Leveraged Recap

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Case2: Leveraged Recapitalization

Client: Sealed Air Corporation

I.Executive Summary
Founded in 1960, Sealed Air grew rapidly during its first twenty-five years because many products had strong patent protection. By the mid-1980s, the patent of air cellular had run out and competition was getting fiercer. The managers started to pay attention to manufacturing. Therefore, the Sealed Air launched World Class Manufacturing to promote manufacturing performance. After a year, this program had revitalized the company and enabled Sealed Air to have $54 million in cash. Because there was no profitable project available, Sealed Air managers decided to use Leveraged Recapitalizations to provide large payout to
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(See Exhibit 1)

(2) Subordinate Bridge note 170 million is 10-year Subordinate Bridge note with an interest rate of 12.625%.
PV of second debt tax shield is 41.68 million. (See Exhibit 1)
So the total PV of tax shield is 64.19 million.

In the other way, we considered the increasing stock price per share after the dividend-declare date.
The price at the declaration date is $45.875/share. The dividend is $40/share.
The original price after dividend paying should be $45.625-$40=$5.875/share.
However, at the ex-dividend date, May 12, 1989, the price of stock turned out to be about $13.5/share (from Historical Stock Price Performance of Sealed Air Corporation New York Stock Exchange Ticket SEE), which means the value of equity increased after the recapitalization. This part is the value generated in the leveraged recapitalization.
Since we have 8.245 million shares outstanding, the total increased value is ($13.5-$5.875)*8.245=$62.87 million. It is very close to the PV of tax shield ($64.19 million).

ii. Result Analysis (1) Changes to the company’s priorities and incentive structure

(2) Changes to the Sealed Air’s investor base
The reason why Sealed Air’s investor base turned over completely after the recap was that many institutional investors as follows had sold
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