Ashish Gupta Amit Singh Amit kr Sinha Maneesh D Singh Prem Kumar Gaurav Kr.

Singh

Winfield Refuse Management Inc. Raising Debt vs. Equity

Executive Summary
Objective What is the best financing option for the $125M acquisition of Mott-Pliese Integrated Solutions (MPIS)?

Alternatives

1. 2. 3.

Debt with Fixed Principal Repayments Debt Equity

Recommendation

Winfield should finance the $125M through issue of bonds with no principal repayments

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Concerns from Last Board Discussion

Concern
Andrea Winfield Additional debt will increase risk and will lead to wild swing in stock price

Joseph Winfield

By issuing 7.5M shares, Winfield will only have to pay $7.5M in dividends Market price is too low (based on Price-to-book comparable). Issuing shares at low price and loss of management control is a disservice to current stockholders.

Ted Kale

Joseph Tendi

Issuing Common Stock will dilute the EPS to $1.91. Using Debt could bump the EPS upto $ 2.51
Other major companies have long-term debt in capital structure while Winfield is unusual
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James Gitanga

Introduction
Winfield MPIS
Winfield + MPIS

Net Income $27M +

Net Income $15M =

Net Income $42M

Region
Midwest

Region Mid-Atlantic & Midwest

Winfield Refuse Management

Region Midwest & MidAtlantic

4

Winfields Current Financial Position

Winfields Revenue and Net Income
Revenue
$500 $400

Net Income
$50 $40 $30 $20 $10 $0

$300 $200 $100 $0 2006 2007 2008 2009 2010 2011 2012E

Industry: Debt-to-Equity
Equity Debt

50% 50%

Winfield Refuse Management

Net Income ($M)

Revenue ($M)

Financing Alternatives
Capital Needs: $125M
1. Debt with Fixed Principal Repayments 15 years 6.5% interest rate $6.25M annual principal payment
Debt with Fixed Principal Repayment Schedule
45 40 35 30 25 20 15 10 6.25 6.25 2.44

2. Debt 15 years 6.5% interest rate Full principal paid at Year 15

Debt Schedule
140
37.50

Interest

Principal

Interest

Principal

125.00

120 Cash Outflows ($M) 100 80 60 40

Cash Outflows ($M)

5 8.13 0

20
0

8.13

Year

Year

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Financing Alternatives Continued:

Capital Needs: $125M
3. Equity 7.5M new shares @ $17.75 Dividend Policy is $1.00/Share

Dividend Payout Schedule

180 160 Cash Outflows ($M) 140 120 100 80 60 40 20 0 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 7.50 Dividend Dividend Terminal Value

Year

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Decision Criteria

Impact on Firm: Total Cost of Financing

Impact on Shareholders: Earnings Per Share

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Cost of Financing

205.00 200.00 195.00 190.00 185.00 180.00 175.00 170.00 165.00 160.00 Cost of Financing Among all the financing options considered, Debt (with no principal repayments) has the lowest cost of financing
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Debt With Pricinpal repayment Debt with Full principal repayment

Earnings Per Share

Pre-acquisition EPS: $1.83
Debt Pros No impact on shares Equity No impact on earnings

Cons
Expected EPS
$3.50 $3.00 Earnings Per Share $2.50 $2.00 $1.50 $1.00 $0.50 $0.00 $46 $51

Reduced earnings by interest

$ 2.51

Increased number of shares

$1.91

Post-acquisition Earnings Per Share

EPS (Debt)

EPS(Equity)

Expected EBIT of 66M

$56 $61 EBIT ($M) $66 $71 $76

EPS(Bond with principal repayment)

Debt financing options provide the highest expected EPS under likely EBIT scenarios.
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Adjusted Earnings Per Share

Adjusted EPS = (NI-principal repayment)/ number of shares Higher earnings per share with the bond option, even treating principal repayments as expenses Adjusted Post-acquisition EPS
$3.00 Adjusted Earnings Per Share $2.50 $2.00 $1.50 EPS( Debt, including principal repayment) $1.00 $0.50

Expected EBIT of 66M

EPS(Equity)

$0.00

EBIT ($M)

Even with Principal Repayments included on an Adjusted EPS basis, EPS with Debt Financing would be greater than EPS with Equity Financing
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Evaluation of Options & Summary

Debt with Principal Repayment

Decision Criteria

Debt

Equity

Cost of Financing
Expected EPS

represents the better alternative

represents the lesser alternative

Other considerations By issuing debt, Winfield would avoid control dilution Flexibilities sufficient cash flow to meet commitments under all options Winfield should finance the $125M through issue of bonds with no principal repayments
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