International Conference on Education For Economics, ISSN (Print) 2540-8372 Business, and Finance (ICEEBF) 2016 ISSN (Online) 2540-7481
ANALYSIS MERGER OF PETROCHINA COMPANY LIMITED AND SINOPEC LIMITED USING DISCOUNTED CASH FLOW METHOD
Marissa Ramadhana1, Subiakto Soekarno2
1. School of Business and Management, Bandung Institute of Technology, Indonesia 2. School of Business and Management, Bandung Institute of Technology, Indonesia E-mail : [email protected] , [email protected]
Abstract
In the past decades, we have been using oil as our first resource of energy, however, there is a new resource of energy that has been developed in America which is shale oil, due to that, the demand of oil is decreasing compared to these last decades and it made oil price decreased dramatically. PetroChina Company Limited and Sinopec Limited are one of several successful company in oil & gas fields based in China, but due to the crisis, they need to decrease its cost such as labor cost also decrease a budget to open a new drilling area in order to have a profit. Thus, one of a solution for the company is to be merged with another company in order to decrease its cost and increase company profit and shares also being merger with another company could increase the company power. Therefore, the author wants know the impact for both companies if they are being merge with each other whether it will increase its power on China Oil as well as decreasing the production cost and increase its income or not. The author will use data of both companies from Annual Report and Capital Market Data of PetroChina Company Limited and Sinopec Limited from year 2010 – 2014 to help the author calculate the synergy of both companies after being merger and to find the valuation of the two companies by using discounted cash flow, this method is a preferred approach to valuing a company. The findings suggest PetroChina Company Limited and Sinopec Limited to be merge since its create synergies. Based on three scenarios, the synergies which created in pessimistic, most- likely and optimistic scenarios are ¥820.832,78, ¥844.294,71 and ¥ 1.344.618,97.
Keywords: Merger, Acquisitions, Valuation, Oil Company, Oil Price, Discounted Cash Flow, Synergy, Shale Oil
I. Introduction Oil is our biggest source of oil, especially in America. However, America has found a new technology, which can cultivate sediIIImentation from rocks and contains a large amount of Kerogen, called shale oil. Consequently, America start to develop shale oil and decrease its demand towards raw oil. In Japan, they started to develop a new resource of energy, which can save a large amount of money other than import raw oil overseas and since America is the largest importer of oil it made oil demand is decreasing since July of 2014.
Middle East and Dubai are one of the biggest exporters in oil & gas field and currently spends considerable amount of money to develop their country. Both country biggest incomes are from exporting oil. Due to that, they start to sell their oil cheaper than shale oil to make America re-considered of buying oil rather than shale oil to make an income for their country. This action made a lot of oil & gas
560
International Conference on Education For Economics, ISSN (Print) 2540-8372 Business, and Finance (ICEEBF) 2016 ISSN (Online) 2540-7481
company start to lowered they price below Middle East and Dubai oil price because if they did not lowering the price, oil & gas company will go broke.
Figure 1.1: Daily Crude Oil Prices, June 2015 - June 2015
Over the past decades, PetroChina Company Limited and Sinopec Limited are one of several successful company in oil & gas fields based in China, but due to the crisis, they have a decrease in income, with the uncertainty of oil price, if they still want to get a profit income they should decrease its cost such as labor cost also decrease a budget to open a new drilling area in order to have a profit.
Looking at the situation of both company, there is a huge probability the both company Figure 1.2 : PetroChina and Sinopec Profit being merger to decrease its outcome and also increase its revenue as the news in Wall Street Journal on Feb 18th, 2015, but until now Chinese Government has not give any confirmation regarding the merger of both company issue. There is a lot of talk about the two company wants to be merger. Therefore, the author wants to analysis both company to make them sure if the both company being merge it will create a synergy by using valuation discounted cash flow.
561
International Conference on Education For Economics, ISSN (Print) 2540-8372 Business, and Finance (ICEEBF) 2016 ISSN (Online) 2540-7481
II. Teoritic›al Framework
PEST Analysis and SWOT Analysis PEST Analysis and SWOT Analysis is used in the research to define and identify the external as well as internal environment of PetroChina and Sinopec Company itself. PEST Analysis is focusing on external environment and China’s politic, economy, social and technology condition while SWOT Analysis is focusing on internal company to identify each companies strenght, weakness, opportunity and threat among other oil&gas company.
