Nova Case

The sale of the Industrial Products Division is a good idea for Nova financially as the cash flows over the next five years from this division do not justify foregoing $160M the company would gain from its sale. Assuming a relatively low 10.5% cost of capital, the NPV of the cash flows would be $-26M over a five year period, making the valuation of the IP division $133.56M (Table 2). This analysis does not even take into consideration the tax benefits from carrying the loss, reducing the future tax burden. Valuation using a 10-year DCF model at a 10.5% discount rate would result in valuation of IP division at $214.5M (Table 3). However, due to the risks associated the basic chemical segment, it is uncertain whether the IP division would be able to sustain profitability past the 5-year time period as described below in the following section. The benefits to selling IPD would be $160M plus the tax benefit of the loss of $190.6M at a 40% tax rate, equivalent to $76.2M. This would put the value to Nova of selling IPD at $236.2M, well above the max valuation of $214.5M.

Reasons to Sell:

Compared with other basic chemicals companies, IPD has the lowest sales and earnings. That means it doesn’t have competitive position in the market. Furthermore, Nova’s IPD operation is at a disadvantage as it is not able to shift between feedstocks as its competitors are, meaning that at any point of time Nova’s IPD chemical offerings could be undercut in price by its competition. Due to the low growth in the basic chemicals segment relative to specialty chemicals, internal investments prior to 1988 were not used to upgrade IPD facilities. This meant that Nova’s IPD operation was susceptible to both price volatility in the chemicals market as well as relative prices of natural gas and petroleum.

As a diversified chemicals company, Nova was underperforming. Compared with the other diversified chemicals companies, Nova had the lowest P/E ratio at 10.3 and the lowest Value/Sales...