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Blaine Kitchenware LBO Decision

The case involves Blaine Kitchenware, a family-owned company facing challenges from foreign competition, recession, and technological innovations. A private equity group is interested in acquiring Blaine and using its cash reserves to take on debt and repurchase shares. The proposal would borrow $50 million at 6.75% interest and use the funds plus $209 million in cash to repurchase 14 million shares at $18.50 per share. As CEO, you must evaluate this proposal and its impacts on leverage, liquidity, return on equity, earnings per share, taxes, value, risk, and ownership structure. You are to prepare an 8-10 page memo analyzing the proposal and providing your own financial recommendation.

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211 views5 pages

Blaine Kitchenware LBO Decision

The case involves Blaine Kitchenware, a family-owned company facing challenges from foreign competition, recession, and technological innovations. A private equity group is interested in acquiring Blaine and using its cash reserves to take on debt and repurchase shares. The proposal would borrow $50 million at 6.75% interest and use the funds plus $209 million in cash to repurchase 14 million shares at $18.50 per share. As CEO, you must evaluate this proposal and its impacts on leverage, liquidity, return on equity, earnings per share, taxes, value, risk, and ownership structure. You are to prepare an 8-10 page memo analyzing the proposal and providing your own financial recommendation.

Uploaded by

William Ng
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Case: Blaine Kitchenware, Inc.

Why this case?


The case captures a very real problem in a number of
public firms in the U.S.:
Old, family-controlled firm facing challenges from the economic
environment (foreign competition, recession, tech innovations)
Ultra-conservative financial policies (no debt, large cash stocks)
Corporate governance issues (family-centric firm culture)
Likely target of PE groups

The firm is facing a financial dilemma that may have


multiple real-side implications
A PE group is interested in using the firms liquid balance
sheet to raise debt, then use the money to buy back stocks
The case allows us to consider Modigliani-Miller, optimal
capital structure, governance issues, the dynamics of LBOs

Your job
Youre Mr. Victor Dubinsky, CEO at Blaine, Inc.
Its April 2007 and you have to consider whether to sell the
firm? Do a LBO? Do nothing?
To make the analysis consistent, consider a specific proposal:
1. Borrow $50 million at the cost of 6.75%
2. Add the loan to $209 million cash & mkt secs in Blaines B-S
3. Then repurchase 14 million shares at $18.50/share

Discuss the proposals effects on, among other things, Blaines


leverage, liquidity, ROE, EPS, taxes, value, risk, ownership
You should also add your own financial proposal
Key point: Discuss the adequacy of any proposed repo price
The rationale and details of your proposals must be given
in a 8-10 page memo by a group of 3-5 students
Deliver a hardcopy in the class session when case is due
Note: Assume the corporate tax rate stays constant at 30.8%

Your job
Describe mechanics of recap plan using 2006 book figures
(US $000)

Original

Cash & Mkt Secs


NWC
PP&E
Other (net)
Total

230,866
32,231
174,321
50,945
488,363

Debt
Equity
Total

0
488,363
$488,363

Post-Repo

Your job
Describe impact of recap plan on income statements
(US $000)

Original

EBIT
+ Interest income
Interest expense
EBT
Taxes (30.8%)
Net income

63,946
13,506
0
77,451
23,821
53,630

Shares
EPS
ROE
Taxes paid

59M
0.91
11%
23,821

Post-Repo

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