1) This report considers the potential purchase of the sodium chlorate producing plant in Collinsville, Alabama by Dixon Corporation from American Chemical Corporation in October 1979. The reason for this stems from the fact that American Chemical Corporation was attempting at the time to buy a controlling stake in Universal Paper Corporation, but the management of Universal contested this on the basis that it would be anti-competitive, given that they were both producers of sodium chlorate. The US government supported Universal in this belief and in order to prevent court action American had to agree to divest its sodium chlorate producing plant in Collinsville, Alabama. As of October of 1979 Dixon has agreed to purchase the plant in principal, and is awaiting approval from their board of directors. 2) Sodium chlorate is produced via the electrolytic decomposition of salt, water and energy. The important factors for us to consider regarding sodium chlorate is where the demand for this chemical comes from. 85% of demand for the product is derived from the paper and pulp industry, where it is used in the production of the bleach that is used to whiten the paper. The remaining 15% comes from its use as a soil sterilant, in uranium mining and in the production of other chemicals. 3) Dixon Corporation are the potential buyers of the plant. They are a specialty chemicals company who follow a strategy of supplying products to the paper and pulp industry. The majority of their custom comes from the South-Eastern area of the United States. In recent years they have experienced strong growth. 4) The Collinsville Plant that is the subject of this report is located in the Northern reaches of the state of Alabama in the South-East of the US. It sources its power from the Tennessee Valley Authority. It produces sodium chlorate with a maximum capacity of 40,000 tons per annum. Throughout the period 1974-1979 the plant has been consistently profitable. 5) Before we can begin any sort of analysis on the plant we first need to examine the financing methods used to fund the $12 million (from this point the abbreviation ‘mill’ will be used in place of million) purchase price. Dixon intends to use two methods: (1) $8 mill in 15 year mortgage bonds via private placement (2) $4 mill in the form of a $4 mill note
Both debt instruments carry an 11.25% interest rate. Further information on the repayment structure of these instruments follows in the ‘Financial Obligations’ section. 6) In addition we need to acknowledge the potential for improved technology in the plant. Currently the electrodes used in the electrolytic decomposition process which produces sodium chlorate are made of graphite. A research team working at the behest of American is working on a laminate coating for the electrodes that will eliminate the graphite costs associated with production (as it will no longer need to be used) and decrease power costs by 15-20%. This is crucial because power costs make up between 55-60% of manufacturing costs at the plant. American estimates this technology will be able to be installed at the Collinsville plant by the end of December 1980. The cost of this installation will be $2.25 million and we have decided it will be financed using a nine-year amortised loan. Again we have used an interest rate of 11.25% for this loan. Further information can be found in the ‘Financial Obligations’ section. EVALUATION
7) Our job as a group was to determine whether or not this is a good investment for Dixon (whether it will add value to the firm). Our first objective is to determine the best evaluation method for the firm. There are many methods available for evaluating projects. Here we will run through some of the more prominent options available and select the one which we deem most appropriate for this project. Before we begin it should be noted that while liquidation valuation and price earnings multiple...
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