Merger and Acquisitions The combining of two or more companies, generally by offering the stockholders of one company securities in the acquiring company in exchange for the surrender of their stock by making one new company and both of the company are having an agreement. In this research we use Horizontal Merger due to PetroChina and Sinopec produces and sells an identical or similar product in the same geographic area could encourage cost efficiency. The benefit of the merger is to eliminates the competitor of both firms as well as increase its market share, revenue and profit. However, an acquisition is when one company wants to buy more than 50% of the target’s company ownership stakes to control the target firm. The purpose of acquisitions is to increase the company growth and it is more beneficial to acquire an existing firm rather ran expanding our company ourselves. The payment in acquisitions usually paid in cash and the acquiring company’s stock or the combination of both. The acquiring company used to offers to buy the premium price of the target firm’s stock price in order to the stakeholder of the target firm wants to sell. (Investopedia 2013)
Discounted Cash Flow Discounted Cash Flow is estimating the expected future cash flows, which discounted to the present value or we used to call it time value of money. (Wikipedia 2015). The step to valuate using discounted cash flow as follows, 1. Estimate future cash flow from investment 2. Consider the riskiness of cash flows and interest rate in capital market 3. Estimate a reasonable discount rate 4. Calculate the present value of the future cash flow
Following is the formula of Discounted Cash Flow,
2 n-1 V = CF1 / (1+k) + CF2 / (1+k) + [TCF / (k - g)] / (1+k)
To calculate the value of firm, the expected cash flow should be discounted due to any payments to either debt or equity holders, at the weighted average cost of capital, which is the cost of different components of financing used for the firm.
562
International Conference on Education For Economics, Business, and Finance ISSN 2233-XXXX
Where, PV = Present Value CFi = Cash Flow in Year i k = Discount Rate TCF = The terminal year cash flow g = Growth rate assumption in perpetuity beyond terminal year n = The number of periods in the valuation model including the terminal year
Following is the formula to calculate value of firm,
Where,
CF to Firmt = Expected Cash Flow to firm in period t, WACC = Weighted average vost of capital, T = time period
Free Cash Flow
Free Cash Flow represents the cash in the company and able to generate after laying out the money required to maintain or expand its asset base. Free Cash Flow is important because it allows a company to pursue opportunities that enhance shareholder value (Wikipedia 2015).
The formula of standard statement of cash flows,
FCF = EBIT(1-Tax Rate) + Depreciation&Amortization – Change in Net Working Capital – Capital Expenditure
The formula if net profit and tax rate applicable are given,
FCF = Net Profit + Interest Expense – Net Capital Expenditure – Net changes in Working Capital – Tax shield on Interest Expense
Where, Net Capital Expenditure (CAPEX) = Capex – Depreciation & Amortization
Tax Shield = Net Interest Expense x Effective Tax Rate
Investors think that Free Cash Flow is giving them much clearer view of the ability to generate cash and profit, also if the Free Cash Flow is negative it doesn’t mean bad, it could be the company is making an investment. (Investopedia 2015)
Terminal Value
Terminal Value is use for an approach that involves making some assumptions about long-term cash flow growth. To determine terminal value (Investopedia 2015), we use Gordon Growth Model and the model uses this formula,
Terminal Value = Final Projected Year Cash Flow x (1 + Long-Term Cash Flow Growth Rate)(Discount Rate – Long-Term Cash Flow Growth Rate)
563
International Conference on Education For Economics, Business, and Finance ISSN 2233-XXXX
Discount Rate
WACC (Weighted Average Cost of Capital, is the calculation of a firm’s cost of capital which each category of capital is proportionately weighted. The resource of this capital includes common stock, preferred stock, bonds and other long-term debt. The WACC of the firm would increases along with the beta and rate of return on equity increase, while WACC increasing, there’s a decrease in valuation and would increase the risk (Investopedia 2015).
