Sealed Air Case - Investment Banking

Topics: Corporate finance, Finance, Stock Pages: 4 (1059 words) Published: October 13, 2014
Sealed Air Case

1.What is a leveraged recapitalization?
A leveraged recapitalization is when a corporation turns to the debt markets to issue bonds and uses the proceeds to buy back shares or distribute equity dividends to investors.

This could be driven by macro-economic factors such as low interest rates on borrowed capital, which makes debt cheaper than equity, thereby making leveraged recapitalization a viable option for companies. Or it could be driven by micro-economic factors such as a need to balance company’s leverage and improve operational efficiency.

2.As an IB financial advisor what would be the underlying circumstances—given the following end-objectives— that would lead you to consider such a financial transaction to your client—brevity as usual

Underlying circumstances that led to the recapitalization decision by Sealed Air management were: •The excess free cash flow, which had tempted the managers to waste money on substandard projects. •Sealed Air did not have good investments or M&A opportunities •They had sufficient capacity in their plants to meet future demand, without significant additional capital expenditure •They had been generating sufficient cash flow from operations to ensure sustainable growth

Given these circumstances, I would advise such a transaction only to clients who operate in mature, non-cyclical industry and has poor financial leverage but needs shareholder value creation. This move would be beneficial only to companies that have a history of steady, predictable cash flows and low levels of debt on their balance sheets.

By undertaking a leveraged recapitalization, such a firm can significantly increase its financial leverage. The increased leverage results in higher value for all shareholders as it magnifies operating returns, and therefore benefits by:

1) Monetizing future cash flows and returning that money to shareholders to reinvest; 2) Boosting the firm’s near term earnings growth...
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