Britt Sturm

FIN 52020 – Cases in Managerial Finance

Fall MBA 2

Dr. Morris

November 2, 2015

Winfield Refuse Management

Based on the financial data in Exhibit 1, what is your assessment of the proposed
acquisition price for MPIS?

Exhibit one compares five waste removal companies. Waste Management,

Republic Services, Waste Connections, Progressive Waste Solutions, and Casella Waste

Systems. In terms of market cap., Waste management leads the industry in size at 15.9

billion dollars. Republic Services is respectively second at 10.2 billion dollars. The other

three companies are well below half of this market cap.. The price-earnings ratio is best

for Waste Connections at 22.4 times, comparative to Waste Management at 17.4 times.

Lastly, Waste Management has a 13.5 percent operating margin comparative to Waste

Connections who displays the best operating margin at 21.1 percent.

MPIS has a market cap of $133,125,000 which can be found by taking the

issuance of 7.5 million shares, multiplied by the common stock price of $17.75 a share.

This evaluation is very comparable to Casella Waste Systems, which could move

Winfield up to one of the top five waste companies in the industry. The analysis states tat

MPIS would become an $66 million dollar company with an earnings per share of $1.91

if stock was issued or raising the stock to $2.51 if the company chose to take on debt.
 Another key point with Exhibit-1 compared to MPIS is all of the companies have

long-term debt. MPIS currently has no long-term debt and it is not something the

company is used to however, I think it is definitely something for them to seriously

consider. I agree with most of the board discussion. I feel that MPIS is a great fit from

reading the case and offers great revenue streams, a stronger competitive advantage and

can help reduce certain cost.

Assuming the given acquisition price, assess the annual cash outlays of both the
proposed common stock issuance and the bond issuance?

An acquisition price of $125 million, which Winfield states they believe, is a fair

price is a great chance for Winfield. The is a fair evaluation, it just needs to be

determined by which method the company will choose to finance this venture. Exhibit 4

gives a clear out lay of what this issuance of bonds versus issuance of common stock

would look like. The diagram is inserted below

The stock route seems like a lot more lucrative choice for the company not only

increasing its earnings per shares drastically but also creating a lot more after tax earnings

for the company and its shareholders. Not to mention the value of the earnings per share
that would be beneficial to everyone. The far right column seems like the best options

just by analyzing the numbers.

Carefully respond to each director's assessment of the financing decision? (NOTE:

Some of the assessments are just opinions but some are just wrongheaded)

The first assessment is that the stock issue has a lower cost. The principal

repayments on the bond mean an additional $6.25 million cash outlay ever year. That is

over 9% of the bond issue. The concern is that taking on more debt will cause wild

swings in the stock price.

This is an extremely unpredictable case and several unknown factors can affect

the stock market. Making the acquisition will make the company look stronger and have

better performances which can cause a rise in stock price as well as if people are

concerned Winfield is taking on too much debt, people might try and sell cause the price

to drop. Needless to say, I don’t think this should be a major concern and this is a great

investment and shareholders should be in favor of this move by Winfield.

The second assessment is math related stating the EBIT $24 million; MPIS will

generate over $15 million each year after taxes. An additional $7.5 million shares sold to

finance this and dividends remaining at $1.00 per share leaves for a nice profit and happy

shareholders. I fell that this is a win-win for both parties.

A third director took the opposing side saying that she believed Winfield’s shares

were grossly undervalued. She stated that issuing a price of $17.75 would be a travesty

and all of their competitors had higher price-equity ratios than Winfield. She is also

concerned that selling 7.5 million shares would dilute management’s control of Winfield.

She makes a fair statement that taking this approach is a huge gift to new shareholders at
the expense of current ones. Since the stock price of the other companies is not shared,

we can calculate the price earnings ratio of Winfield to fairly asses and compare to the

main industry competitors. The P/E ratio can be calculated by taking the stock price,

17.75 for Winfield and divide it by EPS, which we can calculate at both the $1.91 and

$2.51 evaluations. At. $1.91 per share, Winfield’s P/E ratio is 9.29 and at a $2.51 per

share evaluation, Winfield would have a P/E of 7.07. While both of these are well below

the industry averages, I think analyzing the size of the market, and several other factors

are important. Just to note, Winfield’s earning per share has steadily grown from 1.43 to

1.83 from 2006 to 2012.

Two other directors agreed with Ted Kale, the third director who doesn’t want to

go the route as the first two. These two other directors said to not look at valuing a

company based on new common stock but examine the earnings per share, which I

mentioned in the first question. Stock could fluctuate from $1.91 to $2.51 based on the

route the company chooses to elect. This was also address in the previous directors

concerns.

Lastly, James Gitanga weighed in about financing in the waste management

industry and how every company, at least in Exhibit-1 all use long-term financing. I

would agree that they do as shown in the case and suggest that taking on debt is not a bad

thing. It can actually be beneficial in the long run as long as the company operates

successfully and continues down the successful path it has been taking.
How should the acquisition of MPIS be finance, taking into account the issues of
control, flexibility, income, and risk?

The acquisition of MPIS should be financed by issuing stock at the new

common stock price of $17.75 per share. While the company would have less

control of Winfield, the purpose of doing this is to create shareholder wealth, which

is held by management at an astounding 79% of common stock. While issuing 7.5

million shares dilutes the percentage they control and might undervalue their

current stock, the overall outcome has a lot of potential with relatively low risk. This

market has steady growth because consumers will always need trash removal, at

least for the time being and the only way to grow is by moving into new markets one

you have a dominant market share in a city.

The projected income from this deal would cause the income after taxes to

almost double, according to Exhibit-4.

Another choice the company could consider is financing the $125 million

through issuance of bonds with no principal repayments. The main benefits of this

are it is a much lower risk, and by issuing debt, Winfield would avoid loosing

control. Debt financing options provide the highest expected ROE under likely EBIT

scenarios and have no impact on shares.

Overall, this is a great acquisition that Winfield should go through with at a

fair value of $125 million.