1. Problem recognition, definition and
evaluation
As explained in previous economic analysis, the partnership model of poultry farm has
benefit for farmers/investors. Although, the investment has relatively low
risk, another business action may be taken to lower such a risk. Acquiring
existing farming asset is seen as prospective action to be done, thus a business
analysis is required to look at that option.
2. Development of the feasible alternative
Using same Free Cash Flow (FCF) Model, there certain variables and
assumptions need to be defined in order to have valuation of the asset. In valuation
method, Terminal Value (TV) is known as continuing value or horizon value. This
method assumes that the cash flows will grow at a constant rate forever, hence
the name stable growth rate method (Gordon Model). When growth is constant,
calculating the terminal value estimated using a perpetual growth model.
3. Development of the outcome
The valuation of farming refers to forecasted Free Cash Flow (FCF) for
10 years lifespan as shown in Figure 1 and Figure 2.
Figure 1. FCF White Farm
Figure 1. FCF Red Farm
According to above FCF, the annual growth of each type of farm is shown
in Figure 3. As a result, the average of annual growth rate of white and red
farm is -0.07% and -0.08% respectively.
Figure 3. Annual Farm Growth
4. Selection of criteria
The decision will be made based on:
a.
The value
of existing farm with its future prospect
b.
Price must
be paid by the buyer/acquirer to acquire the existing farm at minimum value
c.
Payment got
by the seller if he sells his farm to the acquirer at maximum value
In other words, criteria b and c is part of negotiation to be achieved to
make a deal.
5. Analysis
Table 1 shows the economics analysis of existing white farm if the
acquisition made in end of Year 3. The price of acquisition to be paid to
seller is K Rp 100,000, thus the payment will top up the seller cash flow in
Year 3 (46,596 + 100,000). In acquirer side using 10 years lifespan, the farm
will earn NPV 104,071.
Interestingly, when applying Gordon Model to value the existing farm using
predictive cash flow in Year 6 (51,954), WACC = 15% and growth rate = -0.07%,
the NPV becomes 179,291. The higher NPV in TV analysis is because Gordon Model
assumes that the business will last perpetually, while NPV in ‘classic method’
only analyze FCF for 10 years lifespan.
Table 1. Acquirer-Seller FCF White Farm (Exclude
Transaction’s Tax)
From Table 1, the
price of 100,000 will make a total cash of 109,126 for seller in Year 3. This means
that the acquisition price 100,000 is fair enough for the seller. Moreover if the
seller in year 0 already applied acquisition scenario in year 3, he even can earn
IRR 63%.
Then, the similar calculation is made for Red Farm as shown in Table 2. The
acquirer’s NPV of 10 years lifespan is 57,997, while the NPV of TV year 6 is 115,757.
But in this case, the price 100,000 can only make a total cash of 97,798 for
seller in Year 3. However, if the seller in year 0 already applied acquisition
scenario in year 3, he can also earn IRR 63%.
Table 2. Acquirer-Seller FCF Red Farm (Exclude
Transaction’s Tax)
6. Selection of alternative
Based on analysis above, a price Rp 100,000 K is the best price of an existing
white farm for both parties, i.e. the seller and the acquirer. In an existing red
farm, Rp 100,000 k is too low for the seller, only if the seller just looks at
the total of cash flow at year 3. But if the seller of existing red farm
already put the acquisition scenario at the beginning of the business, he can
earn prospective NPV and IRR.
In the acquirer’s point of view, an Rp 100,000 is better rather than
setting up a new farming system with the estimated initial cost Rp 110,000 as
shown in economics
analysis. A further negotiation may be made to have the best price for the
acquirer position.
7. Performance monitoring and
post-evaluation of results
In conclusion, having looked at the benefit of poultry partnership
model in the previous analysis, the investor should consider the acquisition scenario
as seen in this analysis. However, setting up a new farm or acquiring an existing
farm doesn’t include the risk in the analysis. Therefore, the risk and sensitivity
analysis shall be conducted to balance the benefit of each type of farming model.
References:
·
Asmoro,
Trian H. (2012, Dec 21). Investment on Poultry Farming. Retrieved from: http://aacemahakam.blogspot.com/2012/12/w23tri-investment-on-poultry-farming.html
·
Investopedia.
(2012, Dec 21). DCF Analysis: Coming Up With A Fair Value. Retrieved from:
http://www.investopedia.com/university/dcf/dcf4.asp#axzz2FYzUJ7NL
·
WACC
^Value. (2012, Dec 21).Terminal Value (TV). Retrieved from: http://www.waccvalue.com/valuation/terminal-value/
