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    Sealed Air

    Uploaded by

    Himanshu Kumar
    The document discusses Sealed Air's leveraged recapitalization in 1988. It describes how Sealed Air took on substantial new debt to fund a large special dividend to shareholders, leaving the company highly leveraged. This recapitalization structure was used as a defensive tactic to discourage potential outside bidders from launching a hostile takeover. While leveraged recapitalizations are sometimes used as takeover defenses, many firms that adopt them are later acquired regardless. The recapitalization increased shareholder payouts in the short term but also increased Sealed Air's financial risk through higher leverage.

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    © All Rights Reserved
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    Sealed Air

    Uploaded by

    Himanshu Kumar
    366 views10 pages
    The document discusses Sealed Air's leveraged recapitalization in 1988. It describes how Sealed Air took on substantial new debt to fund a large special dividend to shareholders, leaving the company highly leveraged. This recapitalization structure was used as a defensive tactic to discourage potential outside bidders from launching a hostile takeover. While leveraged recapitalizations are sometimes used as takeover defenses, many firms that adopt them are later acquired regardless. The recapitalization increased shareholder payouts in the short term but also increased Sealed Air's financial risk through higher leverage.

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    Sealed air

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    The document discusses Sealed Air's leveraged recapitalization in 1988. It describes how Sealed Air took on substantial new debt to fund a large special dividend to shareholders, leaving the company highly leveraged. This recapitalization structure was used as a defensive tactic to discourage potential outside bidders from launching a hostile takeover. While leveraged recapitalizations are sometimes used as takeover defenses, many firms that adopt them are later acquired regardless. The recapitalization increased shareholder payouts in the short term but also increased Sealed Air's financial risk through higher leverage.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    366 views10 pages

    Sealed Air

    Uploaded by

    Himanshu Kumar
    The document discusses Sealed Air's leveraged recapitalization in 1988. It describes how Sealed Air took on substantial new debt to fund a large special dividend to shareholders, leaving the company highly leveraged. This recapitalization structure was used as a defensive tactic to discourage potential outside bidders from launching a hostile takeover. While leveraged recapitalizations are sometimes used as takeover defenses, many firms that adopt them are later acquired regardless. The recapitalization increased shareholder payouts in the short term but also increased Sealed Air's financial risk through higher leverage.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 10

    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.

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