TEMPE, INC.

Tempe, Inc., a large Indonesian conglomerate, is looking to expand its investment portfolio
beyond its shores. They are involved in various businesses such as real estate, utilities,
agriculture, and paper manufacturing. They have identified a Filipino company, Catalyst
Chemicals, Inc. (Catalyst), as a potential acuisition. !side from diversifying their portfolio,
another reason for their planned acuisition is to get enough supply of certain chemicals needed
as input for their agricultural business. Currently, there is a shortage of the products of Catalyst
in Indonesia. Tempe"s effective tax rate is #$% on taxable income.
&reliminary talks 'ith the president and ma(ority shareholder of Catalyst, )r. )ariano Fernando,
revealed that he is 'illing to divest his shares in Catalyst as he is nearing retirement age and
none of his children is interested in the chemical industry. )r. Fernando agreed to sell the
company on the condition that the ne' management retains the manpo'er complement of the
firm. To formali*e the discussions, Catalyst hired a financial advisor to compile the information
memorandum for their company. +eproduced belo' are excerpts from the information
memorandum.
History of the Business
)r. Fernando established the business in ,-./, having studied and 'orked in the 0nited 1tates
at a similar company and noting that there is no significant domestic provider of inorganic
chemicals in the country. 2hen it initially started, Catalyst"s only products 'ere potassium
sulfate and sodium hypochlorite. In time, it added hydrochloric acid and ferric chloride and had
to build additional plants that could produce the last t'o chemicals. !long 'ith these
developments, Catalyst also started trading other products as reuested by its customers.
&otassium sulfate is used in the agriculture industry as fertili*er, 'hile sodium hypochlorite is a
general chemical used for a variety of manufacturing purposes such as bleaching, disinfectant,
odor control, chlorination, oxidation, coagulation, precipitation and p3 ad(ustment. Caustic soda
is used in the manufacture of boiler compounds, explosives, ceramics, lye, soap, medical
preparations, food, and insecticides, among others. 3ydrochloric acid is used in 'aste 'ater
treatment and household cleaning as 'ell.
Today, Catalyst supplies the needs of a 'ide range of industries, including but not limited to the
adhesives, po'er generation, agriculture, food and food processing, chemicals, oil refineries,
petroleum refining, textiles, pulp and paper, and semiconductor companies.
#4% of Catalyst"s shares are held by !ncienne Corporation, a food company o'ned by )r.
Fernando"s sister.
Industry Profile
In the latest fact book released in 5//6 by +7 Intelligence, a market research company,
Catalyst is listed as one of the ma(or players in the inorganic chemical industry. !ccording to
+7 Intelligence, Catalyst has .$% market share for potassium sulfate, 6$% for sodium
hypochlorite, 4$% for hydrochloric acid, and #$% for caustic soda.
&age ,
!ccording to 81C9, chemicals and chemical products gre' -.4% in the second uarter of 5//:,
accelerating from the 6.6% gro'th posted during the first uarter of 5//:. From 5//5 to 5//.,
the average gro'th rate of the chemical industry 'as 6..6%, slightly higher than the
manufacturing sector"s gro'th rate of 4.-$%. In the same period, 7;& gre' by 6./,%, on
average. <ther factors contributing to the gro'th of the manufacturing industry include food
manufacturing, furniture and fixtures, and basic metal industries.
Products and Sales Mix
Catalyst produces basic chemicals that are used in the manufacturing industry. It is the
country"s largest producer of potassium sulfate, and even exports the product overseas. <ther
products manufactured include sodium hypochlorite, hydrochloric acid, and caustic soda. In
addition, Catalyst trades calcium chloride, ferric chloride, potassium chloride, and occasionally,
sulfuric acid and liuid calcium upon special reuest of their customers.
!lthough Catalyst does not have long=term sales commitment contracts 'ith its customers, the
composition of its top ten customers from 5//# to 5//. is fairly consistent.
3istorically for potassium sulfate, sodium hypochlorite, and hydrochloric acid, sales contribution
of the top ten customers ranged from ::% to -:% of total sales. For caustic soda, the
proportion of ma(or customers to total sales is increasing, 'hile for ferric chloride, ma(or
customers contribute to almost ./% of sales.
Catalyst en(oys a healthy gross profit margin, averaging 5/%. The sales mix and gross profit
calculation are presented in !nnex !, along 'ith Catalyst"s historical financial statements. The
contribution of each product to sales has been relatively consistent from year to year. The top
four products include potassium sulfate, sodium hypochlorite, hydrochloric acid and caustic
soda.
Costs
Catalyst sources its ra' materials from both 'ithin and outside the country. Inputs for
potassium sulfate and sodium hypochlorite are al'ays imported. Inputs for caustic soda are
sourced from China and inputs from hydrochloric acid are imported from >ordan. <ccasionally
Catalyst imports ferric chloride from Thailand and )alaysia. The rest of the chemicals are
generally sourced locally.
