Case Study Analysis

CHESTNUT FOODS

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 Table of Contents

Table of Contents .................................................................................................................................... 1

Analysis and Interpretation..................................................................................................................... 2
Handling excess FCF-....................................................................................................................... 2
Post Recapitalization- ....................................................................................................................... 3
Conclusion and Recommendation .......................................................................................................... 5

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G19069 – KinshukShekhar
G19073 – Mahak Kapoor
G19075 – Naman Kohli
G19096 - Surbhi
 Analysis and Interpretation

Handling excess FCF-

Sealed Air applied World Class Manufacturing (WCM) to fix its manufacturing problem and that
resulted in increase of the cash flows, also it reduced the inventory that also increased the cash flow.
A year after implementing WCM Sealed Air had excess of free cash flows ($54 million) after
applying World Class Manufacturing program. The firm didn’t want to keep the money with them
as:
 Free cash flow was expected to double over the next year and would create surplus cash.
 The stock price of the company was undervalued after implementing WCM
 The extra cash flow generated from their improvements in operations was enough for the
capital expenditure
 The company wanted to return its money to investors

To give back the money to shareholders he company could opt for Leveraged buyout (LBO) or
Recapitalization.

 LBO – Following this would have let the company get rid of excess cash flows but would
result in the management losing the control in the company.

 Recapitalization –This was another way to return money to the shareholders without the
risk of being taken over. This was smaller risk as it just affected employees to improve
cash flows and maintain high efficiency. The bankruptcy would cause employees to lose
their jobs whereas shareholders were safe as most of the money is paid as dividend. Also,
company believed that recapitalization would make the employees’ operations efficient.
Thus, Recapitalization made more sense for the company.

Given Data-

The stock price at the end of year was $20.378

Outstanding common stock =8.245 million shares
Value of debt after recapitalization = total cash pay-out= $329.8 million
Stock price on the day of announcement= $50.5
Stock price on the day before the dividend was paid = $50.75
Stock price on the day the dividend was paid= $12.5
Stock price at the end of 1989= $20.375

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G19069 – KinshukShekhar
G19073 – Mahak Kapoor
G19075 – Naman Kohli
G19096 - Surbhi
Calculations-

Value of Equity = Value of firm – Value of debt = $20.378x 8.245 million– $329.8 million = -161.78
million dollars
However, the total value for the shareholders on various days since the announcement of
recapitalization are:

 On the day of announcement = $50.5 * 8.245 million = $416.37 million

 On the day before dividend was paid = $ 50.75 * 8.245 million = $418.43 million

 On the day the dividend was paid = $12.5 * 8.245 million + $329.8 (Special dividend value) =
103.06 + 329.8 = $432.86 million

 At the end of year 1989 = $20.375 * 8.245 million + $329.8 (Special dividend value) = 168 +
329.8 = $ 497.8 million

The above calculation shows a growth in shareholder’s value.

Post Recapitalization-

There were few concerns regarding recapitalization:

 The stock price plummeted from $50 to $12.5.

 The company would not be able to do large investments due to low liquidity and thus causing
the loss of market share.
 Many existing investors sold of their shares and new investors came into the organization and
were looking for significant profits. Thus, caused managers of Sealed Air to focus on short
term goals rather than long term forecasts.
As the shareholder’s value increased, by end of the year recapitalization improved the company’s
operation performance and data to support that are:

 the capital expenditure reduced substantially from $20.5 million in 1988 to only $7 million in
1990

 Gross profits increased by 17% from 1988 to 1989

 EBITDA increased by 24% from 1988 to 1989

 By the end of 1989, Sealed Air’s strong cash flow allowed the company to repay $30 million
of bank debt and $5.1 million of its notes payable.

 Thus, no additional repayment was required until 1991.

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G19069 – KinshukShekhar
G19073 – Mahak Kapoor
G19075 – Naman Kohli
G19096 - Surbhi
Another outcome of recapitalisation was the company remained independent and recapitalisation
acted as a defence against take over. This was ensured by:
 Keeping the companies away from acquiring by having huge existing debts.
 By repaying the shareholders in form of dividends, and hence showed its concern for the
shareholders.

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G19069 – KinshukShekhar
G19073 – Mahak Kapoor
G19075 – Naman Kohli
G19096 - Surbhi
 Conclusion and Recommendation

Increasing leverage is not always good for a company unless the organization has the capability to
generate cash and make profit in the future, otherwise the firm could face the problem of liquidation.
The optimal debt levels are depended on company to company across different industries. The decision
of recapitalization was good for the company and, but the firm should know how to perform at optimal
level when the debt is mature. It should also not wait for the debt to increase to a critical level by paying
off the stakeholders.

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G19069 – KinshukShekhar
G19073 – Mahak Kapoor
G19075 – Naman Kohli
G19096 - Surbhi
 Page | 6
G19069 – KinshukShekhar
G19073 – Mahak Kapoor
G19075 – Naman Kohli
G19096 - Surbhi