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.