Final BKI Group 6_edited
Transcript of Final BKI Group 6_edited
BLAINE KITCHENWARE, Inc. Capital StructureBY
Akash Mehta – 213 Ankit Srivastava – 373 Manalp Mehta - 314
Nitish shah – 214 Raj Shah - 215 Zeus Paranjape - 315
Aditya Shekar – 371 Nikunj Loya - 313
Introduction
Blaine Kitchenware was a mid-sized producer of branded small appliances primarily used in residential kitchens.
Victor Dubisnki, an engineer by training, became the company’s CEO IN 1992.
Blaine produced home appliances, such as irons & vacuum cleaners which were easier to use.
By 2006, the company widened their range of appliances used for food and beverage preparation including toasters, small ovens, mixers, pressure cookers and coffee makers.
Market position
Blaine had lesser than 10% of the $2.3 billion U.S. market for small kitchen appliances.
Blaine had competition from inexpensive imports and aggressive pricing by the mass merchandisers
In recent years, Blaine had been expanding into foreign markets.
The company shipped approximately 14 million units a year.
Kitchen Appliance Industry
There were three major segments in the small kitchen appliance industry:
Food preparation appliances
Cooking appliances
Beverage making appliances
The majority of its revenues came from cooking appliances and food preparation appliances.
Strategies applied by Victor Dubinski
The company completed an Initial Public Offering (IPO) in 1994.
Beginning in the 1990s, the company gradually moved its production abroad.
BKI focused on rounding out and complementing its product offerings by acquiring small independent manufacturers or the kitchen appliance product lines of large diversified manufacturers.
Company’s position
The recent development of the firm was a consolidation for the fragmented market conditions.
All acquisitions by BKI were done either through cash or BKI stocks.
For the last 3 years, the margin had dropped despite the introduction of their high-end product range.
Inventory problems.
Financial Performance
Blaine did not lower the prices although the competitors were doing so.
ROE levels were as low as 11%
No outside borrowings. Very conservative approach.
Current dividend payout levels were highly unsustainable.
The Decision - Dilemma
Need to keep in mind the implications of the decision taken.
Puzzle regarding 3 different routes that Blaine could take:
BKI should not go for repurchase of shares at all.
Partial repurchase by its current cash and cash equivalents.
Complete buyback of the market float.
Buyback
A company reacquiring/repurchasing its own shares.
A means for the company to invest in itself.
Leads to decrease in the number of shares outstanding in the market.
Enhancement of the shareholder’s wealth .
Common Types of Buy Back of Shares
An equal access scheme
A selective buy-back
Buyback shares on the stock exchange
Why companiesopt for buyback?
To increase the value of shares still available
To eliminate any threats by shareholders
To use Cash Surplus
Why companiesopt for buyback?
To increase the EPS of the company’s shares
Tax Gain
Exit option
Methods of Buyback
Tender Offer
Open Market
Book-Building Process
Advantages of Buyback of Shares
Increase confidence in management
Higher share price
Increase RoE
Reduce takeover chances
Disadvantages of Buyback
Sending negative signals
Company may pay too much for its own shares
Backfire for a company competing in high-growth industry
SCENARIO 1B.K.I should not go for any Buyback.
Calculations
Total no. of shares: 59.052 Million
Net Income: 53.630 Million
Hence, Earning per share =
=
= 0.91
Market price of the share: $16.25
Price to earnings ratio =
=
=17.85
Calculation
So for complete buyback Blaine needs to repurchase 38% of 59.052 million shares, that is 22.439 million shares.
Therefore, total number of shares left after complete buy-back = 62% of 59.052 million shares = 36.612 million Shares.
Calculation of ROE:
Net income = $ 53.630 Million
Shareholders' equity = $ 488.363 Million
Therefore, ROE =
= * 100
= 10.98%
Inferences
This scenario will maintain the company’ status as under leveraged and highly liquid
This scenario fails to create value for the shareholders and both minority shareholders and promoters will suffer
There is a need to change the current capital structure as it is providing lower returns
Scenario 2A partial buy-back using only cashand cash equivalents/ Market securities
Calculations
Total Cash and Cash Equivalents = $66.557 Million
We are keeping 10% of the cash and cash equivalent aside for daily operations. Therefore 6.557 Million have been kept as buffer for rotating working capital requirements.
Remaining Cash and Cash equivalents = $60 Million
Marketable Securities = 164.309 Million
Total amount available for buy-back = 224.309 Million
Calculations
Now, Share Price = $ 16.25
Therefore,
No. Of Shares bought =
= 13.80 million
These shares are retired.
