Reading: Anatomy of a Recapitalization
Anatomy
of a Recapitalization
•Strasburg
should recapitalize, meaning that it should issue enough additional debt to
optimize its capital structure, and then use the debt proceeds to repurchase
stock. As shown in a previous Figure, a capital structure with 40% debt is
optimal. But before tackling the recap, as it is commonly called, let’s
consider the sequence of events, starting with the situation before Strasburg
issues any additional debt.
•The valuation
analysis of Strasburg at a capital structure consisting of 20% debt and 80%
equity. These results are repeated in Column 1, along with the shareholder wealth, which
consists entirely of $200 million in stock before the repurchase. The next step
is to examine the impact of Strasburg’s debt issuance.
•The
next step in the recap is to issue debt and announce the firm’s intent to
repurchase stock with the newly issued debt. At the optimal capital structure
of 40% debt, the value of the firm’s operations is $257.86 million as shown in
the Figure above. This value of operations is greater than the $250 million
value of operations for wd =
20% because the WACC is lower.
•Notice
that
Strasburg raised its debt from $50 million to $103.14 million, an increase of
$53.14 million. Because Column 2 reports data prior to the repurchase,
Strasburg has short-term investments in the amount of $53.14 million, the
amount that was raised in the debt issuance but that has not yet been used to
repurchase stock. As the chart
shows,
Strasburg’s intrinsic value of equity is $207.86 million.
•Because
Strasburg has not yet repurchased any stock, it still has 10 million shares
outstanding. Therefore, the price per share after the debt issue but prior
to
the repurchase is:
•Column
2 of the Figure above summarizes these calculations and also shows the wealth
of the shareholders. The shareholders own Strasburg’s equity, which is worth
$207.86 million. Strasburg has not yet made any cash distributions to
shareholders, so the total wealth of shareholders is $207.86 million. The new
wealth of $207.86 million is greater than the initial wealth of $200 million,
so the recapitalization has added value to Strasburg’s shareholders. Notice
also that the recapitalization caused the intrinsic stock price to increase
from $20.00 to $20.79.
•Summarizing
these results, we see that the issuance of debt and the resulting change in the
optimal capital structure caused (1) the WACC to decrease, (2) the value of
operations to increase, (3) shareholder wealth to increase, and (4) the stock
price to increase.
Остання зміна: вівторок 14 серпня 2018 08:55 AM