Catalyst"s manufacturing plants and factory machinery account for :/% of its total property plant
and euipment. The production compound is located in )ontalban, +i*al. Catalyst has t'o
potassium sulfate plants, and one plant each for hydrochloric acid, sodium hypochlorite, and
caustic soda. It also has storage tanks for each of their products. In addition, it has other
machinery and euipment needed in the business. 1ome of its euipment are old and 'ould
need ma(or repairs or replacement. Catalyst estimates that it 'ill need to spend &hp#// million
spread over 5 years for the ma(or overhaul and replacement of its ma(or euipment. !fter'ards,
it expects that replacement capital expenditures 'ill approximate annual depreciation expense.
<n average, it spends around &hp:.$ million in repairs charged to profit and loss.
&age 5
The land, land improvements and certain machinery and euipment are held as collateral by a
universal bank for a loan agreement entered into by Catalyst"s affiliate company. !ccording to
Catalyst, the payments of the affiliate"s loan and related interest are updated.
The most recent appraisal of Catalyst"s +i*al property 'as done on !ugust ,6, 5//6. The total
appraised value of the entire compound as of that date 'as &hp 6-.,64-,///, and its estimated
remaining composite useful life 'as estimated to be six (6) years.
In >uly 5//#, Catalyst 'as certified as I1< -//,=compliant by the T0? Certification 9ody of
T0? Industrie 1ervice 7mb3, T0? +heinland 7roup. Its certificate is valid until >uly #,, 5/,/.
Immediately after acuiring the I1< -//5, Catalyst embarked on getting the I1< ,4//,
certification. The said certification 'as granted by the T0? +heinland 7roup on !ugust #,,
5//$, after upgrading its facilities and complying 'ith various environmental reuirements. The
certificate is valid until <ctober #/, 5//-
The average gro'th of Catalyst"s sales has been slo' for the past years, at , to 5% only, much
lo'er than industry average. It has not been aggressive in marketing as )r. Fernando plans to
retire from the business. If adeuate attention is given to marketing, it is expected that Catalyst"s
sales 'ill gro' in=step 'ith manufacturing industry average.
In 5//., the company experienced a decline in sales, particularly for potassium sulfate, due to a
ne' competitor 'ho 'as importing these chemicals from China and selling them cheap in the
&hilippines. )r. Fernando does not believe that the operation of its competitor is sustainable in
the long run. 0nlike in 5//., it does not foresee importations to significantly impact volume in
5//: and on'ards but 'ill probably put some pressure on price. Further, given the current
financial crisis and that the business is capital intensive, it does not anticipate any ne' entrants
in the near future.
The costs have been gro'ing at around $ or 6%, but its markup policies still allo' it to profit
from operations. It pro(ects to be able to maintain gross profit margin moving for'ard, except
for potassium sulfate 'hich faces intense competition from China imports.
Manpower
!s of ;ecember #,, 5//., Catalyst had :- regular employees. <f the :- employees, ,. are
officers (from ;epartment 3ead up'ard). )any of the employees have been in the company
since its inception. 2hen the need arises, contractual employees are hired up to a maximum of
t'o 'eeks.
+ank=and=file employees are all members of the Catalyst @abor 0nion. The existing collective
bargaining agreement is valid until )ay 5//-. In its four (4) decades of existence, Catalyst has
maintained good relations 'ith its 'orkers, 'ith no history of strikes or labor disputes. To date,
the company does not have any pending labor cases filed against it.
The 'ages of the rank=and=file employees are computed on a daily basis and paid 'eekly. The
officers" salaries are paid bi='eekly. The follo'ing table summari*es the gross monthly salary
range of the officersA
&age #
an! "ross Monthly Salary Monthly Salary an#e
!?& and up 66,,$..4/ 6/,/// = ./,///
)anagers #:,6$:..$ #$,/// = 4$,///
3eads of various departments 5$,-5,.:/ 5/,/// = #/,///
Catalyst has a lump=sum retirement benefit program for all its permanent employees 'ho are
not covered under any other employee=sponsored retirement plan. The latest amendment 'as
made on >une 56, 5//4. 0nder the program, Catalyst bears the full cost of the plan. The latest
actuarial report 'as prepared by Fabella !ctuaries, Inc. as of >uly 5, 5//:. Catalyst intends to
have another actuarial report made next year.
The employee structure of Catalyst is sho'n belo'A
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The assets of the fund are held in trust by a 0niversal 9ank. )ost are invested in government
securities. The actuarial report made by Fabella reported that pension fund liabilities exceeded
assets by &hp ,/,..$,6//.
Econo$ic %utloo!
