Leveraged Recapitalization

Transactions where a firm increases leverage

substantially and makes a large cash payout
to shareholders.

Sealed Airs Changing

Competitive Environment
Why did managers at Sealed Air experience a
renewed interest in manufacturing?
Why had Sealed Air been able to
manufacture inefficiently and still have high
margins?

What to do with the Cash

We know where Sealed Airs cash comes from, what
should the company do with all the cash it generates?
Why did the company lever up, if there are no good
investment opportunities today, why not pay out todays
cash and see if anything crops tomorrow?
If you were a share holder what would you want Dermot
Dunphy to do with money?
Dunphy was an MBA, shouldn't any self respecting
MBA be able to find a way to spend several hundred
million dollars?

The Effect of the Recap on Firm

Value and Performance
What do you think about Sealed Airs
recap?
Did the recap create value? If so how
much? Where did it come from?
Is this stock market focus focus or did
something happen to the company?

A Balance Sheet Based Illustration of the Mechanics of

the Special Dividend
Balance
Sheet
12/31/88
Cash
Other Assets
Total

51.1
202.2
257.3

Other liabilities 61.5

Debt
33.5
Equity
162.3
Total
257.3

New
Debt
+

For a
Minute

Dividend
Payout

306.7
==>

361.8
202.2
564.0

- 329.8
==>

==>
306.7
==>

61.5
340.2
162.3
564.0

==>
==>
329.8

Immediately
Following
Dividend
32.0
202.2
234.2
61.5
340.2
(167.5)
234.2

The Effect of the Recap on Firm

Value and Performance
Is there any evidence that the companys
operating performance is improving?

High Leverage and

Manufacturing Excellence
Is pursuing a program of manufacturing
excellence consistent with levering up ?
Is the bank restriction on capital expenditures
damaging to company? Do you think
management will be able to renegotiate these
covenants?

Turnover in the Companys Investor

Base
Why did Sealed Airs investor base turnover
completely after the recap?
Is this something management should be
concerned about?
The companys investment bankers and lawyers
suggested that, instead of a recap, the company
adopt a poison pill. Dunphy refused. Do you
think pill was good idea?
Is this really a take over defense disguised as
tool for organization change?

Leveraged Recapitalization
A defensive reorganization of firms capital
structure in which out-side shareholders
receive a large one-time cash dividend and
inside shareholders new shares of stock. The
cash dividend is largely financed with newly
borrowed funds, leaving the firm highly
levered and with a greater proportional
ownership shares in hands of management.

Leveraged Recapitalization
A defensive LR might succeed by returning
cash to shareholders that is close to or more
than the takeover offer.
In addition shareholder continue to hold
equity stubs received.
Substantial increase in leverage discourages
outside bidders.
Although used as a takeover defence, a high
percentage of firms that adopt them are
subsequently acquired.
Increased efficiency in strategic programs
reduces vulnerability to takeover offer.