The formula of Weighted Average Cost of Capital as follows,
Where: Re =Cost of Equity Rd = Cost of Debt E = Market value of the firm's equity D = Market value of the firm's debt V = E + D = Total market value of the firm’s financing (equity and debt) E/V = Percentage of financing that is equity D/V = Percentage of financing that is debt Tc = Corporate tax rate
Cost of Equity is the return a firm theoretically pays to its equity investors, shareholders, to compensate for the risk they undertake by investing their capital (Wikipedia 2015).
The formula of Cost of Equity,
Where, Rs = Cost of Equity Rs = Rf + Beta x (Rm – Rf) B = Beta Coefficient, measure of systematic risk of a firm’s common stock Rm-Rf = The expected market risk premium for China
Synergy
Synergy is the source of benefit to stockholders. The concept of synergy is when the value and performance of two company combined will be greater rather the total of the separate individual parts. The purpose of synergy is combining two companies could lead to a greater financial result than they ever achieve alone. (Jaffe 2013)
Synergy = VAB – (VA + VB) VA = The value of firm A VB = The value of firm B
VAB = Difference between the value of the combined firm
564
International Conference on Education For Economics, Business, and Finance ISSN 2233-XXXX
Synergy came from the increases in cash flow that could create a value. We calculate ΔCFt as the difference between Cash Flow when the two firms combined and the sum of the separate individual parts.
ΔCFt = ΔRevt - ΔCostst - ΔTaxest - ΔCapital Requirementst ΔRevt = Incremental revenue of the acquisitions ΔCostst = Incremental cost of the acquisitions ΔTaxest = Incremental acquisitions of taxes ΔCapital Requirementst = Incremental new investment required in and fixed assets working capital
Therefore, the synergy is be possible if the revenue increasing, cost reducing, lowered tax and low capital investment or at least one of four categories make an improvements we could call it synergy. (Jaffe 2013)
III. Research Methods The author will analyze the synergy of both company, which are PetroChina and Sinopec Company by calculate their valuation without synergy as well as combine firm of these companies with synergy and compared them. Afterwards, the author will give recommendation for both companies also the China’s government to make a merger decisions.
The research would use secondary data from PT PetroChina and PT Sinopec main website. Following are the data which author will use, 1. PT PetroChina Annual Report from year 2010 – 2014 2. PT Sinopec Annual Report from year 2010 – 2014
These four data would be use to analysis the merger/acquisition also the synergy of both companies.
The data which already collect before, being analyze using Discounted Cash Flow, also we need to determine the synergy of both company and calculate PetroChina and Sinopec Company growth if they combined together using the method and formula in literature review. PEST and SWOT Analysis are also use for the research, PEST Analysis is to identify and analyze macro environment around both companies and SWOT Analysis to identify internal and external situations.
The step to conduct the data analysis, followings:
1. Calculate each of the company’s value of firm. The valuation method which the author use is discounted cash flow with free cash flow 2. Calculate the value of combined firms with no synergy by adding the value of firm which the author already calculate in the first step 3. Estimate the effects of synergy using expected growth rates and cash flows also the author will calculate the value of the combined firms with synergy
565
International Conference on Education For Economics, Business, and Finance ISSN 2233-XXXX
IV. Result and Discussion Industry Overview The industrial Overview will be used for the fundamental in determining the future projection of both companies and combined firm. The analysis will use PESTEL analysis for the oil and gas industry situation in China and worldwide also SWOT analysis for both companies which are Petrochina and Sinopec Company.
PEST Analysis PEST Analysis is a framework of macro-environmental factors to scan the environment component of company’s strategic management. PEST consists of Politic, Economy, Social and Technology.
In the term of Politic, the most influence factor for the government regulation in China, not only for the government regulation that could impact oil and gas companies in China but also geopolitical conflicts also political instability. PetroChina and Sinopec Company are both oil and gas national companies in China, therefor they both have exclusive right for Sino-foreign co-operation in the CBM (Coal-bed Methane). Sino-foreign is a joint venture, which can be form into equity joint ventures as well as cooperative joint venture. However, in Chinese Law only Chinese companies can become shareholders of joint venture.
