The Leveraged Buyout of Cheek Products
Finance 620 – Summer 2010
Background: Cheek Products, Inc. began as a snack food company but has since expanded into different types of business through acquisitions, such as home security systems, cosmetics, and plastics. The company has not been performing as expected in recent years, and management has not tried to improve operations in any way. To help improve the company’s financial position, Meg Whalen, a financial analyst has suggested a buyout. “A leveraged buyout (LBO) is the acquisition by a small group of equity investors of a public or private company.” Meg believes that Cheek Products, Inc. could improve its financial position by making two major changes. The first change that Cheek should make is to concentrate mainly on the snack food industry and the home security industry, and sell the other divisions. The second change, Meg would like to make is to Cheek’s debt-equity ratio. Currently, Cheek is financed entirely with equity. Meg believes that if Cheek’s debt-equity ratio is at least .25, the company would greatly benefit. Meg has prepared estimated future cash flows to support her idea and shared her idea with her other partners, Ben Feller and Brenton Flynn.
After reviewing Meg’s projection and looking through Cheek’s financials, Ben and Brenton believe they could sell the company in five years to another party or go public once again. They also realize that a significant amount of the purchase price will have to be borrowed if the LBO takes place. The interest payments for the next five years, if the LBO takes place, are presented below (in millions):
Reason for case study: If Cheek Products, Inc. undertakes the LBO, “what is the most they should offer per share?”. As previously mentioned, the case study was undertaken because in recent years the company has been underperforming...
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