Sasferco Case Solution

Qualitative factors

The following are the qualitative factors that must be considered before investing in the Sasferco.

The Sasferco is the leading producers of nitrogen fertilizer and has very competitive position in the North American nitrogen fertilizer industry. The competitive advantage of the company is its geographical location as plants are located in a land that provides the distribution advantage. Furthermore, the location has operational advantages as well due to its close proximity to a major natural gas pipeline Also, the cost benefit and reliability of supply is an additional source of competitive advantage.

If the CIC acquires Sasferco then it would create a synergy and it would increase the profitability and increase the market share.

 

Based on quantitative and qualitative factors recommend price:-

 

Generally companies pay more than the market price to acquire company to gain benefit of synergy. Synergy would increases the profitability and decrease the cost. As in this case by acquiring the Sasferco would make the synergy. It is recommended that the company should offer at least the high price of $1217 (from the discounted cash flow).

 

Appropriate selling strategy for Saskferco

 

There are the two selling strategies for Saskferco. Either they sell 100% of share to the CIC or sell the controlling shares (50%). Giving controlling interest would be the better strategy for the Saskferco. Because it would give synergy benefit as well as if the company grow in future they would able to earn dividends from that company. The option of earning dividend is not available in selling 100% shares.

 

Sensitivity/scenario analysis on the key variables in this decision.

The key variable in this decision are the Weighted Average Cost of Capital and the terminal growth rate. Following is the sensitivity analysis:-

 

  Sensitivity Analysis      
Terminal WACC        
        1,217 6% 8% 10% 12% 14%
1% 1474.854 1156.971 977.4421 860.9296 778.45
2% 1746.724 1286.433 1052.962 910.3606 813.3052
3% 2199.842 1467.68 1150.058 970.7762 854.4977
4% 3106.076 1739.551 1279.52 1046.296 903.9287
5% 5824.781 2192.668 1460.767 1143.392 964.3443

Sensitivity/scenario analysis and recommendation to Blair Swystun?

After analyzing the sensitivity analysis conducted above, it is recommended to Blair Swystun that he should keep a close watch on the WACC and terminal growth rate of the company as it has been evaluated that the increases in WACC and vice versa decrease in the terminal growth rate of the company reduces the overall value of the enterprise to a level that would be un beneficial for any party related to the sale or purchase of the enterprise. Furthermore, it has been determined that if the WACC increases and growth rate decreases at the same time the companies selling price would be adversely affected. Which in turn would provide less benefit to the related parties..............................................

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