Document MJ4q1KwRG7Erx7jvVM6n2bQ4a
UNION CARBIDE CORPORATION CHEMICALS AND PLASTICS ENGINEERING DEPARTMENT
A
\ V
ECONOMIC EVALUATION OF THE
ACQUISITION OF PECHINEY-ST. GOBAIN PROCESS PVC RESIN PLANT FROM DOW CHEMICAL COMPANY
By R. W. Brown W. R. Manning September 12, 1968
SOUTH CHARLESTON WEST VIRGINIA
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039064
ECONOMIC EVALUATION OF THE
ACQUISITION OF PECHINEY-ST. GOBAIN PROCESS PVC RESIN PLANT FROM DOW CHEMICAL COMPANY
INTRODUCTION Economic calculations were made to evaluate the possible acquisition
of a PVC resin plant being offered for sale by Dow Chemical Company. The plant is in the final stages of construction on a corner of Dow's Plaquemine, Louisiana plant site. It was built under a license from Pechiney-St. Gobain (P-S-G) to use the company's improved bulk polymerization process. P-S-G guarantees a plant capacity of 31* million pounds per year of PVC resin. Dow has made changes they expect will increase capacity to k2 million pounds per year. Dow's asking price for the initial plant is $5-575 million. They estimate the capacity can be doubled for an additional $2.5 million. The plant layout will accommodate an expansion to quadruple the present capacity.
The four cases investigated were: (1) Standard UCC-type pro forma 0 & R, normal sales of all products. (2) Make vs. buy economics for Fibers & Fabrics Division resin
requirements. (3) Financing by a large volume customer (e.g., Ford). (M Installment financing from Dow. The results and sample calculations are presented on the following pages. A description of each case lists the basis of calculations.
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CONCLUSION
At predicted FVC resin sales prices, the acquisition of the P-S-G plant is not an attractive venture. This is demonstrated by examining each case at the maximum predicted plant capacity and at the maximum predicted average resin sales price of 11.5 cents per pound.
Case 1:
Standard 0 & R. (See Figures 1 and 2.) At a purchase price of $1.5 million less than Dow's asking price, (GFI = $4.5 million before expansion) UCC receives 9% ROI. After expansion, UCC receives 12$ ROI.
Case 2:
Resin for Fibers & Fabrics Division, Make vs. Buy. (See Page 7.) At a purchase price of $1*5 million less than Dow's asking price, (GFI = $4.5 million) UCC receives an ROI of 11$.
Case 3:
Customer financing. (See Figures 3 and 4.) An arrangement which would give Ford a 12$ DCF return (4 ^/lb price reduction, $5-5 mi Hi on invested by Ford) would give UCC a 15$ DCF return. This is a moderately attractive return for both companies but it is unlikely Ford can be committed to a long-term (15-year) purchase contract or that UCC can count on long-term price stability of resin at 11.5 cents per pound.
Case 4:
Dow financing. (See Figures 5 and 6.) A leasing arrangement which would give Dow a 4$ ROI ($650,000 annual lease fee) would give UCC a 4$ ROI.
BASES OF CALCULATIONS. RESULTS, AMD SAMPLE CALCULATIONS
Case 1 - Return on Investment vs. Sales Price on the following basis:
Buy plant from Dow for direct sales of resin. First 25 million pounds per year sold to large-volume customers at overhead = 6 percent of net income from sales (NIFS), distribution in hopper cars at 1.65 cents per pound.
Balance of production to small volume customers at overhead = 13 percent NIFS, distribution in bags at 2.74 cents per pound.
Four values of plant capacity (34, 42, 68, and 84 million pounds per year) and several values of GFI were investigated.
Table 1.
Direct and period costs based on data supplied by Dow are shown in
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039066
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Direct Cost
TABLE 1
^/Lb Of Product
Plant Cost, M$
At Indicated Plant Capacity
3*+ MM
k2 MM
68 MM
81+ MM
Lb/Yr
Lb/Yr
Lb/Yr
Lb/Yr
Vinyl chloride monomer. 1.05 #/# Product x 2.9 <j>/#
Catalyst & Chemicals Steam, 0.1+1+ #/# Prod, x 85 #/M# Nitrogen, 0.11+1+ cu ft/# Prod.
x 0.28 $/cu ft City water, 0.033 gal/# Prod.
x 0.1 gal Elect. Power, 0.1* KWH/# Prod.
x 1.2 tf/KWH
3.01+5 0.250 0.037
0.0U1
0.003
0.1+80
1,035 85 13
Ik
1
163
1,279 105 16
17
1
201
2,070 170 26
28
2
326
2,558 210 32
3U
2
1+02
TOTAL DIRECT COST Period Cost
1,311
1,620
2,621
3,339
Contract maintenance
Insurance
Misc. Dow services
Emergency fire protection & ambulance
Coolant water disposal
Manpower
,..
