Sealed Air Leveraged Recapitalization

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Course Name: CFIN II- TERM 4

Assignment Title: Sealed Air corporation Recapitalization
Submitted by: SG A12
(Student name or group name)
Student Name PG ID
Rohit Ramanan 62210075
Bhavya Digumarthy 62210139
Aditya Mudgal 62210313
Kavya Kamath 62210437
Mayank Sharma 62210854
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Sealed Air Recapitalization Case Analysis – Group A12
Company background
Sealed Air Corporation is a manufacturer of protective packaging materials and systems
including the well-known bubble wrap under the brands InstaPak, Jiffy, AirCap etc.
Margin drivers
The company operated at 40-50% margins owing to significant patent protection, which allowed
it to manufacture relatively inefficiently. This also allowed them to price their products at a
premium, based on customer benefits, rather than using a cost-based pricing method at lower
margins.
Introduction of WCM
The company however introduced initiatives regarding manufacturing more efficiently, which
they called “World Class Manufacturing” (WCM).
Sealed Air generated $54M in excess cash as a direct consequence of yearlong improvements
through its WCM initiatives, which it could put to use in a few ways:
a. Expansion projects
b. Profitable acquisitions
c. Make a large payout to shareholders
Sealed Air couldn’t identify any significant profitable expansion projects or acquisitions at the
time. However, it didn’t want to invest the excess cash in things like securities as that wasn’t the
ideal way to maximize shareholder value. Dumphy at Sealed Air also realized that there were
benefits of recapitalizing and that leverage could have positive impacts on firm performance.
Sealed Air eventually decided to recap and chose the mode of recapping by carefully considering
the benefits to shareholders, simplicity of the option and the potential of being at risk to external
offers. This allowed Sealed Air to decide upper and lower bands of the leverage it wanted to
undertake and eventually decided to borrow against its future stream of cash flows and declare
dividend of $40 per share.
Value created through recapitalization
Sealed Air’s recapitalization efforts created ~$14.43M in shareholder value on the day the share
went ex-dividend. This is on account of a $1.75 (Exhibit 1) value created per share across
8.245M shares.
On day immediately prior to the share going ex-dividend, Sealed Air’s stock closed at $50.75 per
share. In perfect capital markets, the share price must drop exactly by the value of the special
dividend being paid out, which in the case is $40. Consequently, the share price ought to have
been reduced to $10.75 per share. However, given that the share price only dropped by $38.25
per share to $12.5, $1.75 is the value created.
There are a few reasons as to how this value could’ve been created:
a. Strong expectations from shareholders in future growth potential: Shareholders
might’ve expected that the company has a bright future in terms of its earnings and
return potential which could’ve led to some resistance in share price falling by $40.
Shareholder belief was eventually well-founded as the share price closed the year at
$20.375 per share, yielding a 55% return to shareholders over the period in question.
b. Better expectations of future cash flow: With the introduction of debt, Sealed Air
was able to reduce its taxable earnings which could lead to better future cash flow and
net earnings for shareholders. This coupled with existing operational improvements
underway at Sealed Air could’ve been a contributor to the $1.75 value creation. The
debt covenants that the company undertook also enforced efficiency through capital
expenditure rationalizations, and the company also made principal repayments earlier
than anticipated which reduced the immediacy of future repayments.
Operational improvements
Sealed Air’s operations took a turn for the better due to WCM and its recapitalization:
a. Inventory Turnover Ratio: On account of its WCM improvements, Sealed Air was
able to grow its Inventory Turnover Ratio by 18% between ’88 and ’89 from 6.8 to
8.1. (Exhibit 2)
b. Improvement in Net Earnings Ratio: Sealed Air was also able to increase its Net
Earnings Ratio (Gross Profit) to 35%, compared to 33% the year prior. Additionally,
it was also able to increase its EBITDA and Cash EBITDA growth rates compared to
the previous period. (Exhibit 3)
c. Rationalization of Capex and Income Tax Outlays: Sealed Air also rationalized its
capital expenditure and income tax outlays by 35% and 10% respectively despite
higher revenues earned in the period. (Exhibit 4)
Shareholder profile post recapitalization

Investors previously were conservative and pumped money into the stock on account of Sealed
Air having a relatively stable and high market capitalization, history of and high likelihood of
future dividend payments.
The investor completely turned over essentially on account of a fundamental change in the
company’s books. The leverage Sealed Air had taken turned it into a negative net-worth
company which was against the investment thesis of earlier investors.
The new tranche of investors was far more risk-loving and was looking to invest for potential
capital gains from cash flow projections and was also willing to undertake the higher risk of
leverage repayments.
Exhibits
Exhibit 1
Particulars Value
Share price cum dividend (A) $50.75
Share price ex dividend (B) $12.50
# of Shares O/S (in milion) ('C) 8.25
Special dividend amount (D) $40.00
Perfect market share price (E = A - D) $10.75
Value created per share (F = B - E) $1.75

Total value created (F * C) $14.43
Year-end share price at close (G) $20.38
Returns for Shareholders (Capital Gains) ((G - B)/B) 55%
Exhibit 2
Particulars 1989 1988 1987
Inventories 25.9 36.2 31.3
Average Inventory 31.05 33.75
Cost of Goods Sold 250.5 230.2 199.3
Inventory Turnover Ratio 8.1 6.8

Improvement 18%
Exhibit 3
Particulars 1989 1988 1987
Net sales Cost of sales 385 345.6 302.7
Net earnings 134.5 115.4 103.4
Net Earnings Ratio 35% 33% 34%
EBDITA (Earnings before depreciation, interest, taxes, and amortization) 53.7 43.6 36.1
"Cash" EBDITA 69.9 56.5 48.2
EBITDA growth over prior year 23% 21%

Cash EBITDA Growth over prior year 24% 17%
Exhibit 4
Particulars 1989 1988 Reduction
Income tax outlays (12.9) (14.3) -10%
Capital expenditures (net) (13.4) (20.5) -35%

Sealed Air Leveraged Recapitalization

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ASSIGNMENT SUBMISSION FORM

This will be the first page of your assignment

Course Name: CFIN II- TERM 4

(Student name or group name)

ISB Honour Code

• I will represent myself in a truthful manner.

(Please start writing your assignment below)

Shareholder profile post recapitalization

# of Shares O/S (in milion) ('C) 8.25

Special dividend amount (D) $40.00

Perfect market share price (E = A - D) $10.75

Value created per share (F = B - E) $1.75

Year-end share price at close (G) $20.38

Returns for Shareholders (Capital Gains) ((G - B)/B) 55%

Cost of Goods Sold 250.5 230.2 199.3

Inventory Turnover Ratio 8.1 6.8

Net Earnings Ratio 35% 33% 34%

EBITDA growth over prior year 23% 21%

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