"Seo|ed A|r" CASE SIbDY

ANALYSIS kEFOkI
FF011 Corporote F|nonce
Chen I|Q|ong,Deng L|nL|, L|m Y|Hoo, L|n Y|ngShuo|, Wu
L|8|n

1.QuestInn One & Answer

Why did Sealed Air undertake a leveraged recapitalization? Do you think that it was a
good idea? For whom?
Sec|ec ir hcc IrcciIicnc||v neg|ecIec mcnufccIuring in fcvcr cf mcrkeIing, Ihev
were cL|e Ic cc Ihi: Leccu:e cf c |cck cf ccmpeIiIicn, hcwever mic-180:
increc:ec ccmpeIiIicn cnc expiring pcIenI: cn prccucI:, Sec|ec ir reccIec Ic
Ihi: |ncreos|ng compet|t|on by |ntroduc|ng the WCM-Wor|d C|oss Monu|octur|ng
progrom which prcmcIec mcnufccIuring exce||ence. Ihi: increc:ec Sec|ec ir:
cc:h cnc ceLI ccpcciIv.
18-:Icck price :eemec Ic Le uncervc|uec, iI wc: cepre::ec cnc cic ncI :eem
Ic Le imprcving in Ihe necr fuIure. Sec|ec ir hcc c prcL|em wiIh mcncging
Iheir cc:h, Sec|ec ir hcc 50 mi||icn in cc:h cnc :hcrI Ierm inve:ImenI: cnc Ihe
cc:h cn hcnc c: :IcIec in Ihe cc:e wc: expecIec Ic ccuL|e in Ihe nexI vecr.
Fec:cn: fcr Sec|ec ir uncerIcke c |evercgec reccpiIc|izcIicn Leccu:e iI hod o
|ot o| |ree cosh ||ow which IempIec Ihe ccmpcnv Ic wc:Ie mcnev. Exce:: free
cc:h f|cw cri:e: when Ihe ccmpcnv hc: mcre free cc:h in exce:: cf IhcI
neecec Ic func Ihe inve:ImenI:. Mecnwhi|e, Sec| ir d|d not hove good
|nvestments ond M&A opportun|t|es.
CcmpeIiIcr: were mcrkeIing checp imiIcIicn: cf Sec|ec ir: prccucI: Lv
invenIing crcunc Sec|ec ir: mcnufccIuring prcce:: pcIenI:. Frcm Mcncger:
pcinI cf view, Sec|ec ir: |evercge reccpiIc|izcIicn wc: c gccc icec in Ihe
ccnIexI cf iI: chcnging ccmpeIiIive envircnmenI c: Ihe ccmpcnv hcc recchec
c :Icge in Ihe mic-180: where ccmpeIiIicn wc: increc:ing c: cIher ccmpeIiIcr:
:IcrIec Ic prccuce Ihe prccucI: IhcI were previcu:|v pcIenIec Lv Ihe ccmpcnv
:uch c: Ihe cir ce||u|cr pcIenI which hcc expirec. CcmpeIiIcr: were :e||ing Ihem
fcr c checper price. Ihe ccmpcnv :pecificc||v fcce increc:ing ccmpeIiIicn in
Eurcpe c: pricr Ic Ihe mic-180: Sec|ec ir wc: uncL|e Ic :ecure c :Ircng
pc:iIicn wiIh pcIenI: cnc ci:IriLuIcr: IhcI wcu|c c||cw Ihem Ic Icke ccvcnIcge
cf Iheir inncvcIive prccucI: fcr c much |cnger pericc cf Iime. Frcm emp|cvee:
pcinI cf view, c|Ihcugh in c :hcrI Ierm iI cuI Ihe expen:e fcr Ihem, emp|cvee
:Icck cwner:hip wc: gccc in c |cng Ierm. Fcr inve:Icr: cnc ceLI hc|cer:, iI
cepenc: cn Ihe :en:iIive cf ri:k. lI :eemec iI wc: ncI gccc fcr Ihem if Ihev were
ri:k cver:e, vice ver:c.
2. Quest|on Iwo ond Answer

How much value was created? Where did it come from?

Sec|ec ir, wiIh 8.245 m||||on :hcre: cf ccmmcn :Icck cuI:Icncing, pcic c cne-
Iime :pecic| cc:h civicenc cf $40 per shore cn Mcv 11, 18.


