Shift people @ kb M$/yr/position
Contract people including supervision^
Supervisory & technical - 5 10 M$/yr
Misc. operating supplies
300 300 1+25 1+25 15 15 20 20
25 25 30 30 25 25 30 30
220 220 26k 261+ 115 115 170 170
50 50 50 50 20 20 25 25.
TOTAL PERIOD COST
770 770 1,01)+ 1,011+
(1) Five shift positions for Single-Train Plant - 6 for Two-Train Plant. (2) Eleven contract people for Single-Train Plant, l6 for Two-Train Plant.
Royalty Payments to P-S-G Based on -
5$ of NIFS on First $l+,000,000 Sales and Usage 356 of NIFS on Next $6,000,000 Sales and Usage 2$ of NIFS on Sales and Usage over $10,000,000
Working Capital = 12$ of Total Operating Cost + lU$ of NIFS + 25$ of Total Product Cost
Gross Fixed Investment = Plant purchase price + $500,000 for misc. changes before operation, purchase of hopper cars, and other non-plant investment.
Depreciation = 8$ of Gross Fixed Investment
UCC 039067
Sample Calculation for Case 1 (M$ Except Where Noted)
Gross Production, M Lbs Sales price, #/lb
1*2,000 11.5
Net Sales Value
1*,830
Direct Cost Period Cost Royalty Payments
1,620 770 180
Total Plant Cost
2,570
Distribution for:
First 25 MM lbs = $0.0165 x 25 MM=
Balance Overhead,
= $0.0271+ x 17 MM=
First 25 MM lbs = (0.06)x($0.115)x(25 MM) =
Balance
= (0.13)x($0.115)x(l7 MM) =
1*10 1+60
170 250
Total Operating Cost
3,860
'Operating Income Depreciation (8# of GFI)
970 500
ROI Income
1*70
New Fixed Investment
Working Capital
Cash: 0.12 x Total Oper. Cost Acct. Rec.: 0.l4 x Net Sales Value Inventory: 0.25 x Plant Cost
l+,500
460 670 61+0
Total Investment
6,270
ROI = (1+70)/(6270) =
8g
Figure 1 shows percent ROI vs. resin sales price at four plant capacities.
Figure 2 shows percent ROI vs. gross fixed investment (GFI) at various values of resin sales price for a 1+2-miIlion-pound-per-year plant.
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X
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Case 2 - Resin for Fibers & Fabrics
Make by P-S-G Process or Buy @ 11.5 0/lb
Make Option:
Buy P-S-G Plant for $4.0 MM, add $0.5 MM for Miscellaneous and non plant investment; TUGFI = $4.5 MM Assume capacity = 42 MM lb/yr Supply 20 MM lb/yr to Fibers & Fabrics Sell 22 MM lb/yr to customers @ 11.5 0/lb Credit sales against operating cost
Buy Option:
Buy 20 MM lb/yr P-S-G resin @ 11.5 0/lb
(M$ except as noted)
Direct Cost Period Cost Royalty Payments
Total Plant Cost
Dist. 20 MM lb g $0.0l8/lb 22 MM lb g $0,020/1)3
0. H. g 13* on N1FS 5* on F & F Use
Total Operating Cost Less NIFS
Net Operating Cost Plus Depreciation
Make Option
1,600 800 200
2,600
360 440 330 110
3,840 2,530
1,310 360
Buy Option 2,300 2,300
1,670
Saving = 2,300 -- 1,670 = 630
New Fixed Investment
4,500
0
Working Capital
Cash: A. R.: Inv.:
.12x Total .14x NIFS .25x P.C.
Oper.Cos4t 6o
354 650
.04 x T.O.C. .04 x T.O.C. 1/12 x T.O.C.
