Lubricants Company Paramount Trading Limited has bought out its American partner, Allegheny Petroleum, which held a 50 per cent stake in the oil-blending facility that was commissioned this year at Waltham Road in Kingston. "The company has completed an asset purchase agreement with Allegheny to acquire the right, title and interest for all the assets of Allegheny that were used and/or were useful in connection with, or necessary for, the operation of the joint venture ...," Paramount said in a market filing. Paramount Trading Limited is listed on the Junior Market of the Jamaica Stock Exchange (JSE).

Chairman and CEO of the lubricants company, Hugh Graham, told the Financial Gleaner that it now has a licence and supply and distribution agreements with Allegheny for its Altra products.

"We had the opportunity to do it and the board felt that it was the right thing to do - that is to say, buy out Allegheny's shares and get into a franchise arrangement with them," Graham said.

The price tag for the buyout, according to Graham, was in the region of $300 million, which equates to half the $600 million to build the blending plant, but he declined to comment on how the purchase was financed.

Paramount recently raised $300 million through a preference share issue which is listed on the Jamaica Stock Exchange (JSE), but it's unclear whether that transaction factored into the buyout. "The arrangement to pay for something doesn't always involve cash up front, is all I will say on that. The truth is that whatever I say has implications for both our company and our partners, and it may put them in an invidious position," Graham said.

The new arrangements with Allegheny allows Paramount to use formulae, trademarks and related know-how exclusively to manufacture Allegheny lubricants in Jamaica, with exclusive distribution rights to all member states in Caricom. Graham says instead of splitting the profits 50:50, Paramount will pay a royalty and a franchise fee to use both name and technology.

"It's really no different from any of the popular franchises that are around in Jamaica," he said. "We see it as a better deal all around, where we chart our own path and manage our own destiny. In all of that, we still have the technical and product support from Allegheny," he added.

Meantime, Graham says technicians are busy putting the finishing touches on a new filling line at the oil plant which should be up and running by around month end. This will allow Paramount to go after sales in the retail market and blend oil for major brands. Once again, Graham was coy about the details, but indications are that in addition to marketing the Altra brand of lubricants, Paramount will be representing another major brand. "That has allowed us to complete some conversations that we had prior to this. The details I can't say more about at this time, since we are bound by non-disclosure rules," he said.

Case Questions

1. Allegheny Petroleum has moved from being a 50% joint venture partner in the oil-blending facility in Jamaica, to having a franchising relationship with Paramount Trading Ltd. What are the advantages and disadvantages of joint ventures and the advantages and disadvantages of franchising? Which of these advantages and disadvantages do you think played an important role in the decision to switch from a joint venture to a franchising arrangement? Explain and justify your choice

1. The joint venture between Allegheny Petroleum and Paramount Trading was partially financed by the issuing of equity on the Junior Market of the Jamaica Stock Exchange. Explain the other ways that the joint venture could have been financed . Which source of financial resources would you have recommended they use? Explain and justify your recommendation

1. If Allegheny Petroleum had expatriate staff in the Jamaican joint venture with Paramount Trading, they would now by considering repatriating that staff. Using examples to assist you, distinguish for the Allegheny Petroleum management between culture shock and reverse culture . Discuss how they could deal with the possible reverse culture shock of bringing home their expatriates .