Blaine Kitchenware Case Study

Blaine Kitchenware has occupied the industry for over 80 years and continues to gain
control in the market it occupies. As the CEO of the company, Mr. Dubinski is faced with
the difficult decision of determining what is best for the family company. The following
questions will address what decision is the optimal and why it is beneficial for BKI.

Ans. 1) The main dilemma in the case is whether Blaine Kitchenware’s should choose to
repurchase its own shares or not. If Blaine’s Kitchenware does repurchase its shares, they
must consider whether to partially repurchase the market float or go for a complete
buyback where Blaine’s family would become the owner of all the remaining shares. They
also have to consider of the effect of the repurchase on various factors like the risks
involved in raising a debt especially when they are large, very conservative and debt free.
They should also consider things such their acquisition plans, their earnings per share
and their dividend per share, ownership structure, capital structure and of course the
reputation of the company in the market after the buyback. With this in mind we can
consider a few situations and then decide what Blaine should do, keeping in mind the
perspective of both the existing shareholders' as well as Blaine's family’s.
Since no debt is being raised, if all the cash & cash securities plus the market securities
are used for the buy-back, his family may like this option. Their management will have
increased stakes, this will reduce their chance of being acquired and this will provide
more dividends to their remaining shareholders.
There is a big question facing Blaine and that is why would their existing shareholders
want to sell their equity back to the company? Another scenario is to completely buy-
back the market float. Although this will involve the company raising a significant debt,
this will also give them complete control to the promoters. It is probable that their
family’s needs concerning the dividend amount and growth can be better met through
this option and the policy can be set according to their expectations. The return on equity
will increase which will aid the family in better realizing value for their stake. From the
point of view of the shareholders, they are getting a premium on the current market price
if they go ahead with the offer and since debt is being raised – the WACC will come down.
I believe, this could possibly be the best option for Blaine’s Kitchenware to make.
According to their current situation, their current capital structure and payout policies
are appropriate. Blaine is currently over-liquid and under-levered and their shareholders
are suffering from the effects. Since Blaine Kitchenware is a public company with large
portion of its shares held by their family members, they have a financial surplus, which
decreases the efficiency of its leverage. In other words, Blaine does not fully utilize its
funds. Since they are totally equity financed, there is no tax shield. A surplus of cash
lowers the return on equity and increases the cost of capital; also large amount of cash
may offer incentives to acquirer to and also decrease the enterprise value of Blaine.
Acquirers could pay way less than they originally expect to buy out the firm.
Regarding their payout policies, the management’s goal is to maximize the shareholder’s
value, rather than paying dividend. The management should use the available cash and
invest in attractive investments. Although investors take dividend as an indicator for a
company to succeed, they also expect dividend will be paid continuously at either stable

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or growing rate. In summary, in order for Blaine to keep its current payout policies, they
must reduce numbers of outstanding shares throughout share repurchasing.

Ans. 2) Such a large move for the company can greatly affect a lot of aspects, and different
interests lie in different areas for shareholders and management. When stock
repurchases occurs it lowers the amount of stocks within the company, and eventually
within time the E.P.S. would increase in future. This company is facing an unbalanced
capital structure and such a move of a share repurchase, with the help of both cash and
short/long term borrowing. Raising debt can have its advantage within capital structure,
replacing the equity within the firm can reduce WACC and that can lead to a tax
advantage. Covering the advantages and disadvantages of the repurchase, we will
recommend what Dubinski should do.
Covering the advantages of share repurchase first, and focus on what advantages Blaine
can gain from repurchasing the shares. A first advantage of a share repurchase can be the
tax implications involved with it, and the benefit that arises from it. The more a company
is leveraged by debt affects the capital structure, which in turn lowers the amount of
taxed income. This is one beneficial form of stock repurchase.
The second benefit arising from a stock repurchase is the increase in earnings per share.
If earnings were to remain stable, and the number of shares decrease than the earnings
per share will increase. When an efficient market reacts to information such as this, the
price of the stock will increase because the price of the share increased.
When investors are alerted about a new stock repurchase the price of the stock generally
increases which is also beneficial for Blaine Kitchenware. Advantages in stock repurchase
also occur to the outside market, where it alerts them on how healthy cash flows are
within the firm. Float is also decreased in the firm, where outside shareholders have less
share of the company. An increase in buying back the equity can be beneficial for any
company that has the power to do so.
Although there are several beneficial advantages to stock repurchasing, their also is a few
disadvantages that come with it. Announcement of the share repurchase, and the actual
repurchase have a big effect from the timing of the events. Although stock prices might
increase initially, they might decrease once the actual stock repurchase is finalized.
Disadvantages in stock repurchasing are largely involved with timing, and what the
markets might think of the purchase. It can manipulate earnings and overstate them in a
way that is not as good for the company. Manipulating earnings can overstate the actual
company value.
Stock repurchase can be incredibly beneficial, especially for a company like BKI that has
the power to perform a buyback. If company has healthy cash-flows matched with a need
to increase debt within the company, this can be beneficial for BKI. Increasing earnings
per share, is important in repurchasing shares but also the tax advantages (even if they
might be lower) they are still advantageous. If a firm has extra cash, with a healthy cash
flow and a reduction of tax and possibly an increase in firm value. Dubinski should make
a large share repurchase, and BKI should recover some its shares in hopes of gaining the
advantages of tax, and a stronger EPS. The company has the assets (cash) and can take
the restructuring of debt to take advantage of this share repurchase.

