Alliance Concrete: Just One More Thing

5 Pages Posted: 21 Oct 2008

See all articles by Marc L. Lipson

Marc L. Lipson

University of Virginia - Darden School of Business

Abstract

After having negotiated major financial and operating decisions with its parent company, the CFO of this small ready-mix concrete subsidiary is asked to provide a valuation of the subsidiary. A one-year forecast of financial statements is provided along with information on long-term operating expectations and capital costs. This otherwise straightforward valuation exercise is enhanced by (1) the need to select between the parent- or comparable-firm costs of capital, (2) sufficient guidance to perform an illuminating sensitivity analysis, and (3) a sufficiently clear and rich context in which to illustrate the linkages between operating and financing choices. A teaching note and instructor and student Excel spreadsheets are available.

Excerpt

UVA-F-1535

Rev. Jun. 30, 2011

ALLIANCE CONCRETE: JUST ONE MORE THING

Alliance Concrete was a small ready-mix concrete producer in Michigan's northern Lower Peninsula. The company operated 14 mixing plants and owned a fleet of 240 mixing trucks. Its customers were predominantly in the residential and commercial construction industry with some additional sales related to road construction and repair. The company had been extremely successful, with substantial revenue and income growth over the last few years driven by a strong residential real estate market. Although Alliance was purchased in 2006 by National Industrial Supplies, a Canadian construction conglomerate with assets in both the United States and Canada, it continued to operate as a separate legal entity.

For Martin Harris, Alliance's chief financial officer, late January 2006 was the best of times and the worst of times. Harris had been recently promoted to this position after the departure of some of Alliance's senior management upon the completion of the acquisition. His first major task was to forecast Alliance's operations for the coming year. What he discovered was that despite strong growth and profitability, Alliance was going to find itself short on cash. This meant the company would have to skip a dividend to the parent company, miss a principal repayment to its bank, or defer much-needed capital investments. Harris was able to renegotiate the principal repayment with Alliance's bank, who agreed to reset Alliances borrowing limit to an amount greater than their current outstanding loan. In the subsequent conversations with Alliance's parent company, Harris successfully argued for making the full capital improvements recommended by his plant manager which meant a slightly smaller than anticipated dividend.

. . .

Keywords: valuation, subsidiary, cost of capital, free cash flow, forecast, sensitivity

Suggested Citation

Lipson, Marc Lars, Alliance Concrete: Just One More Thing. Darden Case No. UVA-F-1535. Available at SSRN: https://ssrn.com/abstract=1279962

Marc Lars Lipson (Contact Author)

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-924-4837 (Phone)
434-243-5021 (Fax)

HOME PAGE: http://www.darden.virginia.edu/faculty/lipson.htm

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