RSM 433 Case 2

Topics: Stock market, Finance, Corporate finance Pages: 16 (3749 words) Published: April 15, 2015
Executive Summary
Blaine Kitchenware Inc. (BKI), a mid-sized branded small appliances producer for kitchens, is founded in 1927 and is managed by the Blaine Family. With the commitment to high quality and offering diverse kitchen appliances, Blaine has been growing rapidly over the years and went public in 1994. Recently, the company continues to expand its business by outsourcing its production abroad; and over 35% of its revenue comes from outside of U.S. Blaine is characterized as “highly liquid and debt free” due to its unleveraged capital structure. Consequently, the firm could maintain a low risk of financial distress and a high-level working capital on hand to deal with urgent events and potential acquisition opportunities. However, the capital structure and the payout policies are too conservative and inadequate to generate an industry-average return for BKI’s shareholders. The improvements in excess cash and under-leveraged structures are necessary for Blaine to make. To deal with the capital structure issues, this report proposes a restructuring plan focusing on a share repurchase financed by cash and new debt issuance. After the analysis of a simple proposal, it is obvious that the financial ratios and cost of capital are strengthened after the bond issuing and share buyback. We then evaluate the amount of debt issuing that is most favorable to the company by analyzing the trade-off involve and under the consideration of the information asymmetry and agency cost. Also, a special dividend plan is introduced and compared with the repurchase. Detailed recommendations and suggestions for BKI are provided at the end of this report.

Table of Content
I. Industry Overview…………………………………………………………………….... 3 II. Company Overview and Analysis …………………………………………………….. 3 a. SWOT Analysis……………………………………………………………………... 3 b. Porters Five Forces Analysis……………………………………………………….. 5 III. Current Capital Structure Analysis…………………………………………………… 5 IV. Restructuring Plan……………………………………………………………………… 6 a. Share Repurchase Proposal…………………………………………………………6 b. Degree of Leverage…………………………………………………………………. 7 1. Optimal debt issue and trade-off analysis…………………………………….. 7 2. Information Asymmetry and Agency cost…………………………………….. 9 3. Other considerations………………………………………………………….. 11 V. Special Dividend………………………………………………………………………. 11 VI. Conclusion and Recommendations………………………………………………….. 11 VII. Appendix………………………………………………………………………………. 13                        

I. Industry Overview
The small appliances industry segments into food preparation appliances, cooking appliance and beverage making appliances. The industry values approximately $2.3 billion with a modest annual unit sales growth of 2% during 2004-2006. The annual growth of industry dollar volume is only 3.5% and limited by competitions from inexpensive imports and the aggressive pricing by mass merchandisers. Historically, this industry was fragmented. But more consolidations are expected to take place in the foreseeable future. II. Company Overview and Analysis

Blaine Kitchenware Inc. is a small-cap family business specialized in producing small kitchen appliances. BKI possesses 10% of the market share and has moved its production abroad since 1990s with over 35% of revenue generated outside of U.S. SWOT Analysis

Blaine has significant marketing strength thanks to its wide range of products.  Besides traditional small kitchen appliances, this company has several branded lines of deep fryers, waffle irons, small ovens and coffee makers etc. Blaine also benefits from the “highly liquid and debt free” capital structure. Blaine is mainly financed by equity that generates very low financial distress risk. Moreover, the company is debt free thus it has a decent amount of working capital on hand. This makes Blaine highly liquid and easier to deal with urgent events. Furthermore, Blaine had introduced some goods with “smart” technology features and sleeker styling recently, targeting...
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