In term of Economic, China is a global hub for manufacturing as well as the largest manufacturing economy and exporter of goods in the world. According to IMF, China’s the world largest economy by purchasing power party. Based on The World Bank, China has a GDP growth of 6,7% on 2014, however since 2010 up till 2015, data shows China experience a decrease for the last five year. York (Analyst of Woods Mackenzie) state, by 2020 China will be second only to the U.S for the total fleet of personal auto vehicles in use. From 2005 – 2020, China will see the number of vehicles rise from 20 million to 160 million, which means the demand of domestic oil demand growth due to cars and commercial ground transportation.
In term of Social, United Nations predicts China’s population projection by the end of 2020 is 1,387,792,000. This will be a huge advantage for national oil company to generate it sales on gasoline or petrol for cars and commercial ground transportation. According to trading economics, the labor cost in China will be stable up to 2020, thus it will be an advantage for national companies to increase its supply to reach demand. In term of technology, China made an R&D with SASOL which is a chemical company based in South Africa, to establish coal to liquid fuel capabilities in China, since it will improve economics of china as well as the environment itself.
566
International Conference on Education For Economics, Business, and Finance ISSN 2233-XXXX
SWOT Analysis Below are the SWOT Analysis for both Companies, Petrochina Company Limited SWOT Analysis,
Strengths Weakness
• Strong Foothold in China à controlled • Lacking offshore presence in China and owned by China National Petroleum • Declined Liquidity • Research and Development Activities • Operating Loss • Biggest oil producer in China • Well-known company
Opportunities Threats
• Growth in Asia-Pasific Refining • Fluctuations in the oil & gas prices Capacities • High competitions • Growth Initiatives à explore market outside • Government regulations China • Environmental Laws • Positive outlook of petrochemical industry • Stringent Policies and Regulations
Table 4.1 : PetroChina Company Limited SWOT Analysis
Sinopec Company Limited SWOT Analysis
Strengths Weakness
• Strong name in China • Dependence on third party • One of the top companies in terms of sales crude oil suppliers • Operations include oil & gas refining, • Lack of geographical exploration, marketing, storage, and diversification pipeline transportation • Decline in crude oil reserves • Largest Oil refiner in Asia by annual volume
Opportunities Threats
• Growth through joint venture and • Intense competition alliances • Government regulations • Environmental Laws Table 4.2: Sinopec Company Limited SWOT Analysis
Financial Performance Analysis Financial performance analysis is a subjective measure of how well a firm can use assets from its, primary mode of business and generate revenues (Investopedia, 2016). To conduct financial performance analysis for PetroChina Company Limited and Sinopec Company Limited, the author calculate liquidity, activity, debt, and profitability analysis. This analysis is conducted from 2010 – 2014 also only use time-series due to the cross – analysis since the benchmark is only available on 2015.
567
International Conference on Education For Economics, Business, and Finance ISSN 2233-XXXX
Below is PetroChina’s financial performance analysis,
Data 2010 2011 2012 2013 2014 Time - Series Overall
Liquidity
Current Ratio 0,66 0,64 0,64 0,67 0,79 Poor Poor
Quick Ratio 0,33 0,29 0,27 0,29 0,48 Poor Poor
Activity
Average Collection Period 5,52 3,72 3,15 4,20 4,18 Good Good
Average Payable Period 155,90 127,81 115,85 125,04 100,97 Good Good
Total Asset Turnover 0,72 0,83 0,77 0,74 0,76 OK OK Inventory Turnover 6,09 6,54 6,02 5,80 8,65 Poor Poor
Debt
Debt Ratio 35,88% 39,50% 43,70% 42,40% 40,79% OK OK
Debt to Equity Ratio 55,96% 65,30% 77,61% 73,61% 68,90% Poor Poor
Profitability Gross Profit Margin 33,99% 27,09% 25,20% 26,25% 23,89% Poor Poor Operating Profit Margin 15,20% 10,08% 7,67% 7,85% 6,49% Net Profit Margin 13,42% 9,82% 7,73% 9,86% 6,87% Poor Poor Earnings per share ¥0,72 ¥0,69 ¥0,57 ¥0,73 ¥0,53 Poor Poor Return on Total Assets 9,72% 8,19% 5,94% 7,29% 5,21% Poor Poor Return on Equity 15,16% 13,54% 10,55% 12,65% 8,80% Poor Poor
