Sealed Air Case
Sealed Air Corp.
Leveraged Recapitalization (1989)
Case Study
Abstract
The following report outlines the basics of a leveraged recapitalization, the benefits and consequences of a leveraged recapitalization, and ultimately Gator Consulting’s recommendations for when and how to use leveraged recapitalization. Much of this discussion is explained by citing a case study involving Sealed Air Corporation as a way to demonstrate a specific positive instance in the use of leveraged recapitalization.
Leveraged Recapitalization
Leveraged recapitalization is a financial strategy in which a company will take on large amounts of debt to either issue a large dividend or repurchase shares. The goal is to give as much back to a company’s shareholders as possible. This in part lowers the company’s overall Weighted Average Cost of Capital (WACC) since the cost of issuing debt is less expensive than issuing stock as debt holders are first in line during a liquidation of a company’s assets during bankruptcy. In other words, equity owners have more at stake than debt holder so more risk equals higher rates. Also, issuing debt provides a tax shelter as interest is tax deductible. This drastic approach to restructuring a company’s capital structure is still viewed as controversial as financial experts continue to weigh the pros and cons of going through a leveraged recapitalization.# Gator Consulting’s view is leveraged recapitalizations work only in very specific circumstances such as the Sealed Air Case.
Sealed Air Case Study
Sealed Air drew large, steady cash flows over the previous several decades under the protection of its patent portfolio of innovative packaging material. While the company continued to create large cash flow, the corporation was facing an aging patent portfolio that was quickly reaching expiration. Without product innovation, the company faced price cutting competitors, and would need to cut manufacturing costs to remain competitive.
Leveraged Recapitalization (1989)
Case Study
Abstract
The following report outlines the basics of a leveraged recapitalization, the benefits and consequences of a leveraged recapitalization, and ultimately Gator Consulting’s recommendations for when and how to use leveraged recapitalization. Much of this discussion is explained by citing a case study involving Sealed Air Corporation as a way to demonstrate a specific positive instance in the use of leveraged recapitalization.
Leveraged Recapitalization
Leveraged recapitalization is a financial strategy in which a company will take on large amounts of debt to either issue a large dividend or repurchase shares. The goal is to give as much back to a company’s shareholders as possible. This in part lowers the company’s overall Weighted Average Cost of Capital (WACC) since the cost of issuing debt is less expensive than issuing stock as debt holders are first in line during a liquidation of a company’s assets during bankruptcy. In other words, equity owners have more at stake than debt holder so more risk equals higher rates. Also, issuing debt provides a tax shelter as interest is tax deductible. This drastic approach to restructuring a company’s capital structure is still viewed as controversial as financial experts continue to weigh the pros and cons of going through a leveraged recapitalization.# Gator Consulting’s view is leveraged recapitalizations work only in very specific circumstances such as the Sealed Air Case.
Sealed Air Case Study
Sealed Air drew large, steady cash flows over the previous several decades under the protection of its patent portfolio of innovative packaging material. While the company continued to create large cash flow, the corporation was facing an aging patent portfolio that was quickly reaching expiration. Without product innovation, the company faced price cutting competitors, and would need to cut manufacturing costs to remain competitive.