HBS Case study on societe distribution de petroleo (SAT)

Presented by

Institution

Presented to

Date

Case background and Statement of the problem

Marcelo Alecrim, the owner of Setelite Distribuidora da Petroleo (SAT) negotiated with the senior managing director for Darby Overseas Investment Ltd, Julio Lastres in order to sell low selling interests of the company. The sale was looked at as a way of raising money to increase SAT’s growth. In addition, SAT would build its reputation and achieve better interest rates with banks and Petrobras, a Brazilian based company. These negotiations came along with a cost because Alecrim had to use private equity funds on restructuring the company and paying salaries for the key executive positions introduced (Applegate and minardi 2007). The following case determines lastres’s ability to invest or not to invest in SAT with an evaluation of investment and entrepreneurial opportunities in Brazil.

Analysis

From the financial statements of SAT, the company can be evaluated through different methods. The first one is through comparable analysis or even using the DCF analysis. Comparable analysis is a process applied to evaluate a company’s value using metrics of similar businesses in the industry. It operates under the assumptions that similar companies will have same multiples of valuation like the EV/EBITDA.

Using compatible analysis to analyze SAT in the petroleum distribution in Brazil, the following will be portrayed. This makes SAT the giant in the industry according to the data.

DISTRIBUTOR SHARE OF NUMBER OF EXISTING GAS STATIONS IN NORTHEAST

BR (PETROBAS) 32.0%

ESSO 14.0%

TEXACO 12.0%

IPIRANGA 11.0%

SHELL 9.0%

SATELITE 8.0%

WHITE FLAG 7.0%

OTHERS 7.0%

Table 1

Using DCF analysis, the method tries to work out the company’s value of today, depending on the projections on the expected money to be made in the near future. The method of valuation used in giving estimation of the investments opportunity attractiveness. The discounted cash flow (DCF) analysis applies the projections of the future cash flow and discounts them to arrive at the current value which is used in evaluation of the potential investment. DCF is calculated as

Despite the fact that calculations of DCF have many complexities that are involved, its purpose is to estimate money gotten from investment and to adjust the moneys time value.

DuPont analysis is a method of measuring the performance where the assets are measured at the company’s gross book value instead of the net book in order to get the higher return on equity (ROE). From the DuPont analysis, ROE is affected in three things:

Efficiency in operations measured by the profit margin

Efficiency in use of assets measured by the total turnover of the assets

Financial leverage measured by the multiplier of the equity.

ROE = Profit Margin (Profit/Sales) * Total Asset Turnover (Sales/Assets) * Equity Multiplier (Assets/Equity)

Moreover, Darby Overseas Investment Ltd balance sheet created another concern that requires deep analysis. The balance sheet shows that the company had not fully concentrated on the purchases of the required investment raw materials. The entry to the Brazalian market forced the company to increase on its furniture & Fixtures and equipments in order to meet the new demands. In addition, the balance sheet indicated the company had no cash in bank by December 2000. Lack of cash in bank raises more concern because the company seems to lack proper preparation in case of an emergency. It is a general belief measuring of the assets at the gross books will remove the incentives to prevent investing in the new assets. If the results of ROE are not satisfying, the DuPont analysis will assist in locating business part that is underperforming.

Alternative Courses of action

According to Cuthbertson and Nitzsche (2008), the main aim of every organization is to maximize profit at a lower cost. The cost of hiring new staff and restructuring the company would have been avoided through starting with small investments and increasing as the time goes on. In addition, Darby Overseas Investment Ltd sales commission would promote the sales representatives in their work. The company therefore should increase on shares by more than 14% so that the individuals market more units, which end up improving the company revenues. The company can do away with some costs like non-manufacturing utilities and services which tend to utilize a lot of money through sale of the long stocked bikes at throwaway prices to avoid accumulation of the units.

Recommendations

Although investing in Brazil was an excellent idea, Mr. Lastres would have first determined the costs associated with international business management. The discussion finds out that Mr. Lastres invested in Brazil but incurred some losses. In addition, there were costs and benefits from Darby investment that included high demand for oil products and need for more exports (Applegate and minardi 2007).