Therefore the no. of remaining shares
= 59.052-13.80
= 45.252 million
Calculations
Calculations for EPS
Earnings per share =
Therefore, net earnings after reducing 4.92% of $224.309 million = 53.630 – (0.0492 * 224.309)
= 53.630 – 11.039
= 42.594 million
Therefore,
EPS =
= $0.94
Calculations
Expected Market price of the share now = Expected EPS * P/E ratio
Assuming: P/E ratio remains constant
Therefore, Expected Market price = 0.94 * 17.85
= $16.779
Increase in value per share for shareholders = $16.779 - $16.25
= $0.529
Money spent per share for partial buyback =
= $3.793
Therefore, increase in value per share is lesser than money spent per share
Calculations
Calculations for ROE
Net income = $ 42.594
Shareholders' equity = $ 488.363 million - $ 224.00 million
= $ 264.363 million
Shareholders' equity will be reduced as cash and cash equivalents and market securities are being used up for the buyback indication a reduction in the asset side of the balance sheet of the company and thus an appropriate adjustment will have to be done on the liabilities side as well.
Therefore ROE = ($ 42.594 million/ $ 264.363 million) * 100
= 16.11%
Inference
The company’s management which appears to be reluctant to raise any debt, will not have to forego its zero debt policy
The company will have a better Return on Equity
The company might have to raise debt if it has to continue its growth through inorganic route
The share holders will have a better value after this whole exercise
The management will have an increased stake and will have more discretion in making decisions
Scenario 3Whether B.K.I should go for complete share repurchase by raising debt
Calculations
Earning per share:
=
= 0.91
Market price of the share: $16.25
Price to earnings ratio =
=
=17.85
So for complete buyback Blaine needs to repurchase 38% of 59.052 million shares, that is 22.439 million shares.
Therefore, total number of shares left after complete buy-back = 62% of 59.052 million shares
= 36.612 million Shares
Calculations
Calculation for the amount of debt to be raised:
No. of shares to be bought back = 22.439 million shares
Therefore the total price of all the shares to be bought back = 22.439*$18.5
= $415.121 million
Less cash and cash equivalents and market securities = $224.439 million
Therefore the debt to be raised for complete buyback = 415.121- 224.309
= $190.6825 million @ a rate of 6.35%
Calculations
Calculation of EPS:
Interest to be paid = 6.75 % of 190.812 million dollars:
= $ 12.879 million
Now, EBT in the year 2006 = $ 77.451million
Less: loss due to use up ofcash & cash equivalents and
market securities @ 4.92% (224.439*4.92)= $ 11.045million
Revised EBT = $ 66.406
Less interest (@ 6.75%) = $ 12.871
Earnings before tax = $ 53.535
Tax (@ 40%) = $ 21.414million
Net income = $ 32.121 million
Calculations
EPS =
=
= $0.877
Expected Market price = EPS* P/E ratio
= 0.877* 17.85
= $ 15.654
Calculations
The money spent per share in case of complete buyback of shares:
=
=
= $ 7.84
And since the new market price is $ 15.654 and the earlier market price was $ 16.25,
Therefore, decrease in value per share for the shareholders = 16.25-15.654
= $ .596
Hence, in this case the outgo per share is greater than the value per share; it does not lead to creation of more shareholder value (for the shareholders who retain shares)
Calculations
Calculation of ROE:
Net income = $ 24.4824million
Shareholders' equity =263.924 $ million
Therefore, ROE = ($ 32.121million/ $ 263.924 million) * 100
= 12.10.%
Inference
The company will have to raise considerable debt for the required buyback
The promoter will have the complete stake and absolute decision making powers, dividend policy can be made suiting the family’s need.
The company’s debt-equity ratio will remain below 1 which is comfortable
The return on equity will improve which will help family realize better value for their stake
The minority shareholders will gain in the form of 13.48% premium
The complete stake in hands will provide a buffer that may allow company to issue shares in case of an acquisition without reducing the promoter’s stake below crucial 51% level.
Decision Making [Conclusion]
No Repurchase Vs Repurchase
Partial Repurchase using Cash and Cash Equivalents Vs Complete Repurchase by raising Debt
No Repurchase Vs Repurchase
No Repurchase Repurchase
Maintain the company’ status as under leveraged and highly liquid.
The Company is buying back the shares as it is making more profits so improves the company’s status.
Fails to create value for the shareholders.
Will create more value for the shareholders and thus not making the minority shareholders suffer.
Current Capital Structure providing lower returns.
Higher Return on Equity and thus will not need to change the Capital Structure
Inference
Repurchase of Shares is required.
Partial Buy Back Vs Complete Buy BackPartial Buy Back Complete Buy Back
Will not have to forego it’s no debt policy.
Will have to raise considerable debt for the required buyback.
Management will have a lesser stake than if they completely buy back the shares.
Promoter will have the complete stake and absolute decision making powers, dividend policy can be made suiting the family’s need.
No great benefit to the minority shareholders in the company but a slight premium.
Not just eh Family but the minority shareholders will gain in the form of 13.48% premium from this buy back.
Inference
Complete buy back is the most profitable scenario, thus we should do a complete buy back by raising debts.