The case study of Victoria Chemical PLC (A): Merseyside Project

Victoria Chemical PLC (A): Merseyside Project

Victoria Chemical PLC has faced challenges in competing in the market. The company has failed to compete favourably due to the use of obsolete technology. The plant was constructed in 1967 thus increased inefficiency arising from increased production cost resulting from breakdown period, lower volume and labour intensive compared to competitors’ firms. The slump in the market performance has placed the company management under pressure from shareholders. The company performance defies the shareholder objectives of revenue and wealth maximisation of invested funds. The pressure arose from the fact that earning in 2007 fell to 180% from previously 250% in 2006. Also, accumulation of common shares by Sir David Benjamin, a well-know corporate invader poses a significant challenge on the possibility of a takeover. The request for funds from parent company is timely to acquire new plant equipment which will give the company competitive edge in the market. Frank Greystock, proposes that the project improvement requires GBP12 million. The funding enables the company to renovate and reduce the cost of production which in return allows Merseyside plant cover deferred maintenance and capitalise on opportunities to achieve high production efficiency. The increased efficiency reduces wastage of material and time thus reducing the cost of production translated to cheaper polypropylene. The reduced price enables the company to compete with other market players who are already using new technology.

The plant in Merseyside and Rotterdam, Holland sells its products to Europe and the Middle East where it is currently facing high competition from seven large producers and other smaller producers. These competitors have different cost index level that enables them to gain market share according to prices and quality of polypropylene produced. According to analysis carried out, Victoria PLC plants in Liverpool, and Rotterdam registered a cost per tonne index of 1.09 which is the second highest. Montecassion SpA has the highest cost index of 1.11. GBTGA.G Company recorded the lowest cost index of 1.00. The relationship between cost index and annual output shows indirect relationship since companies with high-cost index has lower output and vice versa. GBTGA.G produced the highest output of 350,000 metrics tonne compared to Victoria PLC that each produced 250,000 metric tonnes. Montecassion SpA has the lowest production of 120,000 metric tonnes and the highest cost index.


The graph shows that GBTGA.G and Hosche A.G are most efficient firms producing at GBP1 and 1.02 for each unit respectively and thus able to produce in high volumes. Therefore, plant upgrade is inevitable and requires immediate attention before loyal customers opt to competitors’ products which are priced cheaply and reliable. Consequently, poor performance will affect the company ability to raise funds through issue of equity or loan due unattractive return and fear of losing of finance.

The improvement of the plant in Merseyside entails relocating and modernizing unloading area for car-tank, refurbishing of polymerization tank and compound renovation to increase extrusion and save energy. The program is estimated to cost GBP12 million as mentioned earlier. The improvement will force the plant to close for 45 days leading to massive move of customers to competitors’ product. The loss is factored in the appraisal where estimated at GBP33, 483, resulting to low incremental profit at GBP 2.32million. The company has no option since Rotterdam is operating at full capacity thus unable to meet the demand created by Merseyside plant closure. The analysis put forth that shift is temporary since renovation enables the company to lower energy cost by 7% and improve gross margin by 1% from the current 11.5%. The new equipment is expected to depreciate over 15 years on an accelerated basis thus profitable compared to payback period of 3.8years. The graph below shows trend of incremental gross profit;


Also, the company has to invest in improving and meeting rising transportation demand which arises from increased throughput and market. The cost affects production directly thus need to include in project appraisal to provide sound decision. The overall investment required to meet rising transportation needs is estimated at GBP2 Million. Failure to include will result in overestimation of payback, internal rate of return and net present value of the investment thus poor decision making. The excess produced units will find market from competitive pricing thus causing customers to shift from competitors’. The ability is evident from figure 1 since GBTGA.G has market for its highest unit as a result of low production cost and ability to achieve competitive pricing. The spending is not wasteful since cannibalization of Rotterdam will enable the company to renovate it as well. The renovation of both plants in future will create dominance in the market leading high return and improve shareholder wealth.

The company has two options to address Griffin Tewitt concern about EPC which is an independent part of Merseyside. The company has an option of selling the section before becoming obsolete or adopt Griffin proposal of renovation. The renovation has a strategic advantage to the overall performance of propylene product. The repair costs the company GBP1 million and positive NPV of GBP 750, 000 and improved cash flow by GBP25, 000.

The adjustment of the discount rate is critical to ensure that all assumptions are considered before making investment appraisal. The treasury department uses 3% inflation per year and target rate of 7% which accounts for 10% per annum. The evaluation results give the green light for directors and management to seek funds from the parent company and start renovation immediately. The positive net present value of GBP10.6 million and payback of 3.8 years compared to its estimated economic life of 15years. Also, the renovation will result in 24.3% thus improving shareholder wealth and maximisation of returns. The earnings per share are expected to grow by an average of GBP0.022 annually. The adoption of renovation program is timely and viable drawing decision from appraisal rules on NPV, IRR, and payback period.


Maria, S. (2016).Victoria Chemical PLC (A): The Merseyside Project. Darden Business Publishing University of Virginia