92
-92 190
Total Investment
5,964
190
Differential Investment = 5,964 -- 190 = 5,774
ROI
=
630 5,774
x
100
=
11%
UCC 03907)
8- -
Case 3 - DCF Return on the following basis: UCC and Ford jointly purchase plant. Total purchase price = $6,000,000 If Ford advances $4,000,000, UCC advances $2,000,000 If Ford advances $5,500,000, UCC advances $ 500,000 UCC supplies working capital, operates plant, and sells first 25 MM lb/yr production to Ford at a specified reduction below market price. Balance up to 25 MM lb/yr is transferred to Fibers & Fabrics Division Balance over 50 MM 16/yr sold to others. Distribution costs * 1.65 $/lb to Ford, 1.80 </lb to Fibers & Fabrics, and 2.74 $/lb to others Overhead - 13$ NIFS for all outside sales 0$ for transfers to Fibers & Fabrics Plant capacity = 42 MM lb/yr, UCC expands to 84 MM lb/yr in 1972 for $2,500,000 Direct and period costs, royalty payments, and working capital factors same as in Case 1. Depreciation - Sum-of-the-years digits method, 15-year project life. Tax rate = 53$ in 1969, 48$ in 1970-1984
Figure 3 shows DCF return from UCC's viewpoint vs. reduction in resin sales price to Ford.
Figure 4 shows DCF return and percent R0I from Ford's viewpoint vs. reduction in resin sales price to Ford.
UCC 039072
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w *.-4 --|------ r-4- -
WF H- - L j ' l . - --j-4
-t-t-r-
i-rr
4-4- 40. 4r-t-L +4-4f 44-
Tt -Hr
iii
UCC VIEWPOINT
UCC & Ford Jointly Purchase Plant Total Cost = $6.0 MM Plant Capacity = 42 MM lb/yr UCC Expands to 84 MM lb/yr in 1972
-------- ,
.... j.--
CUGCNE DICTZO CN CO. M A D t i n u , m. a .
{^ \
PAPER
K ttA P H IN C H
O lE T JO fN
X to PER
I0l l
1
0
4
3
NO.
r
UC 1*
CASH FLOW WORK SHEET
UCC CAPITAL SUOCtT PIOCtDUM
UCC's VIEWPOINT
o
ICC & FORD JOINTLY PURCHASE PLANT
FORD INVESTS $5-5 MM, GETS 5 ^/lb Price Reduction; Normal Sales Price 12 7/lb
M-Doliars
l. New Fixed InvfsttMnl 2. TFtnifr of SuMortlAg Fixed Imiit. 3. Total Ftsod Investment
1969
-500 0
-500
1970
0 0 0
1971 1972
0 -2500 .0 0
0 -2500
1973
n n 0
1974
n n n
1975
n n n
1976
n n n
1977
n n
1978
n n n
1979
n _____a.
n
1980
n n rt
1981
n n n
1982
n n n
1983
f\ n n
1984
n rl n
4. Cash Accounts Received le
6. 7. Worfcine Capital
-180
0
0
0 -328
0 ___ 0.
ci
0
n
n
0
n
Cl
n
n
-21*5 0 0 ___ Q_ -571 ___ 0- ___ Q_ ___ 0- ___ Cu ___ 0- ___ 0- Q n 0 r_ . Q-- ____ 0
-651
n
0
ci -523
n
n
n
n _____CL-
0
n
ri
n
ft
n
-1076 n 0 n -1422 n n ___ 0- ___ 0- ___ 0- ___ Q_ ___ o_ 0 0 0 nl.nfl
8. Total Investment
! >ales to Ford 9. to Others
-1576 0 0 -2500 -1422 0 0 0 0 0 0 0 0 0 a 2498
175 0
1750 0
1750 .0
1750 0
f7S
m8o
1750 4oBn
1750 liofin
1750 4nfin
1750 4o8o
1750 4080
1750 itofio
1750 408n
1750 4080
1750 4080
1750
0
4nfio ___ Q_
10. ffiMfeciiset Transfers to F t F 201*0 2040 2040
n cJMrOTMBBM* 12. Plant Cost 13. Distribution 14. Overhead
-2604 (-2604 -2604 -706 -706 -706
-227 -227 -227
IS.
16. \7. Total Not Opotaling Coat
w wr -1497
2040
-2604 -706 -227
-1497
3000 3000 3000
5595" ^9T -4695 -1782 -1782 -1782 "-T50- -756 -758
-4235 -4235 -4235
3000
-^95 -1782 -758
-4235
3000
-4695 -1762 -758
-4235
3000 3000 3000 3000
-7695 P^9T -1782 -1782 -1782 -1782 -758 -158 -=153- -758
-4235 -1*235 -4235 -4235
3000
4695 1782 -758
4235
3000
-4695 -1782 -75.8...
-4235
0
0 0 0
0
IB. Operetina Income
253 253 253 253 15?5 1595 ..1522. 1595 1595 1595... 1595 1595 1595 1595 1595
0
19 Decree letion. Aoiorti totlon ft Depletion
63
58
54 362 337 312 287 262 237 212
187 162 137 U2
87 125
20. Income Before Tax
190 194 198 -110 1258 1283 1308 1333 1358 1383 1408 JA33 1458 1483 1508 -125
21. Income After Tex
- -- 89 101 103 -57 654 667 "SscT 693 706 719 732 745 758 771 784 -=6S_
22. Annual Cosh Income
152 159 157 305 9?1 979 967 955 943 931 919 907 895 883 877 60
23. Annuel Cesh Flow 24. 10% Discount Factors
1424 159 157 2195 -431 979 967 955 943 931 919 907 895 883 871 2558
1.000 .909 .026 .751 .6B3 .621 .564 .513 .467 .424 .386 .350 .319 ,290 263 .239 .218 .198 .180
25. Annuel Present Value 2*. Cuawleliue PnMnt Value
1424 144 130 1648 -294 608 545 490 440 395 355 -317 286 256 229 611 1424 1280 1150 2798 3092 2484 1939 1449 -1009 -614 -259 58 344 600 829 1440
Average ROI 22.6
Max. Cash Committment
.164
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uc -*
CASH FLOW WORK SHEET
UCC CAPtTAL 6UOOIT MOCCBURE
MSJtCT
CASFSORD'S VIEWPOINT
UCC & FORD JOINTLY PURCHASE PLANT
FORD INVESTS $5-5 MM, Gets 5 /lb Price Reduction
1. htow Flxod Invastnont 1. Transfer af Suawtiiw fi*4 Invest. 3. Total Fixed Imrastmant
4. Caoh 5. Aeeounti ftocafvofcla
ft.
7, Wortcina Capital
1969
-5500 0
-5500
1970
0 0 0
1971
0 0 0
1972
0 0 0
1973
0 0 0
1971*
0 0 0
1975
0 0 0
1976
0 0 0
1977
0 0 0
1978
0 0 0
1979
0 0 0
1980
0 0 0
1981
0 0 0
1982
0 0 0
1983
0 0 0
1981*
0 0
0
00000 0 0 00 0 0 00 0 0 0
000000000 0000 00 0
0 0 0 0 0 0 0 0 0 ___ L ___ SL 0 0 0 0 0 0 0 0 0 0 ___ L 0 0 0 0 ___ S_ 0 0 0 0 0
a. Total tnvottmort
9, S>U
-5500 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0000000000000 000
IQ. Plant Cost It Coat Reduction 13. 13. 14, 13.
14.
n. Total Not Opsioilnf Coat
00 0 00 0000 0 0 00 0 0 1250 1250 1250 1250 1250 1250 1250 1250 1250 1250 1250 1250 1250 1250 1250
0 0
1250 1250 1250 1250 1250 1250 1250 1250 1250 1250 1250 1250 1250 1250 1250
0
in. Oporotina Income
1250 1250 1250 1250 1250 1250 1250 1250 1250 1250 1250 1250 1250 1250 1250
0
19 Depreciation, AmortlcetienADoplallon
30 Income Sofora Tan
It. Income After T ox
13. Annual Cads Income
688 6U2 596 600 65I*
261* 316 340 952 ~9W 936
33. Annual Coh Flow
-1*51*8 958 936
34. 10* Discount Factors 33. Annuel Proton* Value
1.000
.909
.036
ItSW 871 77*+
550 50l* 700 71*6
361* "W
911* 892
1+58 1*12 367 792 838 883
1*12 1*35 ~W 870 ~W 826
321
929 1*83
Sol*
9ll* 892 870 81*8 826 801*
.751
.683
.611
.364
.513
.467
686 601* 51*0 1*78 1*21* 375
275 229 183 137 .-22. 1*6
975 1021 1067 1112 1158 120l*' 507 531 555 579 602 626 782 760 738 716 69 4 672
0 -0 -0
0
782 760 738 716 69 * 672
0
.434
.386
.350
.319
.290
.263
.339
331 291* 258 228 201 176
0
26. CutnulMW* Pr*n* Vaiti*
DCF Return Average ROI
TS79 16.1
.1*51*8 3677 2903 2217 -1613 1073 -595 -171 201* 535 829 1087 1315 1516 1692 1692
.218
.in
.180
.164
-13Case k - ROI vs. Resin Sales Price on the following basis:
Lease plant from Dow - Produce k2 MM lb/yr for outside salesDirect and period costs and royalty payments same as in Case 1. Figure 5 shows ROI vs. resin sales price from UCC's viewpoint at
various lease fees. Figure 6 shows ROI vs. annual lease fee and DCF return vs. annual
lease fee from Dow's viewpoint. In this case, DCF returns were calculated on the basis of a nine-year project life and are not directly comparable to the DCF returns calculated in Case 3, which were on the basis of a 15-year project life.
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*4-52 C3
au&<(L t 5X B* 5UO *& C
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5X
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-15-
Sample Calculation for UCC's Return on Investment in Case 4 (M$ Except Where Noted)
Gross Production, M Lbs Sales Price, ^/lb
42,000 12.5
Net Sales Value
5,250
Plant Cost, including royalty Distribution Overhead Lease fee
2,620 840 680 800
Total Operating Cost
4,940
Operating Income Depreciation
310 40
R0I Income
270
New Fixed Investment
Working Capital,
Cash: 0.12 x Total Oper. Cost Acct. Rec.: 0.l4 x Net Sales Value Inventory: 0.25 x Plant Cost
500
595 735 650
Total Investment
2,488
R0!, %
11
NO, 3 4 0 *1 0 P ILT Z O E N llK A P tl PAPLR ID X ID PER IN C H
(V. /
C U Q C N C D lC T Z O C N DO. M ADC IN U. B. A.
16-
-17-
Sample Calculation for Dow's Return on Investment in Case ^ (M Dollars)
Case of $800,000 annual leasing fee.
Operating Income Depreciation (8$ GFI)
800 M6
ROI Income
35^
Total Investment
5,575
ROI, %
6.h
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039081
UC U4 II
CASH FLO* WORK SHEET
UCC C*KT*L tUDSIT PtOCIOUKI
DOW's VIEWPOINT
LEASE PLANT TO UCC FOR $800 M/YR
1. "tew Fixed Unroot--ont
1. TiMifv of
Fixed IiweiI.
3, Total FU4
1968 1969 1970 1971 1972 1973 1971 1975 1976
ft-5575
0. _______H _____ CL _______ 0. _____ CL
n0
_______ Q. _______0.
0
0
n _______a. _____ CL _____ CL _______ a.
-5575 0 0 0 0 0 ft 0 0
1977
n
0
n
Kec. Year
0
n n
4, Cash 5. Account a Received la i, Invarrtarv 7. Worfcine Capitol
0. Total Invoatment
9. Salat
10 Plant Cott
n Cost Radvet ion
13. 13. 14. 15, it. 17 Total Hot Operating Coat
18. Operating Income
0 800 800 800 800 800 800 800 800 800
0
19. Depreciation, Amort ilotion A Depletion 30. Income Bolero Tea
ii. Income After Tex
33. Annuel CeaH Income
0 0
0
0
33. Annuel Ceah Flew
-5575
860
-60 -31
829
829
785
15 8
793
793
715 B5
kk
759
759
615 155
81
726
726
572 228
iiB
690
O O
L/\
300 156
656
1(1(0
360 187
627
627
358 112
230
588
588
286 hi
511 '-in
267 -215
553 199
34. TM Discount Fedor*
1.000 .909
.126
.751
.663
.631
,564
.513
.467
.434
.386
.350
.319
.390
263 .339
.318
35. Annual Preaent Value 16, Cumulative Preaent Value
oC
-5575 753 655 570 196 L29 370 322 275 231
77
-5575 -1(822 -U67 -3597 -3101 -2672 -2302 -1980 -1705 -1171 -1391
DCF Return
3.0J
rO
.196
.180
.164