Ihe ExhiLiI cLcve :hcw: IhcI cn Ihe Ex-Divicenc DcIe, Ihe mcrkeI vc|ue cf
Sec|ec ir: euiIv |ncreosed 54.7 m||||on frcm Ihe ccv Lefcre cnncuncemenI cf
reccp. I Ihe enc cf 18, Ihe vc|ue hcc increc:ec 11. mi||icn.
We u:e ccju:Iec pre:enI vc|ue meIhcc Ic cc|cu|cIe hcw much vc|ue wc:
crecIec.
VL = VC + IC D - f{D)= VC + IC D - {prcLcLi|iIv cf LcnkrupIcv* cc:I cf LcnkrupIcv)
= VC + IC D - {prcLcLi|iIv cf LcnkrupIcv*n* VC)
VL1 = McrkeI Vc|ue cf EuiIv + 8cck Vc|ue cf DeLI = 8.245*45.875+ 35.5 =
378.24+35.5= 413.74
VL1 = VC + IC D1 - f{D)1 VC = VL1 -IC D + f{D) = 413.74 - 35.5*357 = 401.32
We igncre Ihe f{D)1 Leccu:e Ihe cmcunI cf ceLI Lefcre reccpiIc|izcIicn i: :c
:mc|| IhcI Ihe prcLcLi|iIv cf LcnkrupIcv cnc Ihe cc:I cf LcnkrupIcv cre :mc|| c:
we||.
E8lI lnIere:I ccvercge rcIic = 53.7/17.1 = 3.14 {FcIe 88)
E8lID inIere:I ccvercge rcIic = ./17.1 = 4.08 {FcIe 888)
Lcng-Ierm ceLI/ccp = 57 {FcIe 8)
Sec|ec ir rcIe cI 8+
Cc:h u:ec Ic pcv civicenc i: 21.3 mi||icn
VL2= VC + IC D2 - f{D) 2= 401.325 - 21.3 + 357*311.1 -1.287*207*378.24
= 380+108.885 - 14.585= 474.3
VL2 - VL1=474.3-413.74 = 0.5
Iherefcre, 0.5 m||||on wc: crecIec Lv Ihe tox sh|e|d wiIh increc:ing ceLI rcIic.
ln ccciIicn, Ihi: re:u|I i: c|c:e Ic Ihe mcrkeI re:pcn:e 54.7 mi||icn.
Bong rating DeIault rate
D 100
C 80
CC 65
CCC 46.61
B- 32.50
B 26.36
B 19.28
BB 12.20
BBB 2.30
A 1.41
A- 0.53
A 0.40
AA 0.28
AAA 0.01

3. Quest|on Ihree ond Answer

s pursuing a program of manufacturing excellence such as World Class Manufacturing
(WCM) inconsistent with "levering up?

No. fIer Ihe imp|emenIcIicn cf WCM, Sec|ec ir hcc mcre in cc:h cnc
effecIive|v mcIive: Ihe emp|cvee. Ihe mcin |e::cn cf WCM i: IhcI if vcu cc iI
righI vcu ccn hcve iI c||- high uc|iIv, |cw cc:I, fc:I cnc cepenccL|e cu:Icmer
:ervice cnc recucec wcrking ccpiIc|. Sec|ec ir cI c|| |eve|: cnc cI c|| |cccIicn:
i: ceciccIec Ic cchieving WCM Ihrcugh IcIc| uc|iIv {ICC), ju:I-in-Iime
invenIcrv{JlI), IcIc| mcIeric| u:cge{IMU), IcIc| prevenIcIive mcinIencnce{IFM)
cnc emp|cvee invc|vemenI{El). WCM wi|| cuIcmcIicc||v :Iimu|cIe inncvcIicn
IhrcughcuI Ihe ccmpcnv, which wi|| he|p Ic prccuce c :Ieccv f|cw cf new
prccucI: cnc new wcv: cf cpercIing cur Lu:ine:: cnc :erving Ihe cu:Icmer:.

4. Quest|on Four ond Answer

Why did Dermot Dunphy, the CEO, feel it was necessary to change the company's
priorities and incentive structure following the recap?

