Sealed Air

Corporate Governance Assignment IIM Indore EPGP 2011-12

Group 1: Deep Mathur | Deepak Sharma | Kapil Jain | Nikhil Kangutkar | Riju Siddiquie | Shreenath Ukidve

Sealed Air

Q1. How much value was created in the Sealed Air recapitalization? Where did it come from? Answer: The market value was created by the recapitalization of Sealed air. The various events at which market cap increased due to the recapitalization is shown in the table below. At one point in time the market value advantage was $141 million when the stock price was at a maximum of $23. The share price did not fall ex divided as much as the dividend payout. The large part of the value has come because the market is valuing the price and advantages of tax shields from the substantial debt that the company has undertaken as part of the recapitalization process.

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Sealed Air
Q2. Do leveraged recapitalizations generally create value? Analyze with evidence. Valuations for old economy firms generally trail new economy sectors. A way out is to grow through acquisitions but there are limits to this strategy: integration risk, price risk and added leverage can create a new set of worries for the market.

Recapitalizations can provide the answer to this. By undertaking a leveraged capitalization, a firm can significantly increase its financial leverage and sharply reduce its publicly traded equity. Shareholders both new investors in the recap and those existing shareholders who retain their shares after the transaction benefit from deleveraging, which magnifies operating returns and boosts returns on equity. Good candidates for this type of transaction are firms in mature, non cyclical industries that have slow growth rates; generate strong and predictable cash flows, have low capital requirements, and have low levels of debt. The best candidates for this transaction are well-managed firms that consider themselves undervalued by the public markets and find themselves unable to lift their share prices meaningfully. Ways of effecting Recapitalization

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Sealed Air

In a study conducted by Morgan Stanley on 25 leveraged recapitalizations from 1984 to 1990, substantial value for shareholders were shown to be created. The different ways in which shareholder value has been created are: 1. Initial Cash Distribution: The first day distributions averaged 98% of pre announcement value of equity. 2. Once the transaction closed, many firms immediately began to trade at higher EV/EBIDTA multiples. Over a third of the firms saw multiple expansions, with valuations rising 42% on average. 3. Management Compensation: Management and employee ownership stakes increased in 70% of the deals. The average management stake doubled to roughly 15% after the deal. References: http://www2.goldmansachs.com/ceoconfidential/ February 2001 Issue http://macabacus.com/valuation/lbo/leveraged-recap

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Sealed Air
Q3. How did the governance arrangements pre and post recapitalization influence the value outcomes? 1. 2. If only consider the dividend payout then the value created is equal to the No of shares * $40. Leveraged recapitization generate value only in below conditions:
y There is enough tax benefit for the firm y If it brings discipline to management because of fixed outlays. y The cost of capital is not drastically increased y The debt does not bring too many restrictions on capex through the covenants.

3.

The total firm value in this case is destroyed substantially since the FCFE reduces drastically. Refer the attached valuation.
1989 7.2 16.2 -13.4 -38.1 306.7 -329.8 -20.9 9.1 -63.0 1 -54.3103 1990 8.3 16.2 -7 POST RECAP SCENARIO 1991 1992 9.5 11.0 17.33 18.55 -8 -9 -15.3 1993 12.6 19.85 -10.5 -19.6 1994 14.5 21.23 -12 -26.2 1995 16.7 22.72 -12.5 -34.2 1996 19.2 24.31 -12.5 -26.3

Net Earnings Depr & Amor Capex Principal Payment Proceedings Dividend Finance fees Other cash inflow FCFE N= years

25.3 12.9 -20.5 -8.5 -7.8 -4.7 -5.6 -8.9 1 -7.7

17.5 2 12.99049

18.9 5.2 3 4 12.08024 2.870632 -27.44

2.3 5 1.11341

-2.5 6 -1.01926

-7.3 7 -2.59167

4.7 8 1.422631

Value

Net Earnings Depr & Amor Capex Principal Payment Proceedings Dividend Finance fees Other cash inflow FCFE N= years

25.3 12.9 -20.5 -8.5 -7.8 -4.7 -5.6 -8.9 1 -7.7

1989 29.85 16.2 -15

1990 35.23 16.2 -15

WITHOUT REC APFOREC T AS 1991 1992 41.57 49.05 17.33 18.55 -15 -15 -15.3

1993 57.88 19.85 -15 -19.6

1994 68.30 21.23 -15 -26.2

1995 80.59 22.72 -15 -34.2

1996 95.10 24.31 -15 -26.3

3.5 34.6 1 29.78793 36.4 2 27.07173 43.9 3 28.12661 37.3 4 20.59961 43.1 5 20.53283 48.3 6 19.83816 54.1 7 19.14707 78.1 8 23.82583

Value

181.3

Value is destroyed by the recapitalisation since FCFE is drastically reduced.

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