Table 4.3 : PetroChina's Financial Performance Analysis
568
International Conference on Education For Economics, Business, and Finance ISSN 2233-XXXX
Time - Data 2010 2011 2012 2013 2014 Series Overall
Liquidity
Current Ratio 0,69 0,67 0,61 0,55 0,82 Poor Poor
Quick Ratio 0,29 0,26 0,21 0,25 0,63 Poor Poor
Activity
Average Collection Period 16,95 14,86 14,46 19,59 67,62 OK OK Average Payable Period 113,14 102,06 117,90 130,44 173,51 Good Good Total Asset Turnover 1,41 1,60 1,58 1,42 1,13 Good Good Inventory Turnover 8,73 8,47 8,70 9,40 13,03 Poor Poor
Debt
Debt Ratio 54,14% 55,06% 54,24% 53,89% 50,16% Good Good
Debt to Equity Ratio 118,03% 122,50% 118,51% 116,88% 100,65% Poor Poor
Profitability Gross Profit Margin 24,24% 20,77% 20,42% 19,77% 20,42% Poor Poor Operating Profit Margin 6,75% 5,02% 4,72% 4,28% 2,92% Net Profit Margin 5,62% 4,25% 3,90% 3,52% 2,63% Poor Poor Earnings per share ¥5,52 ¥5,41 ¥5,24 ¥4,74 ¥2,66 Poor Poor Return on Total Assets 7,95% 6,81% 6,15% 5,01% 2,97% Poor Poor Return on Equity 17,33% 15,15% 13,44% 10,87% 5,97% Poor Poor
Table 4.4 : Sinopec's Financial Performance Analysis
Liquidity Ratio Liquidity is a firm’s ability to satisfy its short-term obligations as they come due. It refers to the wealth of the company’s overall financial position, which it can pay its bills. The ratio above can shows early signs of cash flow problem and impeding
569
International Conference on Education For Economics, Business, and Finance ISSN 2233-XXXX business failure. PetroChina and Sinopec’s main business is in petroleum as well as chemical field, PetroChina is focusing on upstream are which are drilling and finding new place to drill while Sinopec is focusing on downstream such as production of its oil from crude oil to gasoline. PetroChina and Sinopec inventory of its firm cannot be easily sold because they are partially special-purpose items due to that its liquidity ratio (current & quick ratio) is poor. Based on time-series analysis, both companies liquidity ratio is inconsistence. Basically, PetroChina and Sinopec’s liquidity ratio shows both firms is in poor performances.
Activity Ratio Activity ratios measure activity ratios measure how efficiently a firm operates along a variety of dimensions such as inventory management, disbursements, and collections. Based on the calculation, PetroChina took four days (average) to collect its account receivable while Sinopec took 20 days (average) to collect its average collection, however on 2014, Sinopec average collection period is 64,62. In term of average payment, PetroChina experience a fluctuates condition due to oil price’s condition while for Sinopec in year 2011 – 2014 experience an increase in its average payment. PetroChina efficiency on using its assets to generate sales considered as ok since its average is on 0,76 while Sinopec considered as good since its average is 1,43. Hence, both companies shows an efficiency on its assets. Inventory turnover calculates the activity or liquidity of a firm’s inventory, and for both firms inventory turnover is considered as poor. Hence, overall condition for both firms is still in good performances.
Debt Ratio The debt position of a firm indicates the amount of other people’s money being used to generate profits. PetroChina and Sinopec is doing good on debt ratio since the calculation above indicates that the company has financed close to half of its assets with debt. However, both PetroChina and Sinopec experience a decrease in its indebtness from 2013 – 2015. Based on calculation, debt to equity ratio on PetroChina shows it has lower debt rather than its equity while for Sinopec its equity is higher than debt. It could be dangerous for Sinopec because it could affect the firm itself if its debt increasing while its revenue is decreasing.
Profitability Ratio In this section, PetroChina and Sinopec profitability ratio is decreasing each years. However, both companies is still having an increase on its operating income each year. Hence, the earnings per share of PetroChina is fluctuate while for Sinopec is decreasing on each year. Basically, the profitability ratio on both companies is still near-stable condition.
