Alta-gas Ltd: Acquisition Of Decker Energy International Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Alta-gas Ltd: Acquisition Of Decker Energy International Case Solution

Question 4

The Alta-gas Company creates value for its investors by minimizing its cost of capital and maximizing the returns over its invested capital, which further ensures the company maintain a steady operating cash flows and relevant growth. The competitive pressure to be faced by the Altagas Company after the acquisition of DEI include the following factors

Biomass Supply Risk

The company may not be able to maintain adequate supply of the biomass fuel, as result possible natural occurrences, economic events or by the failure of any counterparty in performing a supply contract made with the company. To satisfy the customer’s demand the company needs to maintain a steady supply of biomass fuel. The biomass supply risk might adversely impact the company’s operating and the financial performance.

Prices Related to Resource Adequacy and Electricity

The company revenue form the power sales is prone to few market factors such as the fluctuations in the market demand and supply conditions. The changes in the demand and supply of power sales may be due to the changing weather conditions, economic activities, customers’ preferences income and the growth factors.

The exposure to such changing market demand supply may get adverse due to termination of the PPA (Power Purchase Agreements). It is because when the PPA agreements are terminated, the power generator won’t be able to charge the same price levels, which would ultimately get reduced by a significant portion. Moreover, the company might not be able to get PPA after expiration at profitable prices, which would allow the company to continue its operations of the plant or the production facility.

High Debt

The company is expected to generate high debt in order to go for the DEI’s acquisition, in accordance with the company’s capital structure in 2011. The company’s cash and the bank balances are not sufficient to enable the company in acquiring DEI. To finance the deal, the company need to generate additional debt, which could add more risk to the company. The increased indebtedness would increase the company’s interest expenses, which could affect the company’s profitability and operational efficiency.

Dividend Payments

The ability of the company to pay for its dividends might get affected adversely if the company would not be able to generate sufficient cash flows, after the acquisition of DEI. Moreover, the high indebtedness might also lead towards the reduction the net income after paying for the interest and tax expenses, which would also reduce the company’s dividend payment levels.

Exchange Rate Risk

The Altagas Company would fund the portion of the acquisition’s purchase price through combination of the US dollar and the Canadian dollar denominated securities and different other credit facilities. The acquisition’s purchase prices had the denomination in the US dollar and a significant decline in the Canadian dollar as compared to the US dollar, would increase the company’s cost of acquiring DEI.

Lower Return from DEI – Acceptable?

It is believed that to generate higher returns the company needs to bear higher risk levels. In acquisition of DEI, the debt providers including the corporate bondholders and the commercial loan providers will demand higher interest payments in the form of compensation for the increased risk levels. So, accepting the lower returns would be acceptable until and unless the increased synergies would generate additional profitability for the company........................

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Alta-gas Ltd: Acquisition Of Decker Energy International Harvard Case Solution & Analysis