Atlantic Corp. Harvard Case Solution & Analysis

Atlantic-Royal’s combined approach

The demand of linerboard is highly economic sensitive and it will depend on the shipped goods. Further, the industry is expected to achieve economic growth in future but the industry is tended to respond less rapidly to economic changes which will increase the shortage of raw material and at relatively high price. If the Atlantic Corporation acquires linerboard mills and other equipments successfully, it will expand its existing capacity and could avoid any adverse effect of unavailability of raw material and at a high price.

The linerboard industry is expected to increase the sales by 7% and the existing capacity is 100% utilized, so in order to avoid any future losses caused by the unavailability of raw material or increased prices, the AC shall acquire linerboard mills and could enjoy reduced cost and increased profit.

The AC can also incorporate its own linerboard plant but it will take substantial time and the benefits will be deferred, so it is advisable for the AC to acquire the plant instantly in order to avoid any adverse change of economy.

Offer price to acquire linerboard and box mill operations

Our analysis in Appendices 1 shows that the maximum price the AC could offer to RPC is $529.789 million. Our analysis is based on the assumptions that the mill and the box plants have an estimated life of 15 years and a nil residual value at the end.

The value assigned for the year after 1993 is $207.51 million and the total price that the AC offers to RPC should not exceed $529.789 million.

Assumptions used for calculating the cash flows are based on annual production and utilization capacity as well as the increase in sales price. The GNP for 1983 has been reported as 8.8 whereas the annual production has been increased from 13,494 in 1982 to 14,900 in 1983 (10.412%). The consumption also reported an increase in 1983 from 11,707 to 12,775 (9.1%). The assumptions used by the AC in calculating cash flows seem reasonable and the assumption has been made that the change in GNP will continue to flow in future.

In order to discount the cash flows, WACC has been calculated and our analysis in Appendices shows that the WACC is 8.66%.

Different assumptions are considered for calculating DCF and WACC, which are shown below

  • Risk-free rate is assumed to be on T bills
  • Market rate is assumed on BBB rated corporate bond
  • Tax rate is assumed to be same in future
  • Changes in EBIT is assumed at an average of prior years
  • Changes in depreciation are assumed at an average of prior years
  • Changes in capital expenditure are assumed at an average of prior years
  • Changes in working capital are assumed at an average of prior years

Royal’s linerboard mill and plants acquisition

Royal’s linerboard mill and other plants seems to be a reasonable acquisition because the economic upward trend is estimated, which may cause that the raw material to be unavailable or may be available at a high price, so such acquisition will tend the AC to avoid any future consequences of unavailability of raw material or increased prices which will ultimately hit reported profit.

The AC shall go ahead with this horizontal takeover and it is estimated that the synergies will result and the company will enjoy increased profit due to reduced cost.

Our analysis in Exhibit 2 shows that the price offered to RPC shall not be greater than $529.789 million. If the RPC demands higher price than this, AC considers adopting different valuation technique and also considers the operational and other strategic factors.

Means of funding

The company can finance this acquisition through drawings on its bank credit line of $200 million, issue $400 million debentures on 25 years maturity and could either issue $300 million common stock. Few things need to be considered before the AC take decision. It has already lowest bond rating and it falls in BBB category so a debt financing might slip further the company in danger....................................

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