Key Assumptions To calculate PetroChina Company Limited and Sinopec Company Limited by using Discounted Cash Flow Method, the author made an assumption to projecting the discount rate, perpetuity growth and the corporate tax of the company. These assumptions are made by the historical data, market data and actual data.
The assumptions for both companies valuation are given in the table below,
570
International Conference on Education For Economics, Business, and Finance ISSN 2233-XXXX
No Description Value Information 1 Risk Free Rate (Rf) 4,22% Nominal Rate of The People’s Bank of China on 2014 2 Market Retrurn (Rm – Rf) 5,33% Implied Market Risk Premia for China, based on Fenebris. 3 Perpetuity Growth 2% Inflation Rate on 2014 in China based on The World Bank 4 Corporate Tax 25% Company’s effective tax rate under the Income Tax Table 4.5 : Assumptions for Valuation
Following is the summary of valuation results of both PetroChina and Sinopec Company, PT PetroChina Company Limited Summary Pessimistic Most-Likely Optimistic Beta 0,255157227 0,255157227 0,255157227 Pretax cost of debt 5,72% 5,72% 5,72% Tax Rate 25% 25% 25% After-tax cost of debt 4,29% 4,29% 4,29% Cost of Equity 4,23502% 4,23502% 4,23502% Cost of Capital 5,34% 5,34% 5,34% Debt to Capital ratio 0,18224347 0,182243466 0,182243466 Terminal Value ¥22.622.543,58 ¥32.991.712,98 ¥34.808.744,88 Value of firm ¥20.224.897,86 ¥28.483.699,17 ¥30.059.177,27 Pretax return on capital 16,07% 16,07% 16,07% After-tax return on capital 12,05% 12,05% 12,05% CAGR -9,85% 9,44% 16,06% Length of growth period 6years 6years 6years Expected growth rate -9,85% 9,44% 16,04% Perpetuity growth rate 2% 2% 2% PT Sinopec Company Limited Summary Pessimistic Most-Likely Optimistic Beta 0,063547312 0,063547312 0,063547312 Pretax cost of debt 6,72% 6,72% 6,72% Tax Rate 25,00% 25,00% 25,00% After-tax cost of debt 5,04% 5,04% 5,04% Cost of Equity 4,239082% 4,239082% 4,239082% Cost of Capital 4,79% 4,79% 4,79% Debt to Capital ratio 0,473835866 0,473835866 0,473835866 Terminal Value ¥2.440.576,46 ¥4.544.895,76 ¥6.650.747,93 Value of firm ¥3.137.501,74 ¥4.838.412,92 ¥6.594.068,49 Pretax return on capital 11,17% 11,17% 11,17% After-tax return on capital 8,38% 8,38% 8,38% CAGR -18,59% 0,70% 7,30% Length of growth period 6years 6years 6years Expected growth rate -18,59% 0,70% 7,30%
571
International Conference on Education For Economics, Business, and Finance ISSN 2233-XXXX
Perpetuity growth rate 2% 2% 2%
Following is the result valuation of combined company,
Cost of Equity Combined Firm Rf 4,22% Beta 0,22918195 Risk Premium 5,33% Re 5,44% Market of Value Equity ¥1.362.144,61 Cost of Debt Interest Coverage Ratio 4,138691838 Rating BBB Typical Default Spread 1,50% Company Tax Rate 25,00%
572
International Conference on Education For Economics, Business, and Finance ISSN 2233-XXXX
After Tax Cost of Debt 4,29% WACC Wd 0,203171461 We 0,796828539 Rd 4,29% Re 5,44% WACC 5,21%
Based on the calculation and assumption above, the author use discounted cash flow method to estimate the combined firm value as well as PetroChina and Sinopec Company value itself. However, PetroChina as the acquirer will experience a decrease growth in combined firm, for pessimistic, most-likely and optimistic here are the calculation below,
Growth PetroChina Combined Firm Pessimistic -9,85% -11,41%
Most-Likely 9,44% 7, 8 Optimistic 16,06% 148,4921% %
The situation above happen due to PT Sinopec has a low growth rate compared to PetroChina as the acquirer, which is 0,70%, while PetroChina has 9,44%. However, according to the calculation, which the author did for the research, combined firm have a higher value rather than PetroChina itself as the acquirer without having merger with Sinopec. The combined firm also has a lower cost of capital for 5,21% rather than PetroChina with 5,34%. Sum of both companies value also lower than the value of combined firm itself, the value for combined firm for pessimistic, most- likely and optimistic are ¥24.183.232,38, ¥34.166.406,79 and ¥37.997.864,73 where the sum of PetroChina and Sinopec’s value for pessimistic, most-likely and optimistic are ¥23.362.399,6, ¥33.322.112,08 and ¥36.653.245,76. Based on the calculation above, merger of PetroChina and Sinopec will create a synergy based on the value. The synergy can be known by subtracting combined firm and sum of PetroChina and Sinopec value for pessimistic, most-likely and optimistic which are ¥820.832,78, ¥844.294,71 and ¥ 1.344.618,97.
