Rondo Company: Manufacturing Copper, Steel, and Iron Pipes | Special Project and Acquisition Opportu

About Rondo Company

Task:

The Rondo Company is a medium size manufacturing company that manufactures copper, steel, and iron pipe. The company was founded by Bill Rondo, the current president and board chairman. Mr. Rondo owns the majority of the company’s outstanding stock. The stock is publicly traded. Key financial, ownership and market information on Rondo is included in.

In addition to the normal course of business, Rondo has two interesting opportunities that it is considering.

The first opportunity is a special contract with a long-time customer. The customer wants to enter into a five-year agreement to have Rondo produce a new type of pipe. Key expected financial information on this special project is included in . In order to take advantage of the project, Rondo would have to invest the amount noted in Appendix B in special purpose equipment. It is unlikely that the contract would be renewed and also unlikely that the new equipment could be adapted to other production. Since the equipment would be special purpose, the expected salvage value is zero.

The second opportunity is the possibility of acquiring a company that makes PVC pipe. This company, Poly Pipe Incorporated (Poly), is smaller than Rondo. It had been started by several previous Rondo managers to take advantage of the new poly vinyl chloride pipe making technology. Although both companies are in the pipe business, their customer bases do not overlap significantly. Metal pipe and PVC pipe are used in different applications. Poly is publicly traded. The market is not active. The majority of the stock is still owned by the three founders. The remainder of the stock is owned by several hundred stockholders; its ownership is not concentrated. Key financial, market and ownership information on Poly Pipe Inc. is included.

In addition to these opportunities, Rondo continues its modest growth. While the company’s growth rate has varied over the last 10 years, it currently expects this historical growth rate to continue. However, Rondo is operating near its capacity. As a practical matter, growth will require incremental additions to production equipment.

Rondo’s Board of Directors has established several policies. While the Board prefers that these policies be followed, they would modify the policies if it made sense for the company.
The dividend payout ratio should be between 40% and 50%.
The debt to total assets ratio should not be higher than 50%.
Annual company growth should continue in the 5% to 10% range. The board will measure growth as the annual increase in Earnings Per Share.
The company should maintain flexibility in financial transactions. No high risk transactions should be used, nor should the company tie its hands with financial arrangements.

In addition, Mr. Rondo wants to maintain his family ownership in the company at a minimum of 30%. He does not want to be required to purchase any additional stock. Since the Rondo family counts on the dividend payments, he is also adamant about continuing the dividend payments near their current per share rate.

Potential Poly Pipe Incorporated Purchase

Poly is a small company that manufactures PVC pipe. They have been in business for 10 years. Growth has been relatively consistent for the last five years. Poly’s products do not compete directly with Rondo’s.

Poly’s managers want to sell the company. If the sale is to be a cash sale they will require a premium of 50% above the current “market” price to cover taxes and still leave a profit. They would be willing to sell by exchanging shares with an appropriate company, possibly on more favorable terms.