Blaine Case

Executive Summary In summary, recommendation by the banker to buy back 14 jillion outstanding shares of Blaine Kitchenware with $ 50 million debt and $209 million bills in hand would result in following financial metric changes * cast up the value of the unfaltering through the benefit of tax income shield from current $960million to $1. 063billion. * The offer results in 3% sum up in EPS from $0. 91 to $0. 93 based on 2006 financial numbers. * An gain of 7. 3% on ROE from 11% to 18. 3% based on 2006 financial numbers. * afterward adjustment, share prices leave behind be $18. 0. Proposed Buy-Back Plan AnalysisAlthough Blaines current financial situation is sound with no debt, its current vestibular sense sheet is under levered and over liquid compare to its peers. The current financial structure earns little comeback on the short-term assets while does not allow the firm to benefit from any debt interest tax shield. The proposed roof structure will benefit the keep compa ny by levering its balance sheet. It will provide an interest tax shield for the income thus increasing the value of the firm for the shareholders. Because interest on debt is a tax-deductible expense, fetching on debt will effectively lower the taxable income allowing the firm to pay less tax.The current large cash and short-term marketable securities on the balance sheet make Blaine an cute target for a take-over. The large cash on balance sheet could effectively be used as a collateral to finance a take-over or merger of Blaine. Such characteristics attract private uprightness firms in which can utilize the over-liquid situation to their advantage. The current get on with nature of business also requires a levered capital structure. A firm in this situation should not follow a pecking order, as it would hold discomfit the value of the firm while making it pleasing for a take-over or merger. slight cash in balance sheet also reduces agency appeal by forcing managers to inve st only in opportunities that are aligned with shareholders vision and interest therefore reducing wasteful investments not benefiting shareholders. As for the future acquisitions, Blaine can all use debt or issue stocks when appropriate. Furthermore the proposed share buy-back will give more control to family investors. Since initial IPO and previous acquisitions has diluted the shares, family control in Blaine has been on decline and a source of concern.The proposed share buy-back will return more control into family shareholder hands further solidifying their support for the upstart capital structure. The repurchase offer would affect both income statement and balance sheet of the firm. In the balance sheet debt is increased by $50 million, cash is reduced by $209 million while equity is reduced by $259 million. The remaining cash can be used to fund seasonal flower operation in combination with additional short-term debt should it be needed. Our EPS will increase by 3% to $0. 93 from current $0. 91 and our ROE will see a large increase from 11% to 18. % further bringing Blaine closer to its competitors. The result of additional debt in the balance sheet will increase the value of the firm from current $960million to $1. 063billion while adjusted share prices will rise to $18. The increase in share value is due to increase in the value of the firm from $960million to $1. 06billion because of levering up the firm since value of any levered firm is its unlevered value plus its tax rate multiplied by its interest intent debt. The $18. 50 offer holds a premium over adjusted future share price of $18 therefore making the proposed capital structure attractive to shareholders.The debt to equity ratio of 2. 5% is still conservative and aligned with the vision of the company not to over utilize debt in its capital structure. Furthermore the increase in Enterprise Value to EBITDA ratio from 9. 9% to 14. 