Capital Structure

Blaine Kitchenware, Inc.

 Case Summary
CEO : Victor Dubinsky
Acquisition inquiries by Private equity investors
Majority shares held by Dubinsky family, Strong representation in Board of
the company
BKI for acquisitions in kitchen appliances space
Private equity buyer can unlock value: Using Blaines cash and new
borrowings they can buy all of its outstanding shares for a price greater
than the current stock price
Current stock price: $16.25 per share
Investment banker advises Victor to repurchase shares himself as BKI is
Over-liquid and Under-levered

Mid-sized producer of branded small appliances for residential kitchens

Founded as Blaine Electrical Company in 1927
 Product Portfolio
Deep Blenders Mixers
Coffee
Fryers Makers

Small Pressure Shredders

Griddles
Ovens Cookers & Slicers

Waffle Slow
Toasters Steamers
Irons Cookers
 Case Summary
10% of $2.3 Bn US kitchen appliances
market
2003-06: Modest sales growth of 2%
Industry dollar volume growth of just 3.5%: Food
Due to competition from mass preparation
merchandisers Cooking
Pricing: Medium price points or just below
well known brands
Blaine brand: Consistently regarded well by Beverage-
customers making
Goods with smart technology features and (2%)
styling priced high to compete with Asian
imports
Distribution channel: 1)BKI => Wholesalers
=> Mass merchandisers => department
stores 2)BKI => Specialty retailers &
Catalogue companies
Small Kitchen Appliances
Standard warranty of 90 days to one year
Industry
 Case Summary
Cast-iron factory for specialty coating in Minnesota, rest
outsourced to suppliers and contract manufacturers in Canada,
Mexico, China & Vietnam
1994: IPO, 62% owned by family
Strategy of acquiring appliance manufacturers and establishing
relationships with suppliers abroad
Keen on increasing presence in beverage appliances segment
85% revenue & 80% operating income from mid-tier products
EBITDA margin = 22%
Declining margins due to acquisitions, consolidation to improve
margins
BKI lost market share because of aggressive rival price
reductions
 Dubinskis Concerns
Repurchase move only in conjunction with
financial policies
Timing of repurchase
Family board members reaction to possible
effects of repurchase
 Balance Sheet
Assets 2004 2005 2006 2007
Cash & Cash Equivalents 67391.00 70853.00 66557.00 68554
Marketable Securities 218403.00 196763.00 164309.00 169238
Accounts Recievables 40709.00 43235.00 48780.00 50243
Inventory 47262.00 49728.00 54874.00 56520
Other Current Assets 2586.00 3871.00 5157.00 5312
Total Current Assets 376351.00 364449.00 339678.00 349869
Property,Plant and Equipment 99402.00 138546.00 174321.00 179551
Goodwill 8134.00 20439.00 38281.00 39429
Other Assets 13331.00 27394.00 39973.00 41172
Total Assets 497217.00 550829.00 592253.00 610021
Liabilities & Shareholder's Equity
Accounts Payable 26106.00 28589.00 31936.00 32894
Accrued Liabilities 22605.00 24921.00 27761.00 28594
Taxes Payable 14225.00 17196.00 16884.00 17391
Total Current Liabilities 62936.00 70706.00 76581.00 78879
Other Liabilities 1794.00 3151.00 4814.00 4958

Deferred Taxes 15111.00 18434.00 22495.00 23170

Total Liabilities 79840.00 92290.00 103890.00 107007
Shareholders' Equity 417377.00 458538.00 488363.00 503015

Total Liablility & Shareholders' Equity 497217.00 550829.00 592253.00 610021

 Profit & Loss Statement
Operating Results 2004 2005 2006.00 Fraction of Sales 2007
Revenue 291940.00 $307,964 342251.00 1.00 352519
Less: Cost of
Goods Sold 204265.00 220,234 249794.00 0.73 257288
Gross Profit 87676.00 87,731 92458.00 0.27 95232
Less: Selling,
General &
Administrative 25293.00 27,049 28512.00 0.08 29367
Operating Income 62383.00 60,682 63946.00 0.19 65864
Plus: Depreciation
& Amortization 6987.00 8,213 9914.00 0.03 10211
EBITDA 69370.00 68,895 73860.00 0.22 76076
EBIT 62383.00 60,682 63946.00 0.19 65864
Plus: Other
Income (expense) 4838.00 5,578 6064.00 0.02 6246
Earnings Before
Tax 67221.00 66,259 70010.00 0.20 72110
Less: Taxes 21508.00 20984 21532.00 0.06 22178
Net Income 45713.00 45,275 48477.00 0.14 49931
Dividends 16000.00 $22,871 28345.00 0.08 29195
Retained Earnings 24875.00 16827.00 14069.00 0.04 14491.07
 Income Statement - Inference
Margins