References list

APPLEGATE, L. M. AND MINARI, A. M. (2007). Satelite Distribuidora de Petroleo. Harvard

Business School

CUTHBERTSON, K. AND NITZSCHE, D.( 2008). Investments, (2nd ed). Wiley

HBS Case study on societe distribution de petroleo (SAT)

Presented by

Institution

Presented to

Date

Case background and Statement of the problem

Marcelo Alecrim, the owner of Setelite Distribuidora da Petroleo (SAT) negotiated with the senior managing director for Darby Overseas Investment Ltd, Julio Lastres in order to sell low selling interests of the company. The sale was looked at as a way of raising money to increase SAT’s growth. In addition, SAT would build its reputation and achieve better interest rates with banks and Petrobras, a Brazilian based company. These negotiations came along with a cost because Alecrim had to use private equity funds on restructuring the company and paying salaries for the key executive positions introduced (Applegate and minardi 2007). The following case determines lastres’s ability to invest or not to invest in SAT with an evaluation of investment and entrepreneurial opportunities in Brazil.

Analysis

From the financial statements of SAT, the company can be evaluated through different methods. The first one is through comparable analysis or even using the DCF analysis. Comparable analysis is a process applied to evaluate a company’s value using metrics of similar businesses in the industry. It operates under the assumptions that similar companies will have same multiples of valuation like the EV/EBITDA.

Using compatible analysis to analyze SAT in the petroleum distribution in Brazil, the following will be portrayed. This makes SAT the giant in the industry according to the data.

DISTRIBUTOR SHARE OF NUMBER OF EXISTING GAS STATIONS IN NORTHEAST

BR (PETROBAS) 32.0%

ESSO 14.0%

TEXACO 12.0%

IPIRANGA 11.0%

SHELL 9.0%

SATELITE 8.0%

WHITE FLAG 7.0%

OTHERS 7.0%

Table 1

Using DCF analysis, the method tries to work out the company’s value of today, depending on the projections on the expected money to be made in the near future. The method of valuation used in giving estimation of the investments opportunity attractiveness. The discounted cash flow (DCF) analysis applies the projections of the future cash flow and discounts them to arrive at the current value which is used in evaluation of the potential investment. DCF is calculated as

Despite the fact that calculations of DCF have many complexities that are involved, its purpose is to estimate money gotten from investment and to adjust the moneys time value.

DuPont analysis is a method of measuring the performance where the assets are measured at the company’s gross book value instead of the net book in order to get the higher return on equity (ROE). From the DuPont analysis, ROE is affected in three things:

Efficiency in operations measured by the profit margin

Efficiency in use of assets measured by the total turnover of the assets

Financial leverage measured by the multiplier of the equity.

ROE = Profit Margin (Profit/Sales) * Total Asset Turnover (Sales/Assets) * Equity Multiplier (Assets/Equity)

Moreover, Darby Overseas Investment Ltd balance sheet created another concern that requires deep analysis. The balance sheet shows that the company had not fully concentrated on the purchases of the required investment raw materials. The entry to the Brazalian market forced the company to increase on its furniture & Fixtures and equipments in order to meet the new demands. In addition, the balance sheet indicated the company had no cash in bank by December 2000. Lack of cash in bank raises more concern because the company seems to lack proper preparation in case of an emergency. It is a general belief measuring of the assets at the gross books will remove the incentives to prevent investing in the new assets. If the results of ROE are not satisfying, the DuPont analysis will assist in locating business part that is underperforming.

Alternative Courses of action

According to Cuthbertson and Nitzsche (2008), the main aim of every organization is to maximize profit at a lower cost. The cost of hiring new staff and restructuring the company would have been avoided through starting with small investments and increasing as the time goes on. In addition, Darby Overseas Investment Ltd sales commission would promote the sales representatives in their work. The company therefore should increase on shares by more than 14% so that the individuals market more units, which end up improving the company revenues. The company can do away with some costs like non-manufacturing utilities and services which tend to utilize a lot of money through sale of the long stocked bikes at throwaway prices to avoid accumulation of the units.

Recommendations

Although investing in Brazil was an excellent idea, Mr. Lastres would have first determined the costs associated with international business management. The discussion finds out that Mr. Lastres invested in Brazil but incurred some losses. In addition, there were costs and benefits from Darby investment that included high demand for oil products and need for more exports (Applegate and minardi 2007).

References list

APPLEGATE, L. M. AND MINARI, A. M. (2007). Satelite Distribuidora de Petroleo. Harvard

Business School

CUTHBERTSON, K. AND NITZSCHE, D.( 2008). Investments, (2nd ed). Wiley