Case Study
Blaine Kitchenware case Week Overview This week we complete the Blaine Kitchenware analysis. The case is about a mid-sized manufacturer of kitchenware trying to decide how to respond to an unsolicited takeover bid. The company is considering a stock repurchase to move closer to its optimal capital structure, and capture the value of interest tax shields, thereby creating value for shareholders. Module Contents · Blaine Assignment Click here to go to assignment. · Capital Structure Review Lecture Go to lecture · Dividend Policy Review Lecture Go to dividend lecture · Blain Case Preparation Discussion Go to case prep discussion NOTE: There will be no numerical comments allowed in this discussion. It is limited to general issues to consider in the financial transaction. Case analyses are due April 25. Please submit your complete analysis through the Canvas system. You can link to the Blaine submission area here (LINK to Blaine submission area) or through Assignments. Use the following pattern for naming your file: YourLastName6310Blaine.docx The Blaine case (or the Marriott case, just do one) are to be done individually. There is a Study Group Area where you can exchange ideas on how to do the analysis. Please do not post any numerical analysis. My objective is for everyone to do the bulk of the analysis on his/her own. If you have a burning question please write to me directly. That way I will respond more quickly. Be sure to include FNCE 6310 and the name of the case in the subject line. Learning Objectives · Apply our theoretical understanding of capital structure to a real world situation. · Identify the how debt restructuring can create value. · Analyze a specific proposal for restructuring Blaine's capital structure. · Become familiar with a tender offer repurchase transaction. Blaine Assignment Summary: The CEO of Blaine Kitchenware is considering taking on debt to repurchase stock and significantly change the company's capital structure. Assignment: In a report of no more than 3 pages clearly state whether Blaine should carry out the following restructuring plan: Borrow $50 million and combine it with $209 million of Cash to purchase shares at $18.50 (about a 15% premium over current market value of $16.25 per share). Assume that beyond 2006 gross profit margins will be 30% and the tax rate will be 40%. Comment on how much and how the debt restructuring creates value for the company. You will need to determine the cost of debt Blaine will have to pay for the $50 million bonds. You will also have develop criteria to determine which alternative (no change or restructuring) is superior. You may find the following table helpful. It is somewhat dated but I don't things have changed too much so the numbers are still relevant. It relates financial ratios to debt ratings. Grading rubric 1. Choice of a cost of debt. Did you support your choice? 2. Completeness of your discussion and numerical support for the value creation of the transaction. 3. Quality of your conclusion. Is it well supported by and does it follow directly from your analysis? 4. Quality of the writing and organization of the report. Are sections clearly labelled? Does the text refer to appropriate exhibits? Did you follow instructions? Please submit your report in the Blaine assignment area of our Canvas class. You may also send me a back-up copy of your report.. Your report should consist of a three-page essay and a page or two that includes your analysis. Only include exhibits that you refer to in your essay. Be sure your name(s) is on your paper. Blaine Kitchenware, Inc.: Capital Structure ________________________________________________________________________________________________________________ HBS Professor Timothy A. Luehrman and Illinois Institute of Technology Adjunct Finance Professor Joel L. Heilprin prepared this case solely as a basis for class discussion and not as an endorsement, a source of primary data, or an illustration of effective or ineffective management. This case, though based on real events, is fictionalized, and any resemblance to actual persons or entities is coincidental. There are occasional references to actual companies in the narration. Copyright © 2009 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. This publication may not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School. T I M O T H Y L U E H R M A N J O E L H E I L P R I N Blaine Kitchenware, Inc.: Capital Structure On April 27, 2007, Victor Dubinski, CEO of Blaine Kitchenware, Inc. (BKI), sat in his office reflecting on a meeting he had had with an investment banker earlier in the week. The banker, whom Dubinski had known for years, asked for the meeting after a group of private equity investors made discreet inquiries about a possible acquisition of Blaine. Although Blaine was a public company, a majority of its shares were controlled by family members descended from the firm’s founders together with various family trusts. Family interests were strongly represented on the board of directors as well. Dubinski knew the family had no current interest in selling—on the contrary, Blaine was interested in acquiring other companies in the kitchen appliances