8% will make the firm more costly to be acquired thus less a ttractive for a take-over. A dividend policy in place of the stock repurchase will not provide the same value for the company and its shareholders. Dividends are subjected to higher(prenominal) tax rate compare to capital gain increased due to share buy-back.This discourages shareholders from desire to receive high dividends in place of higher capital gain as share values increase. A comparison is made below between the proposed capital structure and dividend policy. Share buyback One-time special cash dividends Pros Increase EPS/ROE, pos. sign of future earnings, Lower tax rate compare to div policy Happy shareholders, positive sign of future earnings, Cons Limiting liquidity, opportunity cost Limiting liquidity, opportunity cost, higher tax rate compare to capital gain policy Share outstanding Decrease No changeEPS Increase No change ROE Increase Increase In summary we recommend the share buy-back plan, as it will increase the value of the firm, shield position of income from taxes, increase return on equity and lowers agency cost. The increase in value of the firm and lower cash in hand also makes the firm less attractive target of a take-over. Supporting Material baptistery Exhibit 1 Income Statement With buy back Option Operating Results 2004 2005 2006 2006 gross 291,940 307,964 342,251 342,251 Less Cost of Goods Sold 204,265 220,234 249,794 249,794 Gross Profit 87,676 87,731 92,458 92,458 Less Selling, General & Administrative 25,293 27,049 28,512 28,512 Operating Income 62,383 60,682 63,946 63,946 Plus Depreciation & Amortization 6,987 8,213 9,914 9,914 EBITDA 69,370 68,895 73,860 73,860 EBIT 62,383 60,682 63,946 63,946 Plus Other Income (expense) 15,719 16,057 13,506 0 No marketable security income Less Interest 0 0 0 3,375 Tax shield amount Earnings Before Tax 78,101 76,738 77,451 60,571 Less Taxes 24,989 24,303 23,821 18,629 nett Incom e 53,112 52,435 53,630 41,942 Dividends 18,589 22,871 28,345 22,167 Assume same 53% div policy Margins Revenue Growth 3. 2% 5. 5% 11. 1% 0. 0% Gross Margin 30. 0% 28. 5% 27. 0% 27. 0% EBIT Margin 21. 4% 19. 7% 18. 7% 18. 7% EBITDA Margin 23. 8% 22. 4% 21. 6% 21. 6% Effective Tax Rate (1) 32. 0% 31. 7% 30. 8% 30. 8% Net Income Margin 18. 2% 17. 0% 15. 7% 12. 3% Dividend payout ratio 35. 0% 43. 6% 52. 9% 52. 9% Case Exhibit 2 Balance Sheet With Repurchase Option Assets 2004 2005 2006 2006 Cash & Cash Equivalents 67,391 70,853 66,557 21,866 Marketable Securities 218,403 196,763 164,309 0 Accounts Receivable 40,709 43,235 48,780 48,780 Inventory 47,262 49,728 54,874 54,874 Other Current Assets 2,586 3,871 5,157 5,157 full Current Assets 376,351 364,449 339,678 130,678 Property, Plant & Equipment 99,402 138,546 174,321 174,321 Goodwill 8,134 20,439 38,281 38,2 81 Other Assets 13,331 27,394 39,973 39,973 Total Assets 497,217 550,829 592,253 383,253 Liabilities & Shareholders Equity Accounts Payable 26,106 28,589 31,936 31,936 Accrued Liabilities 22,605 24,921 27,761 27,761 Taxes Payable 14,225 17,196 16,884 16,884 Total Current Liabilities 62,935 70,705 76,581 76,581 Other liabilities 1,794 3,151 4,814 4,814 debt 0 0 0 50,000 Deferred Taxes 15,111 18,434 22,495 22,495 Total Liabilities 79,840 92,290 103,890 153,890 Shareholders Equity 417,377 458,538 488,363 229,363 Total Liabilities & Shareholders Equity 497,217 550,829 592,253 383,253 EPS Per Outstanding Shares of Before $0. 908 59,052,083 After $0. 931 45,052,083 Improvement 2. 51% ROE Book Equity Before 10. 98% $488,363 After 18. 9% $229,363 Equity Value Vu $959,596 VL $1,063,196 New Share Prices $18. 00 Case Exhibit 3 Peer Comparison Home Hearth Design AutoTech Appliances XQL Corp. Bunkerhill, Inc. EasyLiving Systems Blaine Kitchenware Blaine Kitchenware After Repurchase Revenue $589,747 $18,080,000 $4,313,300 $3,671,100 $188,955 $342,251 342251. 25 EBIT 106,763 2,505,200 721,297 566,099 19,613 63,946 63945. 5 EBITDA 119,190 3,055,200 796,497 610,399 23,356 73,860 73,860 Net income $53,698 $1,416,012 $412,307 $335,073 $13,173 $53,630 41941. 55799 Cash securities $21,495 $536,099 $21,425 $153,680 $242,102 $230,866 21,866 Net working capital* 54,316 1,247,520 353,691 334,804 21,220 32,231 Net fixed assets 900,803 7,463,564 3,322,837 815,304 68,788 174,321 174,321 Total assets $976,613 $9,247,183 $3,697,952 $1,303,788 $332,110 $592,253 383,253 Net debt (1) $350,798 $4,437,314 $950,802 $238,056 ($64,800) ($230,866) 28,134 Total debt 372,293 4,973,413 972,227 391,736 177,302 50,000 Book equity $475,377 $3,283,000 $2,109,400 $804,400 $94,919 $488,363 229,363 Mark et capitalization 776,427 13,978,375 5,290,145 3,962,780 418,749 959,596 1063196. 354 Enterprise value (MVIC) $1,127,226 $18,415,689 $6,240,947 $4,200,836 $353,949 $728,730 1,091,330 Equity beta 1. 03 1. 24 0. 96 0. 2 0. 67 0. 56 0. 7 LTM Trading Multiples MVIC/Revenue 1. 91x 1. 02x 1. 45x 1. 14x 1. 87x 2. 13x 3. 19x MVIC/EBIT 10. 56x 7. 35x 8. 65x 7. 42x 18. 05x 11. 40x 17. 07x MVIC/EBITDA 9. 46x 6. 03x 7. 84x 6. 88x 15. 15x 9. 87x 14. 78x Market/Book equity 1. 63x 4. 26x 2. 51x 4. 93x 4. 41x 1. 96x 4. 64x Net Debt/Equity 45. 18% 31. 74% 17. 97% 6. 01% -15. 47% -24. 06% 2. 65% Net Debt/Enterprise Value 31. 12% 24. 10% 15. 23% 5. 67% -18. 31% -31. 68% 2. 58%