RSM 433 Case 2
Executive Summary
Blaine Kitchenware Inc. (BKI), a mid-sized branded small appliances producer for kitchens, is founded in 1927 and is managed by the Blaine Family. With the commitment to high quality and offering diverse kitchen appliances, Blaine has been growing rapidly over the years and went public in 1994. Recently, the company continues to expand its business by outsourcing its production abroad; and over 35% of its revenue comes from outside of U.S.
Blaine is characterized as “highly liquid and debt free” due to its unleveraged capital structure. Consequently, the firm could maintain a low risk of financial distress and a high-level working capital on hand to deal with urgent events and potential acquisition opportunities. However, the capital structure and the payout policies are too conservative and inadequate to generate an industry-average return for BKI’s shareholders. The improvements in excess cash and under-leveraged structures are necessary for Blaine to make.
To deal with the capital structure issues, this report proposes a restructuring plan focusing on a share repurchase financed by cash and new debt issuance. After the analysis of a simple proposal, it is obvious that the financial ratios and cost of capital are strengthened after the bond issuing and share buyback. We then evaluate the amount of debt issuing that is most favorable to the company by analyzing the trade-off involve and under the consideration of the information asymmetry and agency cost. Also, a special dividend plan is introduced and compared with the repurchase. Detailed recommendations and suggestions for BKI are provided at the end of this report.
Table of Content
I. Industry Overview…………………………………………………………………….... 3
II. Company Overview and Analysis …………………………………………………….. 3
a. SWOT Analysis……………………………………………………………………... 3
b. Porters Five Forces Analysis……………………………………………………….. 5
III. Current Capital Structure Analysis…………………………………………………… 5
IV. Restructuring
Blaine Kitchenware Inc. (BKI), a mid-sized branded small appliances producer for kitchens, is founded in 1927 and is managed by the Blaine Family. With the commitment to high quality and offering diverse kitchen appliances, Blaine has been growing rapidly over the years and went public in 1994. Recently, the company continues to expand its business by outsourcing its production abroad; and over 35% of its revenue comes from outside of U.S.
Blaine is characterized as “highly liquid and debt free” due to its unleveraged capital structure. Consequently, the firm could maintain a low risk of financial distress and a high-level working capital on hand to deal with urgent events and potential acquisition opportunities. However, the capital structure and the payout policies are too conservative and inadequate to generate an industry-average return for BKI’s shareholders. The improvements in excess cash and under-leveraged structures are necessary for Blaine to make.
To deal with the capital structure issues, this report proposes a restructuring plan focusing on a share repurchase financed by cash and new debt issuance. After the analysis of a simple proposal, it is obvious that the financial ratios and cost of capital are strengthened after the bond issuing and share buyback. We then evaluate the amount of debt issuing that is most favorable to the company by analyzing the trade-off involve and under the consideration of the information asymmetry and agency cost. Also, a special dividend plan is introduced and compared with the repurchase. Detailed recommendations and suggestions for BKI are provided at the end of this report.
Table of Content
I. Industry Overview…………………………………………………………………….... 3
II. Company Overview and Analysis …………………………………………………….. 3
a. SWOT Analysis……………………………………………………………………... 3
b. Porters Five Forces Analysis……………………………………………………….. 5
III. Current Capital Structure Analysis…………………………………………………… 5
IV. Restructuring