Blaine Kitchenware: Capital Structure

Summary:
Blaine Kitchenware, Inc. was founded in 1927 and as a mid-sized producer of branded small appliances primarily used in residential kitchens.BKI had just under 10% of the $2.3 billion U.S. market for small kitchen appliances. For the period 2003–2006, the industry’s annual unit sales growth was 2%. During the year ended December 31, 2006, Blaine earned net income of $53.6 million on revenue of $342 million.Cause recent shift toward higher-end product lines, Blaine’s operating margins had decreased slightly over the last three years. Margins declined due to integration costs and inventory write-downs associated with recent acquisitions. During 2004–2006, compounded annual returns for BKI shareholders, including dividends and stock price appreciation, were approximately 11% per year.

However, it was well below the 16% annual compounded return earned by shareholders of Blaine’s peer group during the same period.At the end of 2006, Blaine’s balance sheet was the strongest in the industry. BKI has a substantial liquidity. In 2007 Blaine still planned to continue its policy of holding prices firm in the face of competitive pressures. Because of BKI was over-liquid and under-levered, private equity buyer could purchase all of Blaine’s outstanding shares. So Victor Dubinski, CEO of BKI, face a stock repurchase decision in avoid of an unsolicited takeover. The company must determine the optimal debt capacity and capital structure, and subsequently estimate the resulting change in firm value and stock price. Main isuues:

Blaine Kitchenware, Inc is over liquid and under-levered. It means Bliane has large financial surpluses and play a bad financial leverage. The funds have not been fully utilized, even BKI faces that the private equity firm would purchase all of Blaine’s outstanding shares and takeover the BKI. This is the main issue which Victor Dubinski has to deal with. The problem:

In response to an unsolicited takeover, Victor Dubinski must make decision whethe to take share repurchase to face the competitive pressures. The problems which bother CEO are “How many shares could be bought? At what price? Would it sap Blaine’s financial strength? Or prevent it from making future acquisitions?”

The doer:
Under Dubinski’s leadership, who was a great-grandson of one of the founders, Blaine operated three notable exceptions. Firstly, the company completed an IPO in 1994. Secondly, beginning in the 1990s, Blaine gradually moved its production abroad. Finally, BKI had undertaken a strategy focused on rounding out and complementing its product offerings by acquiring small independent manufacturers or the kitchen appliance product lines of large diversified manufacturers The company carefully followed changes in customer purchasing behavior and market trends. Victor Dubinski and the board were eager to continue what they believed had been a fruitful strategy. The company was particularly keen to increase its presence in the beverage appliance segment, which demonstrated the strongest growth and where BKI was weakest. Relevant information for decision:

From the balance sheet, Blaine is debt- free, but the company also hold $231 million in cash and securities at the end of 2006, while in 2005 is $267 million ,in 2004 is $286 million. BKI has a substantial liquidity. And the company’s largest uses of cash has been common dividends, cash consideration paid in various acquisitions. And capital expenditures, which were modest due to Blaine’s extensive outsourcing of its manufacturing. (Average capital expenditures during the past three years were just over $10 million per year.)

During the year ended December 31, 2006, Blaine earned net income of $53.6 million on revenue of $342 million. The company’s 2006 EBITDA margin of nearly 22% was among the strongest within the peer group. While the company’s profitability, returns to shareholders had been somewhat below average.

Blaine’s financial posture was conservative and very much in keeping with BKI’s long-standing practice and, indeed, with its management style generally. Only twice in its history had the company borrowed beyond seasonal working capital needs. In 2007, Blaine planned to continue its policy of holding prices firm in the face of competitive pressures.While the board remained receptive to opportunities, Dubinski and his team had no target in mind as yet at the end of April. Alternative solutions:

The company must determine the optimal capital structure, and estimate the resulting change in firm value and stock price. BKI can borrow money to buy back its own shares or use its funds to repurchase shares. Both solutions improve the financial level benefit and maximize the company value.Compare the two ways, Debt financing will produce the interest tax shield, simultaneously will produce more interests and increase the management risk Plan of action

Our team choose that BKI ues its funds to repurchase shares. Take a part of $231 million in cash and securities to repurchase shares at the price more than $16.25 per share.