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    Sealed Air Corporation's Leveraged Recapitalization - Richa

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    nishant kumar
    The document discusses Sealed Air Corporation's leveraged recapitalization in 1989. Sealed Air had $33 million in debt and $54 million in cash. It changed its capital structure by paying a special $40 per share dividend totaling $330 million, financed with $307 million in new borrowing. This increased debt to 125% of asset book value and 65% of market value. In the following 5 years, operating profit grew 70% while assets grew only 9%, and the stock price outperformed the market by 400%, demonstrating the success of the leveraged recapitalization.

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    Sealed Air Corporation's Leveraged Recapitalization - Richa

    Uploaded by

    nishant kumar
    1K views3 pages
    The document discusses Sealed Air Corporation's leveraged recapitalization in 1989. Sealed Air had $33 million in debt and $54 million in cash. It changed its capital structure by paying a special $40 per share dividend totaling $330 million, financed with $307 million in new borrowing. This increased debt to 125% of asset book value and 65% of market value. In the following 5 years, operating profit grew 70% while assets grew only 9%, and the stock price outperformed the market by 400%, demonstrating the success of the leveraged recapitalization.

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    leveraged recapitalization case

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    Sealed Air Corporation’s Leveraged Recapitalization - Richa

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    The document discusses Sealed Air Corporation's leveraged recapitalization in 1989. Sealed Air had $33 million in debt and $54 million in cash. It changed its capital structure by paying a special $40 per share dividend totaling $330 million, financed with $307 million in new borrowing. This increased debt to 125% of asset book value and 65% of market value. In the following 5 years, operating profit grew 70% while assets grew only 9%, and the stock price outperformed the market by 400%, demonstrating the success of the leveraged recapitalization.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    1K views3 pages

    Sealed Air Corporation's Leveraged Recapitalization - Richa

    Uploaded by

    nishant kumar
    The document discusses Sealed Air Corporation's leveraged recapitalization in 1989. Sealed Air had $33 million in debt and $54 million in cash. It changed its capital structure by paying a special $40 per share dividend totaling $330 million, financed with $307 million in new borrowing. This increased debt to 125% of asset book value and 65% of market value. In the following 5 years, operating profit grew 70% while assets grew only 9%, and the stock price outperformed the market by 400%, demonstrating the success of the leveraged recapitalization.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
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    Sealed Air Corporation manufactured packaging materials and adopted a program called World Class Manufacturing to improve efficiency. In 1989, it had $33M in debt and $54M in cash. It changed its capital structure by paying a $40/share special dividend of $330M, borrowing most of the value of its stock.

    Sealed Air's management considered launching a capital expenditure program, buying another company, increasing the regular dividend, or starting a securities portfolio to use the company's cash.

    Shareholders felt the leverage would make the company riskier, banks had a negative reaction, the company would have negative net worth, and many banks could not approve loans for companies with negative net worth.

    A REPORT ON

    SEALED AIR CORPORATION’S


    LEVERAGED RECAPITALIZATION
    SUBMITTED BY
    AASTHA JAIN
    ABHIRUP BOSE
    RICHA AGARWAL
    SAURAV DROLIA

    GMP 19-20, SECTION – A


    Summary

    Sealed Air Corporation manufactured a wide variety of packaging materials such as plastic packing
    bubbles and Jiffy padded envelopes. It adopted a program called World Class Manufacturing to improve
    manufacturing efficiency and product quality. In 1989, Sealed Air was having $33 million in total debt
    and over $54 million in cash. Sealed Air changed its capital structure by paying a special one-time
    dividend of $40 a share and the total cash payout amounted to $330 million,with about 8.25 million
    shares in trading. The company borrowed almost 90% of the market value(approximately $307 million),
    of its common stock and paid it out as a special dividend to shareholders and the company went from
    being a net lender to being a heavy borrower. Debt now amounted to 125% of the book value of the
    assets and 65% of their market value.

    Until the change in capital structure, Sealed Air’s performance was no better than that of the industry
    as a whole. But the change was a prelude to a sharp improvement in the company’s operating
    performance. In the following 5 years, operating profit increased by 70% while the asset base grew by
    only 9%. This improvement in profitability was more than matched by the company’s stock market
    performance. The initial effect of Sealed Air’s announced change in capital structure was a jump of 10%
    in the stock price. Over the next 5½ years the stock outperformed the market by 400%.

    Management purposefully and successfully used the leveraged recapitalization as a watershed event,
    creating a crisis that disrupted the status quo and promoted internal change, which included
    establishing a new objective, changing compensation systems, and reorganizing manufacturing and
    capital budgeting processes. This decision provides a context in which to explore how financing
    decisions affect organizational structure, management decision making, and firm value. It gives one an
    opportunity to analyze the concept of free cash flow, its effect on stock market prices and firm value,
    and the disciplinary role of high leverage.
    Problem

    1. Sealed Air's management faced many alternative uses for the company's cash. Among them
    were
    a. launching a capital expenditure program,
    b. buying another company,
    c. increasing the regular dividend,
    d. starting to manage a portfolio of securities.

    One could argue that the decision to recapitalize demonstrates a failure on the part of the top
    management team; they should have been able to find something productive to do with the money.

    2. Many shareholders felt this leverage would make the company riskier.
    3. The banks had a negative reaction.
    4. Management, as shareholders, would receive a substantial payout.
    5. The company would end up with negative net worth.
    6. Many banks could not get a deal with negative net worth past the loan committee.

    Analysis

    Despite these problems, Sealed Air managed to finance the special dividend. Banker's Trust led a
    syndicate that loaned 137 under a senior secured bank credit agreement. The loan imposed some
    stringent contraints on the company, including severe limitations on capital expenditures. The company
    also issued $170 million in subordinated bridge notes which were later refinanced with a public offering
    of senior subordinated notes. The remainder of the $340 million came from cash

    Result

    Following the announcement of the dividend, the comany's share price rose briefly -- then, after the
    share went ex-dividend, it fell to $12. After that, it rose steadly -- to $20 by the end of the year, and
    much higher in following years, as the company gradually brought its debt down to a more standard
    level.

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