ln Ihe cc:e cf Sec|ec ir': |evercgec reccpiIc|izcIicn, Ihe mcncgemenI hcc
purpc:efu||v cnc :ucce::fu||v u:ec Ihe |evercgec reccpiIc|izcIicn c: c
wcIer:hec evenI. Ihe mcin rec:cn cf crecIing :uch c cri:i: wc: Ic d|srupt the
stotus quo ond to promote |nterno| chonges |n the compony. Ihu: cfIer
reccpiIc|izcIicn Ihe mc:I impcrIcnI Ihing wc: Ihe neec Ic ree:IcL|i:h whc|e new
cLjecIive:, chcnge Ihe ccmpen:cIicn :v:Iem:, cnc recrgcnizing mcnufccIuring
cnc ccpiIc| LucgeIing prcce::e: :c c: Ic rec|ign Ihe crgcnizcIicnc| Lehcvicr cf
Ihe ccmpcnv Ic meeI Ihe |evercge: ce:irec ci:cip|incrv effecI.
kev inciccIcr cf wheIher |evercge i: hcving Ihe des|red d|sc|p||nory e||ects i:
Ihe pc:I-reccp Lc|cnce :heeI prcgre::. Ihe |crge cverhcng cf ceLI :ervice
cL|igcIicn: gc|vcnize: mcncgemenI Ic imprcve cpercIicnc| perfcrmcnce Ihu:
genercIing :ufficienI cc:h f|cw: Ic pcv ccwn Ihe ceLI. Ihu: Ihe mcncgemenI:
pricriIv wc: Ic puI Ihe Iheir cu:Icmer: fir:I cnc c Iheir cc:h f|cw cLjecIive wc:
recefinec in :uch c mcnner IhcI iI Icck ccre :imu|Icnecu:|v Ic increc:e :c|e:
cnc mcrgin:, hcve |e:: invenIcrv, |e:: ccpiIc| expenciIure cnc fc:Ier cc||ecIicn.
WiIh Ihe cLjecIive: c|ecr|v :pe|I cuI, Ihe new bonus p|on ond new emp|oyee
stock ownersh|p wc: inIrccucec :c c: Ic :erve c: cn ccI cf exIrin:ic mcIivcIicn
fcr Ihe emp|cvee: Ic wcrk Icwcrc: Iheir cLjecIive:.

5. Quest|on F|ve ond Answer

Why did Sealed Air's investor base turnover completely after the recap? s this
something managers should be concerned about?

(1) AIter the new dividend payout policy was implemented, Sealed Air would have a debt-to-
book value ratio oI 1.36 and negative net worth oI $160.5 million, while the future cash flow is
uncertain, this change will drastically heighten the Iinancial leverage ratio as well as the risk
Iaced by investors.
So, under the circumstances, conservative investors who are more risk averse tend to sell the
stock to the recap because they preIer to invest in companies with stable return, growth and
limited risk. But speculative investors who are more risk preIerred tend to hold the stock
because they are willing to look beyond the negative equity and cash Ilow projections Irom
which they may look Ior signiIicant gains in proIitability. So Sealed Air`s investor base turnover
completely aIter the recap
(2)Managers totally84:/-0.43.0730/ about this. Because the speculative investors hold the
company`s stocks chasing Ior signiIicant gains in proIitability, they care only about the short
term proIit which will leads to the price Iluctuation and Iurther increase the risk Iace by the
company.

. Quest|on S|x ond Answer

Was the constraint imposed on capital expenditures under the bank lending agreement
good or bad for the company? Do you think managers will be able to successfully
renegotiate this covenant?

FcrI cf Ihe ceLI ccvencnI: wiIh Ihe Lcnk:, Sec|ec ir cgreec Ic Ihe :checu|ec
ccpiIc| expenciIure: cL|igcIicn:.
Frcm Sec|ec ir CcrpcrcIicn: pcinI cf view, Ihe |ccn ccn:IrcinI i: ccnIrccIuc|
re:IricIicn: p|ccec cn c Lcrrcwer. Ihere cre Iwc Lrccc c|c::ificcIicn: cf
ccvencnI:: cffirmcIive cnc negcIive. Cn cne hcnc, Ihe re:IricIicn: c Ihe
ccmpcnv: expenciIure: give Ihe mcncgemenI cnc emp|cvee: Ihe pre::ure Lv
cuIIing iI: LucgeI cnc re:IrucIure Iheir fcrmc| ccpiIc| LucgeIing prcce::. Ihe
ccn:IrcinI hc: fcrcec Ihe emp|cvee Ic pricriIize Ihe ccpiIc| expenciIure: cnc
which ccu|c :uL:euenI|v imprcve iI: perfcrmcnce.
Cn Ihe cIher hcnc, Ihe ccn:IrcinI :cmehcw mcv Le c :IumL|ing L|cck cf Ihe
ccmpcnv: fuIure grcwIh. Fcr excmp|e, Ihe ccmpcnv ccn cn|v :penc $7 mi||icn
in 11, which i: Ihe cmcunI cf Ihe expenciIure :penc cn in Eurcpe. Ihe
ccmpcnv: mcncgemenI ccn:icerec Ihi: numLer Ic Le Icc |cw Ic Lcc:I Ihe
:c|e: grcwIh cnc ccpcciIv cf mu|Iip|e p|cnI:.
Ihe Lcnk: :IcIec IhcI Ihev wcnI |enc Sec|ec ir CcrpcrcIicn wiIhcuI Ircck
reccrc fcr mcncging Ihe |crge cmcunI: cf |ccn. Frcm Ihe ceLI hc|cer: pcinI cf
view, :eIIing minimum :Icnccrc: fcr c Lcrrcwer: fuIure ccncucI cnc
perfcrmcnce ccu|c he|p Ihe Lcnk mcncging Ihe creciI ri:k. lI: cn impcrIcnI
pcrI cf Lcnk: ri:k mcncgemenI :IrcIegie:. Ihe reccpiIc|izcIicn cnc high
|evercge cnc negcIive neI wcrIh :uL:IcnIic||v increc:e Ihe ccwn:ice ri:k cnc
Ihe prcLcLi|iIv cf cefcu|I. Scmehcw, Ihe ccn:IrcinI: cf Ihe |ccn cgreemenI :hifI
Ihe ceLI hc|cer: pc:iIicn Ic :hcre hc|cer: pc:iIicn. Ihe Lcnk: neec Ic Ircck Ihe
ccmpcnv: perfcrmcnce Ic ccnIrc| Ihe ri:k cf Iheir |ccn:.
8e:ice:, Ihe re:IricIicn cn Ihe expenciIure c|:c ccn increc:e Ihe neI prcfiI cnc
mcke Ihe u:e cf |evercge mcre efficienI. Ihe re:IricIicn: Ivpicc||v c|:c
ccce|ercIe Ihe mcIuriIv cf Ihe |ccn in Ihe evenI cf c vic|cIicn. Sc Ihe monogers
w||| not be ob|e to success|u||y renegot|ote th|s covenont.



