Stock Market and Debt
The Wm. Wrigley Jr. Company: Capital Structure, Valuation, and Cost of Capital
Wm. Wrigley Jr. Company is a well-known leader that manufactures confections such as gums, mints, hard and chewy candies, lollipops, and chocolates. The company was founded in 1891 and its headquarters is based in Chicago, Illinois. It has operations in over 40 countries and distributes many of its world famous brand such as Double mint, Extra, Skittles, Orbit to more than 180 countries. Investment strategy of Blanka Dobrynin, managing partner of Aurora Borealis LLC focused on distressed companies, merger arbitrage, change of control transactions, and recapitalizations. They are trying to buy a large stake in the company and thereby force the management to reorganize the capital structure by raising the debt and using it to pay the dividends or buy back the shares. As a part of evaluating they wanted to find if they are inefficiently financed or not. Under the proposed recapitalization, Wrigley would borrow $3 billion and use it either to pay equivalent dividends or to repurchase equivalent shares. Chandler, an associate in Aurora Borealis, was calculating the impact of this debt on the company. This would affect firm’s share value, cost of capital, debt coverage, earnings per share, and voting control. The debt can increase the value of firm by providing appropriate tax shields. This will give Wrigley a rating of BB/B, and as a result the interest rate charged will be 13%. Chandler knows that maximum value will be achieved when WACC is minimized and she is estimating the impact of recapitalization on cost of equity and WACC. Management is being forced to reorganize the capital structure by raising the debt and using it to pay the dividends or buy back the shares because Blanka Dobrynin is trying to buy a large stake in the company. The buyback of shares would increase the EPS for the firm as a natural consequence of reduction in number of shares outstanding. The increase in EPS
Wm. Wrigley Jr. Company is a well-known leader that manufactures confections such as gums, mints, hard and chewy candies, lollipops, and chocolates. The company was founded in 1891 and its headquarters is based in Chicago, Illinois. It has operations in over 40 countries and distributes many of its world famous brand such as Double mint, Extra, Skittles, Orbit to more than 180 countries. Investment strategy of Blanka Dobrynin, managing partner of Aurora Borealis LLC focused on distressed companies, merger arbitrage, change of control transactions, and recapitalizations. They are trying to buy a large stake in the company and thereby force the management to reorganize the capital structure by raising the debt and using it to pay the dividends or buy back the shares. As a part of evaluating they wanted to find if they are inefficiently financed or not. Under the proposed recapitalization, Wrigley would borrow $3 billion and use it either to pay equivalent dividends or to repurchase equivalent shares. Chandler, an associate in Aurora Borealis, was calculating the impact of this debt on the company. This would affect firm’s share value, cost of capital, debt coverage, earnings per share, and voting control. The debt can increase the value of firm by providing appropriate tax shields. This will give Wrigley a rating of BB/B, and as a result the interest rate charged will be 13%. Chandler knows that maximum value will be achieved when WACC is minimized and she is estimating the impact of recapitalization on cost of equity and WACC. Management is being forced to reorganize the capital structure by raising the debt and using it to pay the dividends or buy back the shares because Blanka Dobrynin is trying to buy a large stake in the company. The buyback of shares would increase the EPS for the firm as a natural consequence of reduction in number of shares outstanding. The increase in EPS