Thursday, December 07, 2006

My fall 2006 International Business Transactions final exam

Like a lot of other professors who teach international economic law, I have been thinking about pedagogy in international economic and business areas at a time when it seems many law faculties are thinking about the role of international and comparative law in the ideal law school curriculum. One thing that characterizes my IBT classes is that I draw for material very frequently on the pro bono development finance practice I have through my work with a leading NGO in the field, the Media Development Loan Fund. I find that working with MDLF means that I have available to me a wealth of private deals that arise in the developing world - in media, in this case, but covering print, TV, radio, and internet - requiring a lot of creative financial thinking to overcome many obstacles such as political risk, lack of a firm rule of law, lack of public capital markets, lack of very many good exits from transactions, etc. This year, like last year, I have drawn on recent activities of MDLF in Africa for the final exam in IBT. I don't think the question is as good as last year's on post-war reconstruction and conflict diamonds - here - but, still, it does address a real, live business problem for many African newspapers, the availability of newsprint. Here is the exam that was distributed as a takehome this morning. (I am giving students the full exam period, about two weeks, to complete it. It is page limited to 16 doublespaced pages.)


Question 1
50% - 8 Pages
Newsprint in Africa

You are the General Counsel to the Africa Fund, a for-profit investment fund based in Washington DC that seeks to find profitable investments in sub-Saharan Africa that will both make a profit and, in broad economic terms, increase foreign investment in African countries. The fund has a combination of private and public investors; the private investors include such major private investment players as the Blackstone Group and the public investors include different aid agencies of the United States, the EU, and Japan. Although the Fund has a broad development goal in mind which has caused the various aid agencies to invest, it is nonetheless a fully for-profit venture, expected to make a commercial return on its investments.

The managing director of the Fund, Philippa Foot, has just returned from a trip around various countries in the region looking at various new investment possibilities. She has just been in to see you about one of them and has requested a memorandum from you outlining what you see as the possibilities, limitations, financial structures, legal structures, and legal issues involved in a possible undertaking, including the possibility that what she is describing might be a very bad idea. You are mulling over the conversation and sitting down to write the memorandum she has requested. Ms. Foot demands that anything put in writing to her (especially from the legal department) be well thought out, well organized, concise, and never, never, never merely rambling. Because you live by this rule, you have been the General Counsel for the past five years while three of your predecessors were fired.

In South Africa, Ms. Foot had conversations with Trevor N., the proprietor of a large newspaper conglomerate in South Africa and Zimbabwe (his paper in Zimbabwe is the last semi-freely published newspaper in that country, and although Trevor is himself Zimbabwean, he does not dare travel back for fear of being imprisoned – again). Ms. Foot had asked him what his biggest financial concern was and whether investment could profitably be made in his newspaper chain. His answer had surprised her. She had expected that he would talk about the difficulties of getting advertising in a difficult market, the need to improve printing facilities through investment in new printing equipment, political pressures, and the need to reduce staff to reduce costs.

Instead, however, he had stressed that his biggest headache was the exorbitantly high cost of newsprint – the paper on which the newspaper is printed – and that sometimes it was not to be had at on the market at all. Asking why, Ms. Foot was told that newsprint was at a premium in international markets, and that large enterprises in other parts of the world had long term supply contracts with producers, particularly farmed paper mills in places like the US Pacific Northwest, Finland, and other producers of newsprint. The result was that long term supply was locked up in long term contracts by large users of newsprint, and places with relatively smaller needs found that they had to buy newsprint at the most premium “spot” price of what was left over on the world market.

Trevor N.’s question for Ms. Foot was whether there was a way in which the Africa Fund could invest in creating a capacity for purchasing newsprint on a long term basis to assure supply at a lower price than premium world market “spot” prices. She told him she didn’t see how, exactly, since his problems would simply be her problems if the Africa Fund tried to buy newsprint on his behalf. She then continued her tour in Africa. What she found, however, was that in every country she went and met with newspaper owners, the complaint was the same – Angola, Mozambique, Senegal, Botswana, Kenya, and other places. Newsprint was very expensive, hard to come by, and the supply was often insecure.

Ms. Foot gave this a lot of thought, and one question she asked everywhere she went was, is the problem that you simply cannot afford the world market price of newsprint – is the problem that you could only afford newsprint if the price was well below market? The consistent answer – one she has sent a team of sharp-eyed accountants and financial analysts to determine for sure – from the newspaper owners in these various countries and markets is that they could afford to pay the same price that global purchasers operating on long term contracts were paying. She wasn’t entirely sure that was true – she thought some of the owners in some countries were being overly optimistic, but for purposes of her current analysis, she is willing to assume that is true.

