BLAINE KITCHENWARE

INC
CASE STUDY

PRESENTED BY : Abdur Raqeeb

 Pre buy back WACC ,EBIT, interest
expense other income ,ROE BKI
• Total no of shares 59.052 Million
• Net Income: 48.477 Million Hence
• Earning per share: Net Income/Total No. of shares = 48.477/59.052
• = 0.821
• Market price of the share:
• $16.25Price to earnings ratio = Market price of the share/EPS =16.25/0.821
=19.79
• Calculation of ROE:
• ROE = ($ 48.477 million/ $ 488.363 million)* 100 = 9.926%

• Conclusion:
• 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
 Post buy back WACC ,EBIT, interest
expense other income ,ROE BKI
• When Blaine repurchases its entire
• Assumption:
1. The controlling family of Blaine Kitchenware Inc. still owns 62% of
its average
• outstanding shares and the market float is 38% of the total
outstanding shares.
2. As in case of partial buyback, the company will use all of its cash
and cash equivalents
• (except some about 10 % for its daily operations), and market
securities and for the
• remaining amount required for the total buyback, Blaine will raise a
debt at an interest
• rate of 6.35 % (assuming that the company has a rating of “a” on
Moody’s scales of
• corporate ratings.)
• 3. The shares are bought back at a premium of 13.8% on the market
price of $16.25/share
• i.e. at $18.5/share, because otherwise the outside investors would not
be interested to
• give up their shares at the existing share price as they are expecting it to
increase in
• the coming years considering the profitability of the company.
• 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 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 = $224.309 million
• Therefore the debt to be raised for complete buyback = 415.121- 224.309
• = $190.812 million @ a rate of 6.35%
• Calculation of EPS:
• Interest to be paid = 6.35 % of 190.812 million dollars:
• = $ 12.116 million
• Now, EBIT in the year 2006 = $ 70.010 million
• Less: loss due to use up of
• cash & cash equivalents and
• market securities @ 4.92% = $ 11.036 million
• Revised EBIT = $ 58.974 million
• Less interest (@ 6.35%) = $ 12.116 million
• Earnings before tax = $ 46.858 million
• Tax (@ 40%) = $ 18.743 million
• Net income = $ 28.115 million
• EPS = Net income/total no. of shares remaining
• = 28.115/ 36.612
• = $0.768
• Expected Market price = EPS* P/E ratio
• = 0.768* 19.79
• = $ 15.199
• 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/59.052 million
• = $ 7.029
• And since the new market price is $ 15.199 and the earlier market price was $ 16.25,
• Therefore, decrease in value per share for the shareholders = 16.25-15.199
• = $ 1.051
• 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)
• Calculation of ROE:
• Net income = $ 28.115 million
• Shareholders' equity = $ 264.363 million
• Therefore, ROE = ($ 28.115 million/ $ 264.363 million) * 100
• = 10.635 %
• Conclusion:
• 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 family’s need
• The company’s 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 promoter’s stake below
crucial
• 51% leve