Tate & Lyle Vietnam

Julia Zellmann, Duong Doan & Verena Goess SS 2011 Project Evaluation and Finance 28 April 2011
Outline The sugar industry Tate & Lyle The company Project History Financing the Project Project Evaluation Conclusion

CASE: Tate and Lyle Introduction The sugar industry Tate & Lyle The company Project History Financing the Project Project Evaluation Conclusion

World Sugar Industry in 1997

Among few agriculture commodities: developed countries compete with developing countries tariff & non-tariff barriers Around 1995 1997: drop in sugar price

How Do We Get Sugar?

s
Developing country Long recession Agriculture contributed nearly half GDP

s
Sugar production: Labor intensive: 1- 7.5 tons/ day vs. modern mill: 5000 tons/ day Low extraction rate Sugar market: Demand: high Price: high Import tariff: 30% Ministry of Agriculture Food Industry: increase domestic sugar production

Tate & Lyle: - Formed in 1921 - Based in London - / and raw sugar - Sales in 1997: 5 047 million

Tate & Lyle: Today ' - Sales 3 553 million (year ended 31 March 2009) - Two global business units - Speciality Food Ingredients (sweeteners, texturants, wellness ingredients) - Bulk Ingredients (high fructose corn syrup, acidulants)

Tate & Lyle: - Tate & Lyle operates mainly in two industries - Corn wet milling - High-intensity sweeteners - Over 30 production facilities and network of research centers throughout the Americas, Europe and South East Asia - Four markets: - Food and Beverage - Industrial - Animal feed - Pharmaceutical and Personal Care

Project History
Nghe An Per capita income: about 2/3 of national average Poor health service 91% literacy rate 75 % farmer households Only basic infrastructure
Nghe An Project area

Project History
The plan Built sugar mill and refinery K Better infrastructure built by Nghe An government
Plan to complete it until November 1998 capacity of 330,000 tons of cane for that season Plan to reach ultimate capacity in November 2002 Ultimate capacity of 900,000 tons of cane per year

Project History
The plan Built sugar mill and refinery Outreach programto farmers Better infrastructure built by Nghe An government
Farmers in an area of 50 km To reach full capacity: 18.000 hectares of cane from 22.000 farmers necessary

Project History
The plan Built sugar mill and refinery Outreach programto farmers Better infrastructure built by Nghe An government
Government agreed to spend $800.000 Tate & Lyle expected infrastructure to be ready by 1998/1999 harvesting season 300 trucks necessary to transport cane during harvesting season

Project History
Project Risks Farmers sell (enough) cane Government does not improve infrastructure in time Not enough truck hauliers available Sugar prices might continue falling Start of construction 1996 Finished 1998

Project Timeline:
Feb. 1996 Sep. 1996 Oct. 1996 1997 1998 1998
Investment license Start of Construction 1st ICF request Bridge loan from Rabobank Completion of Construction 2nd IFC request

Financing the Project:
Feb. 1996 Sep. 1996 Oct. 1996 1997 1998 1998
In February 1996: Investment license

Feb. 1996 Sep. 1996 Oct. 1996 1997 1998 1998
In September 1996: Start of Construction

Financing the Project: - Total cost $90 million - 70% debt Highly leveraged capital structure Equity partner - Mitr Phol Sugar Company - Vietnam Fund Limited - Nghe An Sugar Company Bank debt - Western banks - Thai banks - Bilateral agencies

Feb. 1996 Sep. 1996 Oct. 1996 1997 1998 1998
In October 1996, first IFC request

International Finance Corporation (IFC): - Founded in 1956 - Based in Washington D. C. - Member of the World Bank Group - Owned by 182 member countries, authorized share capital of $2,4 billion - t financing for private sector projects Aim: - Reducing poverty and improving lives - Stimulation of economic growth Private sector investments in developing countries

Criteria, to be eligible for IFC funding: - Location in a developing country that is a member of IFC - Private sector -Technically sound - Good prospects of being profitable - Benefit the local economy - Environmentally and socially sound

IFC Participation: - Protection against political risks in Vietnam - Tax advantages - IFC loans are exempt from withholding taxes - Payments to other foreign banks would be subject to a 10% withholding tax on top of the interest element of debt services - Reserve requirements eliminated

Project Sources and Uses (US$ millions):

Major concerns of IFC: - Provision of a sufficient amount of cane from local famers - Implementation of infrastructure by the government - World sugar price is falling - Protection of local sugar production BUT: - Large social benefits

Financing the Project
Feb. 1996 Sep. 1996 Oct. 1996 1997 1998 1998
In October 1996, first IFC request without success

Feb. 1996 Sep. 1996 Oct. 1996 1997 1998 1998
Proceeding with construction due to bridge loan from Rabobank ($40 million) plus equity and local credits

