Electricidade Portuguesa online - Epo

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Table of Contents

A. Problem Definition        

B. Criteria Selection        

C. Alternative Development        

D. Analysis        

Criterion 1 – Feasibility:        

Criterion 2 – Risk:        

Criterion 3 – Personal Interests:        

E. Decision        

F. Action Plan Creation        

G. Appendix        

Appendix I – Cash flow projections        

Appendix II – PnL projections 2013-2015        

Appendix III – Balance Sheet projections 2013-2015        

A. Problem Definition

The problem facing the founders of Electricidade Portuguesa Online (EPO), Adriano Gomes and Nicolau Ferreira is whether to partner up with venture capitalist, Blackhole VC Partners or not in order to help them achieve the goal of their business, which is to become the ‘leading Portuguese electricity supplier for the household segment’

B. Criteria Selection

To proceed with the analysis of this particular business problem, the following set of criteria has been chosen:

1. Feasibility: This criterion is primarily to gauge the operational (liquidity) and financial (profit potential) feasibility of EPO as a business for Adriano & Nicolau. These two aspects will help answer the following two key questions for the partners:

1. Liquidity (Cash in hand): Do the partners have enough cash in hand to run the business in the alternative they decide? This is the most critical criteria as irrespective of the profit potential of EPO, if the partners run out of cash, the highly regulated business will have to shut down
2. Profit Potential (Income projection): Is this a good business? Does this alternative have potential to make money for the partners in the future? 

1. Risk of the business: This criterion’s purpose is to gauge the different facets of the risk of running the business. Following parameters will be used to gauge the risk:

1. Future market estimates: Is there a chance that the future market estimates are unreasonable or dependent on any other external factor? This criterion will directly impact the profit potential captured in the first criteria
2. Autonomy of control in EPO: Will the partners have enough authority in the running and strategy of EPO going forward with a certain alternative?

1. Personal interests: This criterion will help in the analysis of the interests of the two partners, Adriano and Nicolau which may lead to potential conflict in the corresponding decision. Two key points in this regard are:

1. Aspirations of the partners with EPO: Do the individual personality profiles of the partners make them biased towards a particular alternative? 

C. Alternative Development

1. Future career prospects: How much does a particular alternative drive the individual’s future career prospects? 

For this particular business problem, there are three alternatives available to Adriano and Nicolau:

1. Alternative 1 (A1): Partnership with Blackhole (40%): This alternative is the most concrete offer on the table for the partners. Blackhole VC partners would purchase 40% of EPO as part of this alternative for €500,000
2. Alternative 2 (A2): Sell EPO to EDP: This alternative is a result of the interaction between Adriano’s previous boss at Energias de Portugal (EDP), Bento Goncalves. Even though this is not an official offer, EDP would be willing to purchase the whole of EPO for ~€1.5million. Further, Adriano could be put in charge of a future EDP online unit as part of this alternative

1. Alternative 3 (A3): Reject both offers (Do Nothing): This alternative involves maintaining the status quo of EPO. This alternative would involve Carla Ferreira (financial manager) to secure bank guarantees to free up deposits held by OMIE[pic 4][pic 5]

D. Analysis

Table 1 provides a summary of the analysis of each of the three alternatives against the criteria discussed in Section B. This section throws more light on the rationale used gauging each alternative against the respective criterion.

Criterion 1 – Feasibility:

1. Operational (Liquidity – Cash in hand): As discussed previously, this is the most important criterion for the partners at this moment for running of EPO. For the case of selling EPO to EDP, this criterion is favorable as it involves EPO being taken over by the government entity EDP.
   
   Considering the monthly breakdown of the estimates of the number of customers, sales and expenses (Exhibit 5 in the case), it is possible to see how well equipped EPO is to be operational through the whole of 2013 without doing anything. As shown in Appendix I^[1], the cash flow is negative as of end of March 2013 to the tune of ~€9,700. This trend continues throughout the rest of 2013. Hence, doing nothing is not a feasible option under this criterion.
   