Stock Exchange Ratio Exchange Ratio is the relative number of new shares, which will be given to existing shareholders of a company that has been acquired or has merged with another. Following is the summary of PetroChina and Sinopec Company stock,
PetroChina Sinopec
Earnings after tax ¥96.864,00 ¥32.145,00
No of shares 183021 12107
573
International Conference on Education For Economics, Business, and Finance ISSN 2233-XXXX
Price/Earning Ratio ¥13,39599 ¥2,00825
EPS ¥0,53 2,65504926
Price ¥7,08984 ¥5,33200
To calculate the new shares outstanding for PT Sinopec after being acquired by PetroChina is by using stock exchange ratio, which is comparing PetroChina’s price stock with PT Sinopec.
Based on the calculation above, every 0,752062197 share of PetroChina equals to1 share of Sinopec. Below is the calculation for Sinopec’s new shares of outstanding post-merger,
[0,75206197 x 12,107 shares] = 9.105,31 new shares outstanding ≈ 9.106
Therefore, PetroChina will issue 9106 new shares of outstanding to acquire Sinopec. To know the accuracy of the calculation for this merger, the author will calculate by subtracting combined firm value with debt and divide it with new total shares then multiply it again with the new total shares. If the value of combined company equals with value of PetroChina, Sinopec and additional synergy, basically the calculation the author use in this research is accurate.
Value Combined Company ¥34.166.406,79 Debt ¥347.313,00 New Total Shares 192126 New Price ¥176,03 Value of Combined Company (minus debt) ¥33.819.093,79 Value PetroCina + Sinopec + Synergy ¥33.819.093,79 (minus debt)
For the new share ownership and the structure based on the weight calculation by dividing the PetroChina shares with total new shares of outstanding, PetroChina will owns 95,261% of combined firm, while Sinopec owns 4,739% of the new combined firm. Basically, PetroChina will be responsible for making operation, financial and company decisions.
574
International Conference on Education For Economics, Business, and Finance ISSN 2233-XXXX
575
International Conference on Education For Economics, Business, and Finance ISSN 2233-XXXX
V. Conclusion and Recommendation
Conclusion Based on the calculations, fundamental and analysis in the previous section, the author concludes the financial performance of PetroChina and Sinopec, both firm are in their poor condition. However, the ctivity ratio for both firm are in good condition due which means they are efficient on operating its own firm as well as the debt ratio, both firms experience good conditions. However, regarding of the poor financial condition both firms have, if PetroChina and Sinopec Company are being merged there will be a synergy created. Based on the discounted cash flow method all three scenarios (pessimistic, most-likely and optimistic scenarios) are creating synergy which are ¥24.183.232,38, ¥34.166.406,79 and ¥37.997.864,73. The calculation of combined firm value have a higher results compared to the sum of both companies, and here are the additional synergy value which created by using discounted cash flow model for pessimistic, most-likely and optimistic scenarios, ¥820.832,78, ¥844.294,71 and ¥ 1.344.618,97.
The author also made PEST Analysis and SWOT Analysis, these firms has a benefit due to the economy condition in China since in the future China’s usage of vehicle is predicted to rise from 20 million to 160 million, which means there will be a high demand growth for oil as well as developing its company technologies. Combined firm will experience higher efficiency on cost for oil production (upstream and downstream) since PetroChina focusing more on upstream area compared to PT Sinopec which focusing on downstream area, hence, combined firm should have more efficiency on both area. PetroChina and Sinopec Company also has a strong foothold in China, therefor if the merger happen, they would be the biggest oil company in China also an influential for oil price market for the whole globe.