Feb. 1996 Sep. 1996 Oct. 1996 1997 1998 1998
End of 1998: Completion of construction

Feb. 1996 Sep. 1996 Oct. 1996 1997 1998 1998
Major concerns: - Not enough cane - No completion of the infrastructure - Need of repayment of Rabobank loan

Feb. 1996 Sep. 1996 Oct. 1996 1997 1998 1998
Second IFC request

Cash Flow Forecast (if IFC refinances the NATL project)

Cash Flow Forecast (if IFC refinances the NATL project)

Cash Flow Forecast (if IFC refinances the NATL project) / - EBITDA: Earnings before Interest, Tax, Depreciation and Amortization = Revenue Expenses (excl. Interest, Tax, Depreciation, Amortization) - EBIT: Earnings before Interest and Tax (Operating Income) = Revenue Operating Expenses (Expenses, excluding Tax and Interest ) = EBITDA - Depreciation - EBIAT: Earnings before Interest after Taxes = Revenue COGS - Expenses, including Tax and excluding Interest = EBIT - Taxes - Nominal free cash flow: cash flow in absolute terms, without adjusting for inflation - Real free cash flow: cash flow in current purchasing power, adjusted for inflation

Project Evaluation
Are falling Sugar prices only temporary or permanent? Does the Project contribute to sustainable development? -> Evaluated via the ERR (Economic rate of return) ERR = all costs and benefits from a social perspective (FRR = Financial rate of return)

Project Evaluation
ERR
Customers
Rest of Society Financiers (FRR) Producers of Complementary Products
Neighbors
Employees
Competitors & New Entrants
Suppliers

Project Evaluation
ERR
Customers
Rest of Society Financiers (FRR) Producers of Complementary Products
Neighbors
Employees
Competitors & New Entrants
Suppliers Cane farmers Truck hauliers

Project Evaluation
ERR
How would you decide?

Conclusion /&

Agree to finance the project Ensure ongoing compliance with World Bank guidelines during the life of the project: Monitoring reports by NATL Periodic site visits.

Current situation
World standard efficiency and environmental performance Largest sugar producer in Vietnam: 12000 tons/day, 120 000 metric/ year, 10% of domestic production. Sugarcane productivity: 120 130 tons/ha

Social impact
28,000 cane farmers, 50% minority ethnic groups $16 million per year to farmers and cane transporters Cash flow into poor area increased x 4 Living standards: motorbikes, TVs, houses, roads Technology transfer

Thank you for your attention! -

Quiz:

How long did it take to build the plant? How many farmers were needed to produce full capacity? Name 3 major project risks How is the method to evaluate the project called? Name 3 groups affected by the project

Sources:
Internet: http://www.tateandlyle.com/Pages/default.aspx, 18. April 2011 http://www.ifc.org/, 18.April 2011 http://www.investopedia.com/, 20. April 2011 http://www.isgmard.org.vn/What%20is%20ISG/Plenary2004%20 Docs/NAT&L-e.pdf , NAT&L, 9 Nov 2004 http://www.tateandlyle.com/InvestorRelations/ResultsandPresen tations/Documents/2010/USDResults_for_Six_Months_to_30_Sep t_2010PR.pdf, 4 November 2010 http://www.unctad.org/en/docs//webdiaeia20111_en.pdf, 17 January 2011 Books: Esty, C. E. (2004). Modern Project Finance. Boston: Harvard Business School Publishing

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Julia Zellmann, Duong Doan & Verena Goess SS 2011 Project Evaluation and Finance 28 April 2011

World Sugar Industry in 1997

How Do We Get Sugar?

Financing the Project:

Feb. 1996 Sep. 1996 Oct. 1996 1997 1998 1998

In February 1996: Investment license

Financing the Project:

Feb. 1996 Sep. 1996 Oct. 1996 1997 1998 1998

In September 1996: Start of Construction

Financing the Project:

Feb. 1996 Sep. 1996 Oct. 1996 1997 1998 1998

In October 1996, first IFC request

Project Sources and Uses (US$ millions):

Financing the Project

Feb. 1996 Sep. 1996 Oct. 1996 1997 1998 1998

In October 1996, first IFC request without success

Financing the Project

Feb. 1996 Sep. 1996 Oct. 1996 1997 1998 1998

Financing the Project

Feb. 1996 Sep. 1996 Oct. 1996 1997 1998 1998

End of 1998: Completion of construction

Financing the Project

Feb. 1996 Sep. 1996 Oct. 1996 1997 1998 1998

Financing the Project

Feb. 1996 Sep. 1996 Oct. 1996 1997 1998 1998

Second IFC request

Cash Flow Forecast (if IFC refinances the NATL project)

Cash Flow Forecast (if IFC refinances the NATL project)

Competitors & New Entrants

Competitors & New Entrants

Suppliers Cane farmers Truck hauliers

How would you decide?

Thank you for your attention! -

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