BLAINE KITCHENWARE, Inc.

Capital Structure
BY Akash Mehta 213 Ankit Srivastava 373 Manalp Mehta - 314

Nitish shah 214

Aditya Shekar 371

Raj Shah - 215

Nikunj Loya - 313

Zeus Paranjape - 315

Introduction
Blaine Kitchenware was a mid-sized producer of branded small appliances primarily used in residential kitchens. Victor Dubisnki, an engineer by training, became the companys CEO IN 1992. Blaine produced home appliances, such as irons & vacuum cleaners which were easier to use. By 2006, the company widened their range of appliances used for food and beverage preparation including toasters, small ovens, mixers, pressure cookers and coffee makers.

Market position
Blaine had lesser than 10% of the $2.3 billion U.S. market for small kitchen appliances. Blaine had competition from inexpensive imports and aggressive pricing by the mass merchandisers In recent years, Blaine had been expanding into foreign markets. The company shipped approximately 14 million units a year.

Kitchen Appliance Industry

There were three major segments in the small kitchen appliance industry:
Food preparation appliances Cooking appliances Beverage making appliances

The majority of its revenues came from cooking appliances and food preparation appliances.

Strategies applied by Victor Dubinski

The company completed an Initial Public Offering (IPO) in 1994. Beginning in the 1990s, the company gradually moved its production abroad. BKI focused on rounding out and complementing its product offerings by acquiring small independent manufacturers or the kitchen appliance product lines of large diversified manufacturers.

Companys position
The recent development of the firm was a consolidation for the fragmented market conditions. All acquisitions by BKI were done either through cash or BKI stocks. For the last 3 years, the margin had dropped despite the introduction of their high-end product range. Inventory problems.

Financial Performance
Blaine did not lower the prices although the competitors were doing so. ROE levels were as low as 11% No outside borrowings. Very conservative approach. Current dividend payout levels were highly unsustainable.

The Decision - Dilemma

Need to keep in mind the implications of the decision taken. Puzzle regarding 3 different routes that Blaine could take: BKI should not go for repurchase of shares at all. Partial repurchase by its current cash and cash equivalents. Complete buyback of the market float.

Buyback
A company reacquiring/repurchasing its own shares. A means for the company to invest in itself. Leads to decrease in the number of shares outstanding in the market. Enhancement of the shareholders wealth .

Common Types of Buy Back of Shares

An equal access scheme A selective buy-back Buyback shares on the stock exchange

Why companies opt for buyback?

To increase the value of shares still available To eliminate any threats by shareholders To use Cash Surplus

Why companies opt for buyback?

To increase the EPS of the companys shares Tax Gain Exit option

Methods of Buyback
Tender Offer Open Market Book-Building Process

Advantages of Buyback of Shares

Increase confidence in management Higher share price Increase RoE Reduce takeover chances

Disadvantages of Buyback
Sending negative signals Company may pay too much for its own shares Backfire for a company competing in high-growth industry

SCENARIO 1
B.K.I should not go for any Buyback.

Calculations
Total no. of shares: 59.052 Million Net Income: 53.630 Million Hence, Earning per share = 53.630 59.052 = 0.91 = Market price of the share: $16.25 Market price of the share Price to earnings ratio = EPS 16.25 = 0.91 =17.85
.

Calculation
So for complete buyback Blaine needs to repurchase 38% of 59.052 million shares, that is 22.439 million shares. Therefore, total number of shares left after complete buy-back = 62% of 59.052 million shares = 36.612 million Shares. Calculation of ROE:
Net income = $ 53.630 Million Shareholders' equity = $ 488.363 Million Therefore, ROE =

100

$ 53.630 million * 100 $ 488.363 million

= 10.98%

Inferences
This scenario will maintain the company status as under leveraged and highly liquid This scenario fails to create value for the shareholders and both minority shareholders and promoters will suffer There is a need to change the current capital structure as it is providing lower returns

Scenario 2
A partial buy-back using only cash and cash equivalents/ Market securities

Calculations
Total Cash and Cash Equivalents = $66.557 Million We are keeping 10% of the cash and cash equivalent aside for daily operations. Therefore 6.557 Million have been kept as buffer for rotating working capital requirements. Remaining Cash and Cash equivalents = $60 Million Marketable Securities = 164.309 Million Total amount available for buy-back = 224.309 Million

Calculations
Now, Share Price = $ 16.25 Therefore, No. Of Shares bought = 224.309 16.25

= 13.80 million
These shares are retired. Therefore the no. of remaining shares = 59.052-13.80 = 45.252 million

Calculations
Calculations for EPS
Earnings per share = Net income in the year 2006 Total no. of Shares

Therefore, net earnings after reducing 4.92% of $224.309 million = 53.630 (0.0492 * 224.309) = 53.630 11.039 = 42.594 million Therefore, EPS = 42.594 45.252

