Interviewer: Our client, “ABC”, is a Turkish refrigerator sales and production company. The client has both refrigerator and refrigerator compressor plants in Turkey. A European refrigerator compressor manufacturing company looks for expansion opportunities including the buy-out of ABC’s refrigerator compressor arm. The management team of ABC approaches us for the assessment of the potential sale of their refrigerator compressor plant.
Do you have any questions about the client’s request?

Candidate: Please let me summarize our task to clarify my understanding. Our client is a refrigerator sales and manufacturing company which is approached by a European manufacturing company to buy the compressor arm of the company. We will analyze and assess the advantages and disadvantages of the potential sale of the compressor arm of the company.

Interviewer: That is right. Here are the key facts and information that you may want to use during your assessment:

-ABC generates revenues of TL 1 billion from refrigerator sales and TL 300 million from compressor sales
-70% of the compressor sales are made to ABC refrigerator plant and ABC’s uses its own compressor plants’ products in 98% of its products
-Compressor plant profitability is around 8% whereas the refrigerator plant profitability is around 10%
-Expected selling price of the refrigerator compressor arm of the company is TL 150 million
-Compressor plant has recently received Total Quality Management award. ABC products known in the market with its high durability and quality
-ABC initiated expansion strategy in the recent years. ABC is now capturing market share in Europe and targeted to grow further in the region, which can be translated as a 15% increase in the production every year
-ABC plans to invest in the Europe operations to achieve its expansion targets. ABC is expected to have TL 80 million per year back payments of a loan for those investments
What would be your approach for the assessment of compressor plant sale?

Candidate: Firstly, I would like to focus on the financial risks and benefits that the company can gain from this deal. The compressor plant makes approximately TL 24 million of profits and the refrigerator plan TL 100 million in one year. As the 70% of the compressor sales are inter-company sales and the contribution of the compressor company to the overall profitability is very limited. We can say that the core business of the ABC is the refrigerator market.

The estimated selling price of the compressor plant is TL 150 million. This amount may support ABC in paying back its loan. TL 150 million is a significant contribution to ABC, especially when we consider the amount of investment that ABC needs to invest every year for the expansion in Europe. Selling the compressor plant can help ABC in the first two years, which are critical for the launch of expansion success. However, in the medium term, the company needs to develop sustainable financials to be able to pay back its loan.

Interviewer: That’s interesting. What is your result from the initial analysis you have made until now?

Candidate: The sale of the compressor arm can help the client establish a better cash flow and stronger financial support for the European expansion. On the other hand, the sales of the compressor plant does not offer a long term sustainable cash flow, hence, the ABC needs to maintain and further improve its current profitability in the refrigerator plant to mitigate the loss from the compressor sales which is around TL 7 million. However, I still believe that the sales of the compressor company can make a substantial contribution to the refrigerator sales, as the refrigerator sales are the main focus area of ABC.

Interviewer: That sounds reasonable. What are the other aspects that you would like to consider?

Candidate: Now, I would like to focus on strategic risks and benefits. There are three main questions that we need to answer in case of compressor plant sale.
- What should be our client’s compressor supply strategy?
- What are the risk factors for the expansion strategy?
- How would be the quality of the compressors affected?
When we consider today’s compressor supply of refrigerator plant, it is clear that the refrigerator plant is highly dependent to the compressor plant. High quality production of the compressor plant has so far strengthened the positioning of ABC’s refrigerators in the market. However, in case of a sale, the compressor plant may not be able to meet our supply expectations. Additionally, we need to consider that the price of the compressors will be higher than today, as the sales price offered within group companies are generally lower as compared to external vendor prices. Thus, the profitability of the refrigerator company will be negatively affected from the sale.
Moreover, ABC has launched initiatives to be a powerful player in Europe and the company may need to increase its production capacity by 15% every year, which means doubling the refrigerator production in the next five years. In case of a sale, there is a risk that the compressor plant may not produce the required amount of compressors and our client may need to use other vendors.
Lastly, there is a risk that the quality of the compressors may be poor due to possible aggressive cost saving strategy of the new owner. A decrease in the quality may have significant negative impact on the ABC’s perception in the market.
To minimize the potential risks, we need to investigate both local and global compressor vendors and identify suitable alternatives. We can make an overall assessment of vendors by considering product availability, adaptability, capacity, quality, price, lead time and response time to urgent needs.
I think that while local compressor vendors can provide less lead time and faster response to the urgent needs, global players can offer international experience and lower prices due to economies of scale. Through these investigations, we can identify the risk level for changing the compressor vendor.

Interviewer: Assume that you have made the investigations and found out that there are some other local and global compressor vendors but ABC’s compressor plant has the best offerings fitting your needs. What would be your final advice to the client for the sale of the compressor plant?

Candidate: So far, we have found that the sale of the compressor plant would lead to a contribution of TL 150 million to the company cash flow. This is a material amount, as the company needs to invest TL 80 million per year to realize its expansion plans. However, the compressor plant is the key vendor for the refrigerator plant and there is a risk of not identifying appropriate alternative vendors.
I believe that selling the compressor plant can be a good opportunity to strengthen our client’s cash flow if only ABC can minimize the risk of compressor sourcing.
I would recommend that our client needs to consider making an agreement with the compressor plant to guarantee the compressor buying amount, pricing and quality terms for the following 3-4 years. This may allow ABC to guarantee its compressor sourcing for the next few years, which are critical for achieving the European growth plans. At the same time, our client will have enough time to investigate and make agreements with new compressor vendors, if needed.

Interviewer: Thank you. Those sound realistic and applicable recommendations