Sealed Air Case
Leveraged Recapitalization (1989)
The following report outlines the basics of a leveraged recapitalization, the benefits and consequences of a leveraged recapitalization, and ultimately Gator Consulting’s recommendations for when and how to use leveraged recapitalization. Much of this discussion is explained by citing a case study involving Sealed Air Corporation as a way to demonstrate a specific positive instance in the use of leveraged recapitalization.
Leveraged recapitalization is a financial strategy in which a company will take on large amounts of debt to either issue a large dividend or repurchase shares. The goal is to give as much back to a company’s …show more content…
However, if a company takes on too much debt, the benefits of the increases in debt begin to be offset by the increased likelihood of bankruptcy brought about because of too much debt.
There were analysts that felt that Sealed Air’s recapitalization was going to be value destroying because of the debt load. While their concerns are well grounded, the market has shown that the debt taken on by Sealed Air was actually value creating as evidenced by the increase in total value of the company and the increase in shareholder value ( See Appendix 1). What is not clear is whether the debt taken on by Sealed Air is exactly the debt needed to maximize value. Should they have paid a $35 special dividend? What about a $42 special dividend? We will have to trust in the management team’s analysis and expertise in their business in determining whether $40 was the magic number for the special dividend.
Value Created by Recapitalization
When reviewing the Sealed Air recapitalization we looked at “Value created” as the metric to determine if the recap was a good idea or not. We found that the recapitalization created value in a number of different ways as outlined below. Also advise, this is same calculation can be applied to any company considering a leveraged recapitalization.
Value to Sealed Air
Using the equation below, we measured the value that was created to Sealed Air by looking at the total market value of the company before the