7. Quest|on Seven ond Answer

Would such an increase in leverage be good for all companies? Why or why not?

Sec|ec ir CcrpcrcIicn: |evercgec FeccpiIc|izcIicn i: c :IrcIegv where c

ccmpcnv Icke: cn :ignificcnI ccciIicnc| ceLI wiIh Ihe purpc:e cf pcving c
|crge civicenc. Ihe re:u|I i: c fcr mcre fincncic||v |evercgec ceLI rcIic which i:
cc||ec cpIimc| ceLI ccpcciIv. Ihi: Iechniue ccn Le u:ec, cnc hc: Leen u:ec,
c: c :hcrk repe||cnI Ic wcrc cff c hc:Ii|e Ickecver. Ihi: i: ccne Lv cccing ceLI,
e|imincIing ic|e cc:h cnc ceLI ccpcciIv. M&M :hcwec IhcI Ihe vc|ue cf c firm i:
incepencenI cf Ihe rcIic cf ceLI Ic euiIv u:ec Lv Ihe firm in fincncing iI:
inve:ImenI:.
Ihi: :IrcIegv refer: Ic Ihe Ircce-cff Ihecrv: c ccmpcnv chcc:e: hcw much ceLI
fincnce cnc hcw much euiIv fincnce Ic u:e Lv Lc|cncing Ihe cc:I: cnc
LenefiI:. Hcwever, on |ncreose |n |everoge |s not good |or o|| compon|es.
DifferenI ccmpcnie: hcve cifferenI cpIimc| ceLI |eve|: Lc:ec cn cifferenI
incu:Irv, cifferenI mcrkeI, cnc cifferenI ceve|cping :Icge:. Fcr excmp|e, in Ihe
Ffizer cc:e, pcrI cf Ihe:e kncw|ecge-Lc:ec ccmpcnie: mcrkeI vc|ue ccme:
frcm Iheir pcIenIic| fuIure grcwIh. Ccmpcnie: neec Ic mcinIcin c |cw ceLI
|eve| cnc prepcre mcre cc:h Ic cecrec:e Ihe cc:I cf LcnkrupIcv. Ihe fincncic|
incu:Irv :uch c: Lcnk, mcnev i: Iheir ccmmcciIv. Ihe prcfiIcLi|iIv ccme: frcm
Iheir high |evercge. Ihe:e Iwc cifferenI Ivpe: cf cpercIing Lu:ine:: incu:Irv
cLvicu:|v wi|| hcve cifferenI cpIimc| ceLI |eve| cnc iI: ncI ccmpcrcL|e.
DifferenI ceve|cping :Icge: wi|| c|:c hcve cifferenI cpIimc| |evercge:. Fcr
excmp|e, Ihe vcung firm: in high-grcwIh incu:Irie: Ienc Ic u:e |e:: ceLI, which
hcve high fuIure vc|cIi|iIv. Hcwever, firm: in :IcL|e incu:Irie: wiIh |crge ucnIiIie:
cf fixec c::eI: Ienc Ic u:e mcre ceLI, which neec mcre ccpiIc| inve:ImenI in
Ihe fuIure grcwIh cnc ceve|cpmenI.