Ms. Foot’s question for you, as General Counsel and strategic advisor, is whether you see a way in which the Africa Fund could somehow, some way, bring together the different businesses in the different countries to gain greater market power together and so get better prices and more assured supply of newsprint. At the same time, she wants to know what the role of the Africa Fund might be, on the assumption that it is willing to put up some amount of capital, but wants its participation to be no greater than 25% of the total of capital put into any investment arrangement, with no more than 25% of the risk and 25% of the return – but an absolute veto on any decision to enter into binding, long term contracts with any newsprint producers. She is open to the idea that the Africa Fund might not put in straight cash into an investment arrangement, but might put its cash in another way that might be used to anchor the first purchases of newsprint from sellers. Trevor N., for his part, has the strongest media conglomerate and can afford a higher price than the other media owners – they, on the other hand, are highly concerned that they might get themselves stuck in an arrangement in which they are committed irrevocably to a price they cannot afford to pay. Ms. Foot would like something that takes these concerns into account. She also notes that one of the Kenyan owners is a larger paper aiming to maintain market share in Nairobi with a small but aggressive competitor – she suspects that the larger Kenyan paper might actually prefer a higher price because it might hurt his competitor more than it hurts him, and she wonders how an arrangement might deal with that, or if it even can.

She has been burned before in joint ventures and although she is willing to entertain a possible JV arrangement, she wants to know how in fact it would really work and solve the problems posed. She is also concerned that in several larger countries – Kenya and South Africa, for example, some of the potential participants in the newsprint purchasing scheme are also competitors with each other in their own markets – how, if at all, should this affect the analysis, or is it irrelevant? Her ballpark estimate of how much total startup funds from everyone combined would have to be in order to negotiate seriously with international newsprint vendors is US $2 million; she wants to be sure that the Africa Fund gets back its investment and a reasonable return. This is not, as she pointedly says, charity work.

Draft that memo to Ms. Foot, giving a structuring scenario and explaining how it solves the financing issues, and further explaining how it works from a legal standpoint, stating the documentation necessary to make such arrangements work and identifying the most essential terms that need to be specified in the documents – not the run of the mill stuff, but the terms critical to this deal. Be both strategic advisor and lawyer.

Question 2
50% - 8 Pages
The International Newsprint Vendors

Same facts as above question. Congratulations – Ms. Foot liked your previous memo and you are still employed!! She has set up a structure based on your scenario, and the investment arrangement is now prepared to go forward with purchases of newsprint.

The Africa Fund, acting as negotiator on behalf of the various newspapers, is now entering into negotiations with several different, independent newsprint sellers in different places in the world. The Africa Fund, using the structure you created earlier, has at its disposal US $2 million, 25% of which it has contributed in some fashion. It can use that money any way it sees fit, but the fundamental issue is that it needs to acquire commitments for $6 million of newsprint to be delivered in equal installments over a three year period. It does not have $6 million dollars to simply pay for newsprint over three years. It needs a way to spread the payments over the three year period in which the newsprint will actually be used, while ensuring that the obligation to deliver at a set price remains good.

None of the vendors is very happy about going into a long term contract with the African parties when they could use the same newsprint to go into contracts with much more financially stable companies such as the New York Times or Le Monde. Ms. Foot originally did not understand why the vendor should care; if the purchaser did not make payment, then the seller could stop shipment, but apparently the shipments must be made in bulk, a year’s worth of newsprint in order to make the shipping economical, so the vendor really does care about getting paid. For their part, the African companies are worried about the quality of the newsprint – the Finnish vendor is reputable, but if the quality of the paper is not good, the new and expensive color printing presses that several of the newspapers have recently invested in will not be of any real use, because the paper won’t take the color inks.

The Finnish vendor is willing to consider a lien against the best assets of the African purchaser group – meaning, Trevor N.’s printing presses in South Africa and Ken’s printing press in Nairobi. Neither is wild about this idea, but each would consider it since between the two of them, they would receive the bulk of the newsprint in any case, and at a much more favorable price than they currently pay. They worry, however, that the failure of the five other, much smaller, financially weaker newspapers to pay their share could force them to make up the loss in order to avoid losing their presses; furthermore, Trevor and Ken would only do this knowing that the other one was doing it as well. They therefore want to find some arrangement that, while granting liens on the presses, gives them some protection. The Africa Fund is willing to consider an additional investment, beyond its current participation, to protect against this possibility, provided that it is limited to 50% of the additional risk involved.

Ms. Foot wants you to provide her with a memo proposing a way to structure a deal with the Finnish vendor, understanding that there are many contingencies on which you may have to simply state some assumptions in your memo. She wants to know how you would structure the overall transaction with the Finnish vendor, and any subsidiary arrangements that need to be made by or with other parties. She wants to know, of course, what the Africa Fund’s particular role will be, both in directing the use of the existing $2 million, and the additional risk commitment that she has indicated that the Africa Fund might be willing to make. In offering a strategy, act as both strategic advisor and lawyer and give a plan for how legally to document the arrangement, focusing not on the standard clauses of any relevant documents, but the ones that are essential to this deal.



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