The global crisis has caused international research agencies to revise their expectations for
almost all countries in the next fe' years. The follo'ing information is available from the
Bconomist Intelligence 0nit
,
A
Philippines
&ey indicators '(() '((* '(+( '(++ '(+' '(+,
+eal 7;& gro'th (%) 4.4 5.# #.6 4.6 $., $.#
Consumer price inflation (avC %) -.6 6.$ 4.$ 4.5 4 4
9udget balance (% of 7;&) =/.- =,.5 =/.6 =/., /., /.#
Current=account balance (% of 7;&) ,.. ,.5 ,., ,.6 ,.: 5
@ending rate (avC %) :.: :.$ ..: ..$ ..5 ..5
Bxchange rate &A01D (av) 44.44 $/.$ 4-.6 4:.$ 4..6 46.-
Bxchange rate &A01D (end=period) 4..-. $/./$ 4-./$ 4:./$ 4..5$ 46.$$
Indonesia
&ey indicators '(() '((* '(+( '(++ '(+' '(+,
+eal 7;& gro'th (%) 6., #.$ #.6 4.: $., $.#
Consumer price inflation (avC %) ,/.$ ..$ 6.6 $.6 $.$ $.4
9udget balance (% of 7;&) =,.4 =,.. =,.6 =,.4 =, =/.:
Current=account balance (% of 7;&) /.4 /.: ,.5 ,., /.- /.$
;eposit rate (avC %) :., :.: :.5 ..# ..5 .
Bxchange rate +pA01D (av) -,$$: ,/,#56 ,/,5#/ ,/,5-4 ,/,#,# ,/,##,
Bxchange rate +pAE,// (av) -,55$ ,/,64$ ,/,6$6 ,/,.$, ,/,:$6 ,/,--/
-inancial State$ents of Catalyst .please see /nnex /0
Te$pe1s Story
1
Taken on 8ovember 5$, 5//:
&age 4
Tempe has plans to expand its agricultural business despite the global economic slo'do'n. In
its recent 1hareholder )eeting, it announced that it plans to gro' the agricultural business
segment by ,/% per year. It pro(ects that as a conglomerate, the gro'th rate 'ill be around :%
in the next year, .% in the year after that, and a respectable 6% thereafter. Tempe has
historically performed better than the industry. 2hile the industry average gro'th rate
approximates that of the Indonesian 7;&, Tempe is , or 5% ahead. Tempe attributes this to
the skill and effective strategy of their management team.
Tempe is open to the idea of expanding the existing capacity of the entity that they 'ish to
acuire. It is treated as a prime borro'er in its homeland, getting access to favorable bank
rates. It has successfully floated &hp5$ billion 'orth of 01 dollar denominated bonds globally
and is currently considering another float to fund its acuisition plans. Catalyst is not a ma(or
acuisition so Tempe is still debating 'hether or not it 'ill leverage it. Tempe suspects that the
financial crisis 'ill bring interest rates do'n in Indonesia for the next five ($) years. Interest rates
around the globe have gone do'n as various central banks try to prevent a liuidity crisis. It
also expects the spread bet'een its o'n lending rates and Indonesia average deposit rates to
be around 5.$%.
Tempe"s management uses a hurdle rate of ,6% in the evaluation of ne' pro(ects. It hired a
financial advisor to provide them cost of euity estimates, as they are not listed. !ccording to
the report, Tempe"s beta is ,.,5. The capital market"s average annual return for the last 5/
years 'as ,5.$%. The current sovereign rate is :./% for a ,/=year bond.
!n analysis of the Indonesian ma(or conglomerates sho's that the average debt=euity ratio is
,.6.
-inancial State$ents of Te$pe .please see /nnex B0 2 already translated into Thousand
Php .you $ay choose to i#nore exchan#e rate differences $o3in# forward0
&age $
Tas!s
,. 7iven the information about Catalyst Chemicals, Inc., should the Indonesian conglomerate
buy itF 2hat is your suggested price rangeF Calculate 'eighted average cost of capital of
Tempe. 2hat is the appropriate discount rateF 2hat is the investment I++F &lease state
the bases of your assumptions.
5. 2hat are the items that need to be taken into considerationF 2hat risks should be
highlightedF @ist do'n the top #=$ factors 'hich support acuiring and not acuiring
Catalyst. Include a critiueGanalysis of the historical financial statements of Catalyst.
#. 2hat 'ould the impact of Tempe"s acuisition be on the &hilippine chemical industryF
4. !lso, consider ho' the acuisition should be funded, through debt or euity.
$. 2hat actions should Catalyst take to counter threat from China importsF 2hat 'ould be the
impact on the financials of CatalystF 3o' should Tempe gro' the business of Catalyst
moving for'ardF
6. @astly, 'hat deal structure 'ould you advise the Indonesian conglomerate to follo', in case
of successful acuisitionF In particular, 'hat goal(s) should they pursue, and 'hat are the
nonfinancial issues that they must consider in their decision to purchaseF 1hould it be a
share sale or an asset saleF 1hould it be full acuisition or excluding the shares o'ned by
!ncienne CorporationF 2hat 'ill be the implications of each optionF
The recommendations should be backed up by calculations based on the information provided.

&age 6