Revenue Growth 3.20% 5.50% 11.10% 3.00%

Gross Margin 30.00% 28.50% 27.00% 27.00%

EBIT Margin 21.40% 19.70% 18.70% 18.68%

EBITDA Margin 23.80% 22.40% 21.60% 21.58%

Effective Tax Rate 32.00% 31.70% 30.80% 40.00%

Net Income Margin 15.70% 14.70% 14.20% 14.16%

Dividend payout ratio 35.00% 50.50% 58.50% 58.47%

 Comparative Study
Home & Hearth Auto Tech
XQL Corp Bunkerhill Inc. Easyliving Systems Blaine Kitchenware
Design Appliances
Revenue 589747.00 18080000.00 4313300.00 3671100.00 188955.00 342251.00
EBIT 106763.00 2505200.00 721297.00 566099.00 19613.00 63946.00
EBITDA 119190.00 3055200.00 796497.00 610399.00 23356.00 73860.00
Net Income 53698.00 1416012.00 412307.00 335073.00 13173.00 53630.00
Cash & Securities 21495.00 536099.00 21425.00 153680.00 242102.00 230866.00
Net Working Capital 54316.00 1247520.00 353691.00 334804.00 21220.00 32231.00
Net Fixed Assets 900803.00 7463564.00 3322837.00 815304.00 68788.00 174321.00
Total Assets 976613.00 9247183.00 3697952.00 1303788.00 332110.00 592253.00
Net debt 350798.00 4437314.00 950802.00 238056.00 -64800.00 -230866.00
Total Debt 372293.00 4973413.00 972227.00 391736.00 177302.00 -
Book Equity 475377.00 3283000.00 2109400.00 804400.00 94919.00 488363.00
Market
Capitalization 776427.00 13978375.00 5290145.00 3962780.00 418749.00 959596.00
Enterprise Value
(MVIC) 1127226.00 18415689.00 6240947.00 4200836.00 353949.00 728730.00
Equity Beta 1.03 1.24 0.96 0.92 0.67 0.56
RoE 11.30% 43.10% 19.50% 41.70% 13.90% 11.00%
Total Debt to Book
Equity 0.78 1.51 0.46 0.49 1.87 -
LTM Trading
Multiples
MVIC/Revenue 1.91x 1.02x 1.45x 1.14x 1.87x 2.13x
MVIC/EBIT 10.56x 7.35x 8.65x 7.42x 18.05x 11.40x
MVIC/EBITDA 9.46x 6.03x 7.84x 6.88x 15.15x 9.87x
Market/Book Equity 1.63x 4.26x 2.51x 4.93x 4.41x 1.96x
Net Debt/Equity 45.18% 31.74% 17.97% 6.01% -15.47% -24.06%
Net Debt/Enterprise
Value 31.12% 24.10% 15.23% 5.67% -18.31% -31.68%
 Comparative Study (cont..)
Revenues

Blaine Kitchenware

Easyliving Systems

Bunkerhill Inc.

Revenues
XQL Corp

Auto Tech Appliances

Home & Hearth Design

0.00 5000000.00 10000000.00 15000000.00 20000000.00

 Comparative Study (cont..)
Net Income

Blaine Kitchenware

Easyliving Systems

Bunkerhill Inc.

Net Income
XQL Corp

Auto Tech Appliances

Home & Hearth Design

0.00 400000.00 800000.00 1200000.00 1600000.00

 Home &
Auto Tech Bunkerhill Easyliving Blaine
Hearth XQL Corp
Appliances Inc. Systems Kitchenware
Design

