Wrigley Case
INTRODUCTION * Wrigley has a one sided capital structure * Their interest rates has been at their lowest in 50 years * However, they have the leading market share in a stale low technology business * Blanka Dobrynin, the managing partner of Aurora Borealis LLC (a company who used a hedge fund to invest in companies who are in distress, merger arbitrage, change-of-control transactions, and recapitalization) wanted to investigate a potential investment of $3B in Wrigley * Wrigley being an all-equity firm, significantly outperformed the S&P500 Composite Index * In terms of equity, Wrigley’s MV was 13.1B
STATEMENT OF THE PROBLEM * Wrigley was an all equity firm who had a capital structure of 13.1B as I had previously stated * Their problem was to estimate the effect of a leveraged recapitalization. * By doing a leveraged recapitalization, this would have an impact on share value, debt rating, cost of capital, Earnings Per Share, and voting control. * Each of theses elements would effect the company in a different way * This will be discussed as we go throughout the remainder of the presentation
DEBT RATING * Debt rating involved determining if assuming the $3 billion debt would cover the resulting interest payments, as well as if a rating of BB/B is likely. * Based on the interest coverage ratio, which is 1.47, it is questionable that Wrigley would be able to cover the resulting interest payments. This is because an investment coverage ratio of 1.5 or lower questions a company’s ability to meet interest payments. * The interest coverage ratio was calculated by an estimate of the 2002 EBIT divided by the debt interest expense (debt * interest expense). * We calculated the 2002 EBIT by calculating the average growth rate of the EBIT from 1999-2001. This growth rate was calculated to be 8.19% * The investment grade was determined from the market value of equity, thus an AA/A. * The interest
STATEMENT OF THE PROBLEM * Wrigley was an all equity firm who had a capital structure of 13.1B as I had previously stated * Their problem was to estimate the effect of a leveraged recapitalization. * By doing a leveraged recapitalization, this would have an impact on share value, debt rating, cost of capital, Earnings Per Share, and voting control. * Each of theses elements would effect the company in a different way * This will be discussed as we go throughout the remainder of the presentation
DEBT RATING * Debt rating involved determining if assuming the $3 billion debt would cover the resulting interest payments, as well as if a rating of BB/B is likely. * Based on the interest coverage ratio, which is 1.47, it is questionable that Wrigley would be able to cover the resulting interest payments. This is because an investment coverage ratio of 1.5 or lower questions a company’s ability to meet interest payments. * The interest coverage ratio was calculated by an estimate of the 2002 EBIT divided by the debt interest expense (debt * interest expense). * We calculated the 2002 EBIT by calculating the average growth rate of the EBIT from 1999-2001. This growth rate was calculated to be 8.19% * The investment grade was determined from the market value of equity, thus an AA/A. * The interest