American Chemicals

Contents

Executive Summary        2

Collinsville Plant        2

Industry Overview        2

Key Issues        2

Valuation        2

Recommendations        3

Appendices        4

Appendix I - Projections        4

Appendix II – Computation of cost of Equity and WACC        5

Appendix III – NPV Calculation – Acquisition of Collinsville Plant (without lamination)        5

Appendix IV – NPV Calculation – Incremental NPV (with lamination)        5

Executive Summary

Dixon Corporation, a U. S. -Based chemical company, is mulling on buying a plant from American Chemical Corp. The American Chemical’s Collinsville plant makes sodium chlorate for the paper and pulp industry. Dixon should pay $12 million as purchase price for the plant. It should also pay $2. 25 million to complete the lamination technology developed by the plant’s research and development staff, which is expected to improve the plant’s efficiency.

The opportunity and the industry in which the company operates were analyzed. The financial valuation was done using Weighted Average Cost of Capital method and the Net Present Value method and a recommendation is provided based on the results.

 Collinsville Plant

American Chemical Corporation’s plant in Collinsville has the capacity to produce 40000 tons of sodium chlorate per year. Sodium chlorate is produced via the electrolytic decomposition of salt, water and energy. The important factors to be considered 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, it’s used in soil sterility, in uranium mining and in the production of other chemicals.

Industry Overview

In the Sodium Chlorate Market in USA Customers includes Paper & Pulp Producing Companies like Georgia Pacific and Universal. Because of the high competition among the sodium chlorate producers, the bargaining power is being increased. The demand is also increasing at the rate of 8 to 10% per year with extra usage in the plant effluent problems of paper corporations.

It is a highly competitive market. Market Leaders like Hooker, Pennwalt, and American & Kerr-Mc Gee have more than 55% of the US Market. Huge number of small medium enterprises with active shares in the sodium chlorate market in US. Paper Companies like Universal also have their own NaClO3 plants actively participating in the competition. Companies like Brunswick and Southern are specialized only inNaClO3 production. There is a threat from substitutes Graphite Rods used in the production of NaClO3 are being replaced with Metal or Laminate rods. This would eliminate graphite costs and reduce power costs by approx. 30%.