Revenue 589747.00 18080000.00 4313300.00 3671100.00 188955.00 342251.00

EBIT 106763.00 2505200.00 721297.00 566099.00 19613.00 63946.00
EBITDA 119190.00 3055200.00 796497.00 610399.00 23356.00 73860.00
Net Income 53698.00 1416012.00 412307.00 335073.00 13173.00 53630.00
Cash & Securities 21495.00 536099.00 21425.00 153680.00 242102.00 230866.00
Net Working Capital 54316.00 1247520.00 353691.00 334804.00 21220.00 32231.00
Net Fixed Assets 900803.00 7463564.00 3322837.00 815304.00 68788.00 174321.00
Total Assets 976613.00 9247183.00 3697952.00 1303788.00 332110.00 592253.00
Net debt 350798.00 4437314.00 950802.00 238056.00 -64800.00 -230866.00
Total Debt 372293.00 4973413.00 972227.00 391736.00 177302.00 -
Book Equity 475377.00 3283000.00 2109400.00 804400.00 94919.00 488363.00
Market Capitalization 776427.00 13978375.00 5290145.00 3962780.00 418749.00 959596.00
Enterprise Value (MVIC) 1127226.00 18415689.00 6240947.00 4200836.00 353949.00 728730.00
Equity Beta 1.03 1.24 0.96 0.92 0.67 0.56
RoE 11.30% 43.10% 19.50% 41.70% 13.90% 11.00%
Total Debt to Book Equity 0.78 1.51 0.46 0.49 1.87 #VALUE!
Calculation for Premium on Equity
In unlevered firm Return = 11%

Risk free rate = 5.1%

= 0.56

Risk Premium (Rm Rf) = 10.53%

 WACC for Different Debt
WACC
11.05
11
10.95
10.9
10.85
10.8
WACC
10.75
10.7
10.65
10.6
10.55
10.5
1 1.6 2 5 8 11 14 17 20 23 26 29 32 35 38 41 44 47 50 53 56 59 62 65 68 71 74

The distress and bankruptcy costs have been ignored

Differences in financial distress cost
Data used for Defining Optimal Capital
Structure

We used the value of RoE (median) to

calculate the final capital structure
Calculation Debt needed for given RoE
RoE = 19.5%
EBIT = $70010
Tax = 40%
Cost of Debt = 6.74%
Return = 0.6 (70010 - .0674Debt)
Target Equity Book Value= Return/ 0.195
Initial Equity Book Value = $488683
Debt = $488683 - Return/ 0.195
Therefore Debt = $343788
 Kd 6.74
asset 0.56
Tax rate 0.4
Rf 5.1
Rm-Rf 10.53
Current Share Price 16.25
Number of Shares 59052

Market Value of Equity (Unlevered) 959595

Book Value of Equity 488363

Book
Number of Market Value
New Shares Value of of Debt/Equity Debt/EquityMarket
Debt Share Price Outstanding Equity Equity BookValue Value e ke WACC

343788 18.58 40547.60 753322.2 144575 2.38 0.46 0.71 12.61 10.77
 After Repurchase
Assets 2006
Cash & Cash Equivalents 66557.00
Marketable Securities 164309.00
Accounts Recievables 48780.00
Inventory 54874.00
Other Current Assets 5157.00
Total Current Assets 339678.00
Property,Plant and Equipment 174321.00
Goodwill 38281.00
Other Assets 39973.00
Total Assets 592253.00
Liabilities & Shareholder's Equity
Accounts Payable 31936.00
Accrued Liabilities 27761.00
Taxes Payable 16884.00
Total Current Liabilities 76581.00
Other Liabilities 4814.00
Long term debt 343788
Deferred Taxes 22495.00
Total Liabilities 447678.00
Shareholders' Equity 144575.00
Total Liablility & Shareholders' Equity 592253.00
 EBIT 63946

Other Income 6064

Less: Interest 23171.3112

EBT 46838.6888

Tax @40% 18735.47552

Net Income 28103.21328

Comparison of Two Capital Structures
Before Buy Back After Buyback
Net Working Capital 263097.00 263097.00
Long Term Debt 0 343788.00
Debt to Equity (book value) 0 2.377921494
Debt to Equity (market value) 0 0.456576607
Book Value 488363.00 144575.00
Number of Shares OS 59052 40547.6
Book Value Per Share 8.270050125 3.56556245
Market Value per share 16.25 18.57
Total Capital 477391.00 477391.00
Assets Market Value 1063485.00 1200646.93
Equity (Book) to Total Capital 1.022983257 0.302844
Equity (Market) to Total Capital 2.010081883 1.577258331
Value of Firm 440828.2409 541827.1266
 Conclusion
The new capital structure adds value to the
firm.
The RoE increases to 19%
It increases the control of the family over the
firm
Debt also provides a tax shield which the firm
was avoiding until now