   Under the case of partnership with Blackhole, with an assumption that there is an influx of €500,000 in the form of cash/liquidable assets from the VC, EPO will never be in the red throughout 2013, 2014 and 2015. The lowest cash in hand available to EPO based on the current market estimates will be ~€29,875 as of December 2014. The graph provided in Appendix I gives an idea of the difference in the cash flow projections for Alternative 1 v/s Alternative 3. 

1. Financial (Profit Potential – EBT): Based on the market estimates presented in the case study, it is possible to project the PnL statements for the years 2013, 2014 & 2015. This has been provided in Appendix II. To summarize the findings, the forecasted earnings before tax for the years 2013, 2014 & 2015 are ~ €(167,514), €140,236 and €629,861 respectively. Alternatives 1 & 3 hence are favorable in terms of financial feasibility alone. However, with the hindsight that alternative 3 is not operationally feasible, partnering with Blackhole is a more favorable option.
   
   For the case of selling to EDP, even though the financial feasibility does remain as it is for the other alternatives, the profits will go to EDP rather than the partners themselves. The potential of earning more money from EPO does not exist in this alternative.

Criterion 2 – Risk:

1. Future market estimate: The numbers mentioned as future estimates for the market seem very aggressive in terms of a new company. To put it into context, the projected increase in customers is 300% & 200% over 2013 & 2014 respectively. There is an inherent risk that these numbers may well be dependent on external factors such as elimination of regulated rates for the household electricity segment. This makes both alternatives 1 & 3 riskier to the partners in spite of the fact that this is a fairly small chunk of the overall Portuguese market (e.g. 2015 expected sales ~1.2% of the market). For the case of selling EPO to EDP, this is a risk-free option as the partners may end up getting ~€1.5million for a company whose value as per Balance sheet (total assets in Appendix III) in 2012 is €478,370

1. Autonomy of control: For the case of alternatives 1 & 2, there is a risk that both Adriano & Nicolau may not have much say over the running of EDP and the future strategy of the firm. As mentioned in the case, Blackhole (Roland Vater) sees EPO as an opportunity in supporting the key German shareholder’s eventual entry into Portugal. This may not necessarily be aligned with the partners interest. Similarly, for the case of EDP as Bento clearly stated that EDP will buy the whole of EPO, there is almost zero likelihood of any of the partners having any influence whatsoever in decision making of EPO operations.

Criterion 3 – Personal Interests:

1. Aspirations of the partners with EPO: As individuals Adriano & Nicolau are two completely different personalities with different motivations driving their careers.  Adriano is a calm & warm person, married to Lucia with two kids and who seems to have liked his job at EDP. Lucia has been very supportive of him launching a new business. He is an expert in the electricity sector with all his career experience focused on this.
   
   On the other hand, Nicolau is single, aggressive and has had experience in sectors other than electricity as part of his job in two consulting firms. He seems to have little fear of failure, not intimidated by change and is ambitious. One of the things Nicolau is looking at as part of partnering with Blackhole is to potentially work with them more in the future.
   
   Given these contrasting characters, it looks like Adriano is leaning towards the selling to EDP option since its low risk & pays out his initial investment whereas Nicolau seems to be the one pushing for alternative 1 as it fits in perfectly with his profile.

1. Future career prospects: As mentioned in the previous point regarding the individual partner’s aspirations, it certainly looks as if the safer option in terms of future career prospects for Adriano is selling EPO to EDP. This is because Bento has offered him the possibility of being put in charge of a future EDP online unit. However, this option doesn’t necessarily suit Nicolau as its highly likely that he may not be offered a role & also because its highly unlikely given Nicolau’s personality that he may be willing to work for someone in the company he founded.
   
   Given the above fact, the more favorable option under this criterion is to go with alternative A as both of them would have jobs at the end of the day and an overall bigger control in the company (60% total compared to 40% share of Blackhole). The career may not completely align with Adriano’s comfort zone but it is a good business in which he has shown to put in a lot of hardwork previously.

E. Decision

Post the analysis of each alternatives against the corresponding criterion in Section D, the decision I would like to suggest to the partners, Adriano Gomes and Nicolau Ferreira for this business problem is: