drive, Arlington, VA 22203 Tel: 703-841-8176 Fax: 703-841-4880 Fax: 506-220-2551 Email: ecoenterprisesfund.com

Page 57


POTENTIAL INVESTORS

Corporación Financiera Ambiental, S.A.-CFACorporación Financiera Ambiental provides long-term investment capital for businesses with solid growth potential. These enterprises involve the sustainable or environmentally friendly use of natural resources. CFA is managed by Empresas Ambientales de CentroAmerica and its parent company, Environmental Enterprises Assistance Fund. Company invests in the Energy Efficiency Sector

http://www.eeaf.orghttp://www.iadb.org/mif/investment_page/english/cfa-engl.htmlEnvironmental Enterprises Assistance Fund1901 North Moore Street, Suite 1004Arlington, VA 22209, EE.UU.Tel: (703) 522-5928Fax: (703) 522-6450Web: http://www.eeaf.orgE-mail: [email protected]

Page 58

Another Social Fund to contact may be the NAEF

NAEF: North America Environmental Fund

• NAEF is a US$36M private fund that promotes the environmentally friendly

industries in US, Canada and Mexico.

• NAEF was created by Nacional Financiera –Mexican bank, OECF –Japanese

entity, and Ventana –private firm.

• NAEF mainly invests in projects that reduce air pollution, recycling, energy

production.

POTENTIAL INVESTORS

Source: Multilateral Investment Fund / www.iadb.org/mif/

Page 59

We suggest Vehizero to contact the NAEF (VENTANA) representative

NAEF: North America Environmental Fund

Carlos de Rivas Oest

Phone: (5) 258-0175

Fax: (5) 258-0186

E-mail: [email protected]

POTENTIAL INVESTORS

Page 60

Securing capital from Social Funds firms is a good opportunity

Great strategic fit, financial and strategic flexibility point toward Social Funds as a viable option to obtain funds

POTENTIAL INVESTORS



Wealthy Individuals


Attractive return Good Good Low HighAcceptable risk Good Low Good HighStrategic fit Good Low Fair High

Overall Investor score Good Low Fair/Low High


Strategic control Good Good Fair HighFinancial Flexibility Fair Low Good HighRisk of abandonment Good Low Fair Fair

Overall Vehizero score Good Low Fair Good

Page 61

Obtaining capital from wealthy individuals might be possible

• Project returns might be almost irrelevant. Wealthy individuals might view the project as financial aid not as a profit-seeking enterprise

• Social risks are important. Wealthy individuals are the most cautious category when it comes to the risks of bad publicity

• Strategic fit. Depends on the individual and his charitable goals. The small size and far-away location might be a concern. This category could be hit or miss.

• Strategic control. These individuals will not engage into the operations of such a small enterprise.

• Financial Flexibility. Capital is likely to be viewed as a donation, however, this donation is unlikely to be sufficient.

• Risk of abandonment. Individuals are likely to give one-off donation, and are unlikely to engage in several rounds of financing.

POTENTIAL INVESTORS

Page 62

Wealthy Individuals are known to donate money to environmental causes

CURRENT DONORS

• Ted Turner– Granted $ 1 billion to United Nations for various social and environmental causes

Potential Donors

• David Rockefeller

• Carlos Slim

• George Soros

POTENTIAL INVESTORS

Page 63

Securing capital from might be a distant third option for Vehizero

Low demands for financial return and laissez-faire attitude make wealthy individuals marginally attractive

POTENTIAL INVESTORS



Wealthy Individuals


Attractive return Good Good Low High HighAcceptable risk Good Low Good High FairStrategic fit Good Low Fair High Fair

Overall Investor score Good Low Fair/Low High Fair


Strategic control Good Good Fair High HighFinancial Flexibility Fair Low Good High FairRisk of abandonment Good Low Fair Fair Fair

Overall Vehizero score Good Low Fair Good Good

Page 64

Any investor is likely to inquire Vehizero about the following

• Exit strategy– With IPO not being a viable selling to strategic investor (I.e. large automaker) remains the only

option

• Selling expertise– Vehizero currently lacks selling expertise, as its human talent is concentrated in the

engineering aspect. As the company moves forward from being R&D stage to commercial enterprise stage, how does Vehizero plan to overcome this lack of expertise?

• Servicing expertise– Vehizero currently does not highlight the area of servicing and repairing its vehicles. Future

investors would need to be convinced that this is not a risk area

• Environmental impact– Battery recyclable?

– Ratio of vehicle gasoline consumption vs. power plant gasoline consumption to produce electricity?

– Parts recyclable?

Page 65




• Our valuation of Vehizero sets a range between $ –3.3 million and $ 10.2 million, while project’s IRR estimated to be 14%



Page 66

Summary of the investor evaluation



Wealthy Individuals


Attractive return Good Good Low High HighAcceptable risk Good Low Good High FairStrategic fit Good Low Fair High Fair

Overall Investor score Good Low Fair/Low High Fair


Strategic control Good Good Fair High HighFinancial Flexibility Fair Low Good High FairRisk of abandonment Good Low Fair Fair Fair

Overall Vehizero score Good Low Fair Good Good

RECOMMENDATION

Social Funds and Development Agencies are the most likely sources of financing

Page 67

– Attractive return– Low risk– Strategic fit

Low

Results of the investor analysis

Attractiveness To Vehizero

Ab

ility

to

ob

tain

fu

nd

s

HighLow Fair Good

High

Fair

Good

Ability to secure Funds

Excellent Sources

Unattractive Sources

– Strategic Control– Financial Flexibility– Risk of abandonment


Social Funds and Development Agencies are the most likely sources of financing, with wealthy individuals being a distant third option

Development Agencies

Wealthy Individuals

Bank Debt

Traditional VC

Social Funds

RECOMMENDATION

Page 68

Final conclusions and recommendations

CONCLUSIONS

• Funding requirements to sustain operations for up to 3 years are estimated to be $5.5M. This includes capital expenditures and accounting losses

• Vehizero valuation ranges from $ –3.3 million to $ 10.2 million with average IRR estimated to be 14%. There is a great deal of volatility within the range, and the mean valuation is around $ 1 million.

• While entering the delivery vehicle segment is possible, the options of entering the taxi segment, expansion to other cities in Latin America, and trading carbon bonds are much less viable.

RECOMMENDATIONS

• Vehizero should launch an exploratory effort in the U.S. and other countries internationally, first targeting international development agencies and socially-oriented VC firms, then approach wealthy individuals as project reaches the next development stage

RECOMMENDATION

Investment Brief Vehizero S.A. Final Report March 19, 2002 Prepared for Mr. Sean O’Hea by the Fuqua Team Fuqua Faculty Advisor: Campbell Harvey Fuqua Team:

Documents

attractiveness of vehizero

project team

valuation of vehizero

oriented investors

financial investors

material research activities

investment brief vehizero

hybrid vehicle segment