Wrigley Case
March 11, 2014
Ladies and Gentlemen of the Board:
In my experience, I have seen a steady decline in the use of debt financing. Upon closer inspection, I have noticed that your company uses no debt at all. As an experienced hedge fund manager, I am concerned that your management is missing valuable opportunities by excluding debt from your capital structure. My partner, Susan Chandler, and I have done extensive research on how undergoing a capital reconstruction process can benefit you in the long run.
If your company decides to recapitalize, there are a few ways in which the debt can be used in regards to equity. Our extensive evaluation of the possible outcomes has revealed that borrowing $3 billion to either pay out an equivalent dividend, or continue with a share repurchase could positively affect many aspects of your company. This capital restructure could improve your firm’s share value, cost of capital, debt coverage, earnings per share and voting control. Please refer to our analysis below and in the attached excel spreadsheet for consideration.
Using Debt to Maintain Dividend
In order to maximize shareholder value, one option to consider is issuing debt to pay out an equivalent dividend. It is important to note that increasing your debt will lead to a higher net income. In turn, this money can be used to increase dividend payments or maintain them if the firm is falling behind. In general, shareholders will prefer dividends as opposed to return of capital gain, the latter being more risky. According to the Modigliani–Miller dividend irrelevance theory, your dividend policy will not affect the value/risk of the firm. On the other hand, Gordon and Lintner believe a stock’s risk declines as dividends increase. These financial experts both present important theories to consider.
Using Debt for Stock Repurchase
One of the benefits of repurchasing stock is the signal it sends to investors. When a stock repurchase occurs, investors assume that the stock
Ladies and Gentlemen of the Board:
In my experience, I have seen a steady decline in the use of debt financing. Upon closer inspection, I have noticed that your company uses no debt at all. As an experienced hedge fund manager, I am concerned that your management is missing valuable opportunities by excluding debt from your capital structure. My partner, Susan Chandler, and I have done extensive research on how undergoing a capital reconstruction process can benefit you in the long run.
If your company decides to recapitalize, there are a few ways in which the debt can be used in regards to equity. Our extensive evaluation of the possible outcomes has revealed that borrowing $3 billion to either pay out an equivalent dividend, or continue with a share repurchase could positively affect many aspects of your company. This capital restructure could improve your firm’s share value, cost of capital, debt coverage, earnings per share and voting control. Please refer to our analysis below and in the attached excel spreadsheet for consideration.
Using Debt to Maintain Dividend
In order to maximize shareholder value, one option to consider is issuing debt to pay out an equivalent dividend. It is important to note that increasing your debt will lead to a higher net income. In turn, this money can be used to increase dividend payments or maintain them if the firm is falling behind. In general, shareholders will prefer dividends as opposed to return of capital gain, the latter being more risky. According to the Modigliani–Miller dividend irrelevance theory, your dividend policy will not affect the value/risk of the firm. On the other hand, Gordon and Lintner believe a stock’s risk declines as dividends increase. These financial experts both present important theories to consider.
Using Debt for Stock Repurchase
One of the benefits of repurchasing stock is the signal it sends to investors. When a stock repurchase occurs, investors assume that the stock