Wrigley's Case Analysis

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Aurora Borealis – Internal Analysis Report:
Recapitalization of The Wm. Wrigley Jr. Co.[pic 3][pic 4][pic 5]

1. Introduction

The Wm. Wrigley Jr. Co. is the leading manufacturer of gum products globally. Their product lines consist of chewing gums, specialty gums and gum base. Spread across different principle brands such as Double mint, Spearmint etc. US accounts for 42% of sales & pre-tax profits, international sources account for 58% of sales & pre-tax profits. Wrigley has been doing well – over the past 2 years it has seen a compounded annual rate of 10% in revenues (9% in earnings). Our area of focus is on the capital structure – the company is debt free. We believe that entering the company’s shareholder group and initiating a capital restructuring to increase reliance on debt at low cost will result in creation of value for the shareholders.[pic 6]

2. Business risks associated with Wrigley

1. Competition: there are other large players in the food and beverages sector who may decide to enter the gum market. This could impact Wrigley’s market share and in turn revenues. However, considering Wrigley is the market leader, they are in a strong position to overcome such threats.
2. Foreign regulations: a large portion of Wrigley’s business (58%) is from international sales. Any change in regulations in these markets would negatively impact the topline of the company.[pic 7]

3. Recapitalization plan

Based on data of comparative companies, we estimate that Wrigley will be able to raise 3$B debt by issuing 10-year bonds of grade BB (9.75% yield). This capital can be used in two ways to modify the capital structure of Wrigley:

1. Dividend payout: The 3$B will be paid out in dividends (over existing 232.44M shares, resulting in 12.9$/share).  AB’s payout will be proportional to the number of shares held in Wrigley. AB will also have the rights to the future earnings of the company. The EPS would decrease to 0.61$ for the subsequent year.
2. Leveraged buy-out of shares: The 3$B will be used to buy back shares (48.76M shares at 61.53$/share). Thus, the future earnings will be concentrated in fewer hands. This would decrease the EPS to 0.77$ for the subsequent year.[pic 8]

4. Risk/Benefit analysis

The following would be the impact on Wrigley due to the recapitalization in both the options:

1. Decreased WACC (10.9% to 10.5%)
2. Interest tax-shield will result in greater earnings for the shareholders[pic 9][pic 10]
3. Part of Operating Cash Flows will be used to cover interest expense (292$M)

A more specific analysis is listed below:

The voting rights would change based on the option chosen: