Strategic Management

John D. Macomber
Poland's A2 Motorway (HBS 9-202-030)
Fundamentals of the Economic Deal
This worksheet is intended to illustrate how to get at some of the simple
fundamentals of the economics, for basic discussion purposes.
STEPS
1 Identify the players (on a separate exhibit)
2 Follow the money: The Basics:
Where does the REVENUE come from?
What is the OPERATING EXPENSE?
What is the ANNUAL OPERATING MARGIN?
What is the FIRST COST to build it?
What are the SOURCES OF INVESTMENT funds?
3 To simplify, a) use the original projections and b) pick a "stable" year in the future as a start.
4 "What If" analysis. What if the revenues are below projections?
What if the costs are above projections?
The learning point in this case at this time is to cut through the complexity and get the basic issues.
The actual case study is written for a finance class - but we will not go into those details here.
What is the "Stabilized Pro Forma?" - Pick 2007 since it is after the ramp-up and before the refinancing.
From Exhibit 9 (the numbers are close to those in Exhibit 8):
Pro Forma Pro Forma What If What if
2,007 2,007 Revenue Down Costs Up
Million PLN Million Euros @ 50% 25%
4
Operations
Revenue 318 80 40 80
Operating Cost 74 19 19 19
Annual Operating Margin 244 61 21 61
Debt Service on Senior Loan 151 38 38 38
Free Cash Flow (to service bonds) 93 23 (17) 23
Cost
Design 16 16 16
Construction 622 622 778
Subtotal 638 638 794
Other 296 296 296
Total 934 934 1090
Sources of Funds (Exhibit 7)
AWSA Subord Debt & Equity 235 235 391
Senior Loan 242 242 242
Bond Issue (zero-coupon)? 266 266 266
Bond Interest 135 135 135
Other 56 56 56
Total 934 934 1090
To Illustrate Cash/Cash (this is not the actual deal)
Free Cash 23 (17) 23
AWSA Cash In: 235 235 391
Cash / Cash Return as an example: 9.89% -7.02% 5.95%