THE WM. WRIGLEY JR.

COMPANY:
CAPITAL STRUCTURE, VALUATION, AND COST OF CAPITAL

3/14/12

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Introduct ion

Interests are at their lowest rate for the past 50 years. Even though the crisis, corporate deleveraging has gone too far and CEOs are missing opportunities to create value. The Wm. Wrigley Jr. company is totally unleveraged. It used to be the worlds largest manufacturer and seller of 3/14/12 chewing gums and has several well

Overview : Effects of the recapitalization

Borrow $ 3 billion to pay dividend or to repurchase shares

Effects :

On Prices : outstanding shares and book value of equity On Earning Per Share and Price Earning Ratio On debt interest coverage ratio and financial flexibility On the voting control of the Wrigley family On the Cost of Capital
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Effect of a Leveraged Recapitalization

Leverage has positive effect on the firm value. It is the benefit of debt tax shields. This savings derives from the deductibility of interest expense from the firms taxable income. According to Modigliani & Miller (M&M), the impact of those tax savings is seen in the second term of this equation:
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Comparison dividends / shares repurchase

Dividends Effect on no Market Value Equity Effect on No outstanding Shares Cash change yes for the firm Cash for Yes Shareholders Effect on Share Negative Share repurchase no

Yes

yes No Positive
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Effect on prices (1)

After After Recapitalizatio Recapitalizatio n - Dividend n - Repurchase Market Value 11.3 Billion 11.3 Billion Equity # of Outstanding 232.441 Million 183.677 Million Shares Add. Cash Received 3 Billion 0
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Effect on prices (2)

MV Equity + PV Debt Tax Shield 13.1 Billion + (3 Billion x 40%) = $14.3 Billion 14.3 B/232.441 M = $61.52 per Share MV Equity + PV Debt Tax Shield 13.1 Billion + (3 Billion x 40%) = $14.3 Billion

Shares repurchased: 3 B/$61.52 = $ 48.764 M Price unchanged MV equity : (232 441 48 764)* 61.52 = $11,3B

Effect on the stock price: 14,3/232 441m 3B/232 441M = 61,52 12,91 = 48,61$ 3/14/12 per share

Impact on EPS & PER

Capitalization EPS Status
Before $1,36 Recapitalization

Why
(EBIT*0,6)/ 232 441M shares

+/- 10% change in EBIT

+/- 10% change in EPS +/- 38% change in EPS

After $0,35 (EBIT*0,6 - 0,13*3B)/ 232 Recapitalization 441M shares Dividends After $0,45 (EBIT*0,6 0,13*3B )/ 183 Recapitalization 684 M shares Repurchase Capitalization PER

+/- 38% change in EPS

Status

Why?

Before Recapitalization After Recapitalization Repurchase

$45,19 $137,1

MV equity/ Net earnings 13,1B/EBIT*0,6 Price/EPS 48,61/0,35

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Impact on Debt Interest Coverage and Financial Flexibility

Before Interest Coverage Financial Flexibility n/a

After

1,35* (in line with BB/B rating) Good Poor (more than 26% drop of EBIT) company may not be able to meet its debt payments
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Impact on Voting Control & Book Value

Before Change in Capital Wrigley Family Shares Voting outstandin rights g 39 858 247 318 287 176 189 800 42 641 232 441 641 232 441 After Dividend Wrigley Fmily Voting rights 39 858 247 318 287 176 141 036 After Share repurchase* Wrigley Family Voting rights Total Voting rights 189 800 426 410 616 210 Total Voting rights 189 800 426 410 616 210 Shares Total outstandi Wrigley Voting ng Shares rights 189 800 42 641 232 441 141 036 426 410 567 446

Shares outstanding

Wrigley Shares

Wrigley Shares 189 800 42

Class A

189 800

189 800

39 858

Class B

42 641

42 641

42 641

247 318

Total

232 441

232 441

183 677

287 176

Wrigley Voting Power

47%

47%

51%

Book Value of Equity Before Dividends

Share repurchase 3/14/12

Impact on Cost of Capital

Before Recapitalization 100% * 0 n/a 0,75 7,15% 7,54% 10,9% 7,15% After Recapitalization 79%* 21%* 7,8% 0,87 7,98 % 8,38% 11,74% 8,26% 3/14/12

Weight of Equity Weight of Debt After-tax Cost of Debt Beta Cost of Equitya Cost of Equityb Cost of Equityc WACCa

Impact on Cost of Capital (calculation)

BetaL = ,75 (1+ ((1-40%)*(3 B/11,3 B)) = ,87 CAPM with Rf = 20Y US = 5,65% CAPM with Rf =20Y US = 5,65% REUL = 5,65% + .75 (7%) = 10,9% REL = 5,65% + .87(7%) = 11,74% REUL = 1,9% + .75 (7%) = REL = 1,9% + ,87(7%) =

CAPM with Rf = Average Short term US =1,9% 7,15% CAPM with Rf = Average Short term US =1,9% 7,98% CAPM with Rf = 20Y US 7,54%
- Maturity Spread = 2,29%

REUL = 2,29% + ,75 (7%) = = 2,29% + ,87(7%) = 8,38%

CAPM with Rf =20Y US Maturity Spread = 2,29% REL Excess Market Return = 7%

WACCBefore = 0 (1-40%) 13% + 100% (10.9%) = 10.9%* 3/14/12 WACCAfter = 0,21% (1-40%) 13% +0,79* (11.74%) = 10.9%*

Extraordinary Repurchase Dividend Stocks Financial Situation & WACC Same Same

Conclusi on

Conclusion

Same effect/ Possible Financial distress in case of adverse economic situation; WACC may worsen depending on risk-free rate hypothesis Higher EPS for share repurchase, possible positive effect if future earnings growth Same effect With Share repurchase Wrigley's family has the majority voting power Current Shareholders value is the same

EPS PER Wrigley's Voting Power Value to shareholders

0,35 137 47% $61.52

0,45 137 51% $61.52

If the company takes the debt, it may use if for re-purchasing shares which may be preferred by Wrigleys family. The company may be reluctant to take so much debt because its financial situation can severely deteriorate if earnings fall (but if the assumption of 3/14/12 continuous growth holds the restructuring will have a highly positive effect on the shareholders value).

Thank you for your attention

3/14/12