Why does Herbert Kohler wants to do the recap4
Calculation of Enterprise value4
Using Discounted cash flow method4
Dividend Growth Model7
Comparable Companies Analysis8
Justifying the share price of $ 55,40010
Defending $270,000 as share value10
Final advice to Herbert Kohler10
In May 1998, Kohler Co. offered a recapitalization plan to buy-out minority shareholders and hence become a 100% family owned business. But the offered price of $55,400 was contested by the dissenting shareholders who considered the share price to be around $2,70,000. For Kohler, the court determined share price would have severe economic consequence besides raising the cost of recapitalization. Kohler Company was faced with a very tough decision of whether or not to settle outside of court or go to court to settle with the dissenting shareholders. As per the valuation exercise presented herewith, the average enterprise value of Kohler comes to $1,715 MM which translates to a per share price of $230,291. The valuation has been carried out using different methodologies such as Discounted Cash Flow, Dividend Growth Model and Comparable Company Analysis. The Enterprise Value of $1,715 MM is the average of values obtained through these methods. Based on the valuation exercise, it is quite likely that if the court was to determine the fair value of the shares, the same would be substantially high and may also lead the price to be determined close to what dissenters are asking for. In such a situation, to avoid the implications which a court determined prices would have, Herbert Kohler should pursue an out of court settlement with the plaintiffs. The price which Kohler should offer should be substantially higher than the original offer of $55,400. The price offered should be 20% less than the average price of $230,291 obtained as per the above valuation, which comes to $184,232. It should be explained to the dissenters that the 20% discount has been applied towards the lack of controlling interest and lack of liquidity of the shares.
Why does Herbert Kohler wantS to do the recap
Herbert Kohler want to do the recap by buying out the minority shareholders even though he already controls about 90% of Kohler Co is because of following reasons: 1. To maintain the confidentiality of financial and business data to leak out to general public. Though Kohler is a private company and was not needed to publish its financial statements, it is very much required to disclose financial information to the shareholders of the company. Lesser the number of external shareholders, more secure is the proprietary information about the company. 2. To restrict the trading of shares which are held by outsiders. As per Herbert, such trading are happening at very high price and poses the risk of speculative trades and further offloading of shares by family members to general public. 3. Currently the number of outside shareholders was 300 and if this number was to cross 500, it would have attracted disclosure requirements from SEC. 4. It would be easier for Kohler to make investments for the long-term growth of the company by re-investing 90% of its net income. With fewer outside shareholders, there would be less pressure to declare dividends each year. Kohler family members would be inclined more towards long-term growth as compared to outside investors who look for short-term investment gains.
Calculation of Enterprise value
Using DIscounted cash flow method
Derivation of Equity Beta of Kohler
For computing the Equity Beta of Kohler, Betas of comparable listed companies have been taken into account. Case facts provide the value of equity beta for...