space—so this overture, like a few others before it, would be politely rebuffed. Nevertheless, Dubinski was struck by the banker’s assertion that a private equity buyer could “unlock” value inherent in Blaine’s strong operations and balance sheet. Using cash on Blaine’s balance sheet and new borrowings, a private equity firm could purchase all of Blaine’s outstanding shares at a price higher than $16.25 per share, its current stock price. It would then repay the debt over time using the company’s future earnings. When the banker pointed out that BKI itself could do the same thing—borrow money to buy back its own shares—Dubinski had asked, “But why would we do that?” The banker’s response was blunt: “Because you’re over-liquid and under-levered. Your shareholders are paying a price for that.” In the days since the meeting, Dubinski’s thoughts kept returning to a share repurchase. How many shares could be bought? At what price? Would it sap Blaine’s financial strength? Or prevent it from making future acquisitions? Blaine Kitchenware’s Business Blaine Kitchenware was a mid-sized producer of branded small appliances primarily used in residential kitchens. Originally founded as The Blaine Electrical Apparatus Company in 1927, it produced then-novel electric home appliances, such as irons, vacuum cleaners, waffle irons, and cream separators, which were touted as modern, clean, and easier to use than counterparts fueled by oil, coal, gas, or by hand. By 2006, the company’s products consisted of a wide range of small kitchen appliances used for food and beverage preparation and for cooking, including several branded lines of deep fryers, griddles, waffle irons, toasters, small ovens, blenders, mixers, pressure cookers, steamers, slow cookers, shredders and slicers, and coffee makers. 4040 O C T O B E R 8 , 2 0 0 9 For the exclusive use of J. Bates, 2020. This document is authorized for use only by Jennifer Bates in FNCE 6310 Financial Decisions and Policies Spring 2020 taught by John Byrd, University of Colorado - Denver from Jan 2020 to Jul 2020. 4040 | Blaine Kitchenware, Inc.: Capital Structure 2 BRIEFCASES | HARVARD BUSINESS SCHOOL Blaine had just under 10% of the $2.3 billion U.S. market for small kitchen appliances. For the period 2003–2006 the industry posted modest annual unit sales growth of 2% despite positive market conditions including a strong housing market, growth in affluent householders, and product innovations. Competition from inexpensive imports and aggressive pricing by mass merchandisers limited industry dollar volume growth to just 3.5% annually over that same period. Historically, the industry had been fragmented, but it had recently experienced some consolidation that many participants expected to continue. In recent years, Blaine had been expanding into foreign markets. Nevertheless in 2006, 65% of its revenue was generated from shipments to U.S. wholesalers and retailers, with the balance coming from sales to Canada, Europe, and Central and South America. The company shipped approximately 14 million units a year. There were three major segments in the small kitchen appliance industry: food preparation appliances, cooking appliances, and beverage-making appliances. Blaine produced product for all three, but the majority of its revenues came from cooking appliances and food preparation appliances. Its market share of beverage-making appliances was only 2%. Most of BKI’s appliances retailed at medium price points, at or just below products offered by the best-known national brands. BKI’s market research consistently showed that the Blaine brand was well-known and well-regarded by consumers. It was associated somewhat with “nostalgia” and the creation of “familiar, wholesome dishes.” Recently, Blaine had introduced some goods with “smart” technology features and sleeker styling, targeting higher-end consumers and intended to compete at higher price points. This strategy was in response to increased competition from Asian imports and private label product. The majority of BKI’s products were distributed via a network of wholesalers, which supplied mass merchandisers and department stores, but its upper-tier products were sold directly to specialty retailers and catalogue companies. Regardless of the distribution channel, BKI offered consumers standard warranty terms of 90 days to one year, depending on the appliance. Blaine’s monthly sales reached a seasonal peak during October and November as retailers increased stock in anticipation of the holiday season. A smaller peak occurred in May and June, coinciding with Mother’s Day, a summer surge in weddings, and the seasonal peak in home purchases. Historically, sales of Blaine appliances had been cyclical as well, tending to track overall macroeconomic activity. This also was the case for the industry as a whole; in particular, changes in appliance sales were correlated with changes in housing sales and in home renovation and household formation. BKI owned and operated a small factory in Minnesota that produced cast iron parts with specialty coatings for certain of its cookware offerings. Otherwise, however, Blaine, like most companies in the appliance industry, outsourced