Case Summary:

M/s Swedish Match, formed by Mr. Ivan Kreugar in 1916 after merging different
match companies, is engaged in the production of smokeless tobacco, cigars,
matches, and lighters. Smokeless tobacco, cigars and other tobacco products
represented 89% of the companys sales in 2004, whereas match business
contributed mere 11% of sales and 1% of operating income. Products of the
company are globally with Scandinavia, the U.S, and the rest of the world
representing approx.. one-third of the company sales. Swedish Match had a
conservative policy in all financial matters. At the time of firms IPO in 1996,
management had decided to target book equity of at least 30% of assets. The
firm paid high dividends and made some share re-purchases. For a period,
leverage had increased due to acquisitions in the cigar area but now is largely
paid off. The firm had a credit rating of A- from rating agency S&P.
Now the company is in the process of a lookout for a new financial policy,
including how to measure leverage and what targets to apply.
Mr. Lars Dahlgren, recently appointed CFO of the firm, is of the view that this is
good time to reconsider the companys financial policies because of following
factors:
(i)

(ii)

Sweden had recently instituted a new corporation law that allowed firm
to repurchase shares even if it resulted in negative consolidated book
equity for the group.
A continuation of the current policy would reduce leverage in the next
few years and Mr. Dahlgren viewed several potential benefits of taking
on more debt. (a) Leverage reduced the corporate income tax bill. In
most countries corporate income tax rate was 28% and was expected
to remain same. (b) Some viewed excess cash or debt capacity
negatively, seeing them as potentially leading to waste and
inefficiency.

Current Discussion: M/s Swedish Match has availed bank loans to fund acquisition
of several cigar firms. However the debt is now getting rapidly reduced due to
which Leverage ratio (the ratio of debt to capital) of the firm is projected to be
very low soon.
Mr. Lars Dahlgren, recently appointed CFO of the firm is now contemplating
issuing Euro denominated bonds and an aggressive share repurchase
programme. Dahlgren is very well aware that the board would raise several
concerns, viz.:
(i)

Would the new leverage affect the firms ability to undertake

acquisitions?

(ii)

Would the firms ability to repay its debt be robust even in a cyclical
downturn?

In addition to the above, Dahgren also pondered over the appropriate amount
and structure for a bond issue.