There is also another factors which contribute for a creation of synergy of combined firm, new cost of equity. The new cost of equity for combined firm is lower than PetroChina itself, new cost of equity for combined firm is around 5,44% while for the cost of capital for pessimistic, most-likely and optimistic scenarios are 5,22%, 5,21% and 5,18%.
Recommendation Based on above conclusions, the author suggests PetroChina and Sinopec Company to do a merger. Hence, a merger of between these two companies will create a larger market shares as well as to make a largest company in China, which in the future could predominantly affect the market price of oil company. The author also suggests PetroChina as the biggest company to acquire Sinopec under PetroChina name. The merger could be done for both companies by exchange it with PetroChina stock, which is for every 0,752062197 shares of PetroChina is equals to 1 PT Sinopec share. Overall, PetroChina will issue new shares of outstanding for 9105,307 (9106) new shares. The new combined firm is also being control by PetroChina since PetroChina has 95% stock of combined firm, also for the operational structure it will be best if PetroChina still focusing on
576
International Conference on Education For Economics, Business, and Finance ISSN 2233-XXXX upstream while Sinopec focus on downstream since its what both companies do best to increase its production activities for combined firm.
In the future, the author suggests to use discounted cash flow method to estimate companies value as well as calculate the cost of merger and determine the most advantages and appropriate way to do a merger.
References
(1) About PetroChina: Company Profile PetroChina Company Limited. (2016, April 15). Retrieved from http://www.petrochina.com.cn/ptr/gsjs/gsjs.shtml (2) About Sinopec: Company Profile Sinopec Corp. (2016, April 15). Retrieved from http://english.sinopec.com/about_sinopec/ (3) Damodaran, A. 2006. Damodaran on Valuation: SECOND EDITION. Wiley Finance (4) Gitman, L.J. 2012, Principles of Managerial Finance: Thirteen Edition. Pearson P. (5) Kearney, AT. 2013. M&A Deal Evaluation: Challenging Metrics Myths. ThomasKearney. (6) Ross, Westerfield, Jaffe. 2012. Corporate Finance: Tenth Edition. McGraw- Hill/Irwin. (7) Group, Fitch. (2015, April 30). PetroChina-Sinopec Merger: an Oil Giant in the Making. Retrieved from http://www.bmiresearch.com/ (8) Organization of the Petroleum Exporting Countries. 2015. World Oil Outlook. Vienna, Austria : OPEC. (9) Knomea. (2016, July 16). Crude Oil Price Forecast: Long Term 2016 to 2025 | Data and Charts. Retrieved from https://knoema.com/yxptpab/crude-oil-price-forecast- long-term-2016-to-2025-data-and-charts. (10) PetroChina Company Limited. Annual Report 2010. Company Annual Report, Beijing: PetroChina Company Limited, 2010. (11) PetroChina Company Limited. Annual Report 2011. Company Annual Report, Beijing: PetroChina Company Limited, 2011. (12) PetroChina Company Limited. Annual Report 2012. Company Annual Report, Beijing: PetroChina Company Limited, 2012. (13) PetroChina Company Limited. Annual Report 2013. Company Annual Report, Beijing: PetroChina Company Limited, 2013. (14) PetroChina Company Limited. Annual Report 2014. Company Annual Report, Beijing: PetroChina Company Limited, 2014. (15) Sinopec Company Limited. Annual Report 2010. Company Annual Report, China: Sinopec Company Limited, 2010. (16) Sinopec Company Limited. Annual Report 2011. Company Annual Report, China: Sinopec Company Limited, 2011. (17) Sinopec Company Limited. Annual Report 2012. Company Annual Report, China: Sinopec Company Limited, 2012. (18) Sinopec Company Limited. Annual Report 2013. Company Annual Report, China: Sinopec Company Limited, 2013. (19) Sinopec Company Limited. Annual Report 2014. Company Annual Report, China: Sinopec Company Limited, 2014.
577