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The purpose of this report is to assess the viability of the acquisition of Royal Paper Corporation’s (Royal) Monticello mill and box plants by Atlantic Corporation (Atlantic). This will be conducted through the evaluation and analysis of whether this project is profitable and also if this is a sound strategic move.
In making our final decision, we have undertaken extensive qualitative and quantitative analysis. Such factors we have taken into consideration are the future trend of linerboard prices, the profitability of the linerboard industry and whether this acquisition will improve Atlantic’s position in the forest product and the linerboard industry. Furthermore we have investigated the prices that Atlantic should pay to acquire the linerboard and box mill operations from Royal, as well as finding the amount of external financing required and by which means of funding the acquisition should be conducted by.
Through our quantitative and qualitative findings, we believe Atlantic should undertake the acquisition of Royal’s Monticello mill and box plants, as Atlantic has the opportunity to strengthen their linerboard capacity. In addition, we have determined the value of this acquisition is at a price of $417.413, under the Corporate Valuation Model.
Furthermore, we estimate that external funds of $302 million would be required should Atlantic proceed to acquire the mill and plants at $319m. Our suggested funding mix is US$106 million debentures; and US$210 million common stock (proceeds of US$196 million) as we believe Atlantic should issue debentures to the point that does not affect bond rating, and then issue common stock.
Atlantic’s Operating Strategy
Acquisition of Royal’s Linerboard Mill and Box Plants as a Sound Strategic Move We recommend the acquisition of the above mentioned linerboard mill and box plants after considering the following qualitative factors: I. The bright prospect for the linerboard market for the year 1984 onwards described as “strong demand, limited supply and no new capacity”. Atlantic’s current net buyer position in the linerboard market further pushes us to favour this acquisition as it will be protecting Atlantic from linerboard price increases. I. The linerboard industry is also less sensitive to economic shifts. The driving factor of linerboard demand is the amount of goods being shipped in the nation, and as we can see from Exhibit 2, with US consumption used as a demand proxy, that the demand for linerboard has consistently increased from year to year. II. The acquisition also enables Atlantic to have more than 75% geographic market coverage of box plants, covering the West, East, Midwest and South. This will provide Atlantic with a competitive advantage because high shipping costs encourage industry participants to locate box plants nearer to end users. III. We are also aware of another option of Atlantic building its own linerboard mill. However, we disregard this option on the basis that not only will it take longer for Atlantic to participate in this industry, it also costs more with less capacity. Outlook for Linerboard Prices and Profitability of Linerboard Industry The linerboard industry consists of high levels of in-built fixed costs in its operations, but is possible to experience high levels of profitability due to factors like strong demand, limited supply and with no new capacity additions expected for the forthcoming period meant that the industry is likely to operate at 100% utilisation. With linerboard prices forecasted to top $420 per ton by the end of 1986, linerboard sales are predicted to rise nearly 7% as real GNP. All these factors would lead to high profit...