= $0.94

Calculations
Expected Market price of the share now = Expected EPS * P/E ratio Assuming: P/E ratio remains constant Therefore, Expected Market price = 0.94 * 17.85 = $16.779

Increase in value per share for shareholders = $16.779 - $16.25

= $0.529 Money spent per share for partial buyback = = $3.793 Therefore, increase in value per share is lesser than money spent per share $224 million 59.052 million

Calculations
Calculations for ROE
Net income = $ 42.594 Shareholders' equity = $ 488.363 million - $ 224.00 million = $ 264.363 million

Shareholders' equity will be reduced as cash and cash equivalents and market securities are being used up for the buyback indication a reduction in the asset side of the balance sheet of the company and thus an appropriate adjustment will have to be done on the liabilities side as well.
Therefore ROE = ($ 42.594 million/ $ 264.363 million) * 100

= 16.11%

Inference
The companys management which appears to be reluctant to raise any debt, will not have to forego its zero debt policy The company will have a better Return on Equity The company might have to raise debt if it has to continue its growth through inorganic route The share holders will have a better value after this whole exercise The management will have an increased stake and will have more discretion in making decisions

Scenario 3
Whether B.K.I should go for complete share repurchase by raising debt

Calculations
Earning per share: 53.630 59.052 = 0.91 = Market price of the share: $16.25
.

Price to earnings ratio =

16.25 0.91 =17.85 =

Market price of the share EPS

So for complete buyback Blaine needs to repurchase 38% of 59.052 million shares, that is 22.439 million shares. Therefore, total number of shares left after complete buy-back = 62% of 59.052 million shares = 36.612 million Shares

Calculations
Calculation for the amount of debt to be raised:
No. of shares to be bought back = 22.439 million shares Therefore the total price of all the shares to be bought back = 22.439*$18.5 = $415.121 million

Less cash and cash equivalents and market securities = $224.439 million
Therefore the debt to be raised for complete buyback = 415.121- 224.309 = $190.6825 million @ a rate of 6.35%

Calculations
Calculation of EPS:
Interest to be paid = 6.75 % of 190.812 million dollars: = $ 12.879 million Now, EBT in the year 2006 = $ 77.451million

Less: loss due to use up ofcash & cash equivalents and

market securities @ 4.92% (224.439*4.92)= $ 11.045million Revised EBT = $ 66.406 Less interest (@ 6.75%) = $ 12.871 Earnings before tax = $ 53.535 Tax (@ 40%) = $ 21.414million Net income = $ 32.121 million

Calculations

EPS = =

32.121 36.612

= $0.877 Expected Market price = EPS* P/E ratio = 0.877* 17.85 = $ 15.654

Calculations
The money spent per share in case of complete buyback of shares: Total price for the entire market float to be bought back = Total no. of outstanding shares $ 415.121 million = 52.904million = $ 7.84 And since the new market price is $ 15.654 and the earlier market price was $ 16.25, Therefore, decrease in value per share for the shareholders = 16.25-15.654 = $ .596

Hence, in this case the outgo per share is greater than the value per share; it does not lead to creation of more shareholder value (for the shareholders who retain shares)

Calculations
Calculation of ROE:
Net income = $ 24.4824million Shareholders' equity =263.924 $ million Therefore, ROE = ($ 32.121million/ $ 263.924 million) * 100

= 12.10.%

Inference
The company will have to raise considerable debt for the required buyback The promoter will have the complete stake and absolute decision making powers, dividend policy can be made suiting the familys need. The companys debt-equity ratio will remain below 1 which is comfortable

The return on equity will improve which will help family realize better value for their stake
The minority shareholders will gain in the form of 13.48% premium The complete stake in hands will provide a buffer that may allow company to issue shares in case of an acquisition without reducing the promoters stake below crucial 51% level.

Decision Making [Conclusion]

No Repurchase Vs Repurchase Partial Repurchase using Cash and Cash Equivalents Vs Complete Repurchase by raising Debt

No Repurchase Vs Repurchase
No Repurchase Maintain the company status as under leveraged and highly liquid. Repurchase The Company is buying back the shares as it is making more profits so improves the companys status. Will create more value for the shareholders and thus not making the minority shareholders suffer. Higher Return on Equity and thus will not need to change the Capital Structure

Fails to create value for the shareholders.

Current Capital Structure providing lower returns.

Inference
Repurchase of Shares is required.

Partial Buy Back Vs Complete Buy Back

Partial Buy Back Will not have to forego its no debt policy. Management will have a lesser stake than if they completely buy back the shares. Complete Buy Back Will have to raise considerable debt for the required buyback. Promoter will have the complete stake and absolute decision making powers, dividend policy can be made suiting the familys need.

No great benefit to the minority shareholders in the company but a slight premium.

Not just eh Family but the minority shareholders will gain in the form of 13.48% premium from this buy back.

Inference
Complete buy back is the most profitable scenario, thus we should do a complete buy back by raising debts.