Ans. 3) Calculations

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EPS

EPS= EBIT/CSO

Repurchase of shares: Interest = 6.75% (50,000,000)

259 million in cash = 3,375,000
50 million in new-debt bearing interest
To repurchase 14,000,000

CSO = 59,052,000 - 14,000,000

CSO = 45,052,000

EBIT = 63,946,000 - 3,375,000

EBIT = 60,571,000

EPS = 60,571,000/ 45,052,000

EPS = 1.34

Change in EPS = 1.34 - 0.91

0.91
Change in EPS = 0.4725
= 47.25%

ROE

ROE = Net Income

CSO
ROE = 53,630/45,052
ROE = 1.19

Interest Coverage Ratio

Interest Coverage = EBIT/Interest Expense

Interest Coverage = 63,946,000/3,375,000
Interest Coverage = 18.95

Debt Ratio

Debt Ratio = Total Debt/Total Assets

Debt Ratio = 103 890 000/592 253 000
Debt Ratio = 0.1753

Family's Ownership Interest

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 62% (59,052,000 CSO)
= 36,612,000 shares
After repurchase of 14,000,000 shares

36,612,000/45,052,000
= 81.27%

With the calculations made we can see that not only can BKI afford to repurchase their
shares, but they will benefit from it. After calculating EPS there would be a 47.25%
increase in the earnings per share after recapitalization. Another positive number would
be the 1.19 ROE, this number shows that after the shares are repurchased that there will
be a positive return on equity. This number means they will turn a 119% return on their
equity after the shares are repurchased. Interest Coverage and the debt ratio is another
interesting number. With the 18.95:1 ratio for interest income, and a 0.1754 debt ratio,
we see that BKI has a large amount of assets built up and will be easily able to afford the
price of buying back these shares. This was one of the main
concerns, where they did not want to borrow money and potentially have a large interest
expense. As for the family's ownership interest, under the new proposal, they would now
own 81.27% of the company, giving them even more power than they would have
before. All of these calculations indicate that it would be greatly beneficial to BKI to
repurchase their shares, where they can afford it and they will benefit from it in the long
run.

Ans. 4) When a company is owned and maintained by a family that maintains it in a

strong family setting, it is important for them to maintain a certain percentage of
ownership. Eliminating external owners is important in gaining a better advantage for
the company, and in this instance the family Is looking to gain a larger ownership of the
company. The proposal would have to examine a number of factors, and some main
questions were asked on would it sap financial strength, or prevent the company from
making future acquisitions. Before examining the perspective of the family, and the
shareholder it is important to examine what an external financial party would insists on
behalf of a structured financial argument. A company with a healthy cash flow, matched
with a stable Net income can be a candidate for a stock repurchase. It is important to
examine the current debt obligations within the company, which are far less weighted
compared to Liabilities and Shareholder’s equity. The firm’s choice will ultimately lie on
BKI’s financial perspective and needs on liquidity, capital structure, dividend policy, and
ownership structure.
As a member of the family I would be in favor for the stock repurchase for a number of
reasons. Members of the family were welcoming the idea of the possible effects of the
share repurchase, one main attraction of the repurchase would be the fact that ownership
percentage would rise. This attraction is key to the family who maintain this more family
company, and a larger ownership in the company would allow them to own more of it.
Looking back on the history of the company, it is important to realize the intangible effect
the company has, and how advantageous it would be for them to have a buyback. It would
also give the board more flexibility in setting future dividends per share, and give them
more control of the company. As a member of the family I would want the share
repurchase because of the amount of control I would obtain, along with the knowledge of

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my company having healthy cash flows. Although I would approve of the share
repurchase I would be skeptical about the debt factor within the repurchase, the interest
rate could be detrimental to the company and the interest payments could incur more
cost than benefit. It is also the third time since its inception, that the company seeked debt
financing which proved to be a large decision for the company. As a member of the family
I would approve of the repurchase, and there are no new trends that indicate that the
company will see future bad financial performance.
As a shareholder of the company you could be reluctant to receive a payment from the
buyback at market price, or you can be a shareholder who retains their shares. It is
beneficial in both cases; both shareholders who continue to own shares will see a rise in
EPS in shares after the repurchase which will benefit the shareholders. The shareholders
could see a significant rise for a short time, however it is important to realize the amount
of control they will lose when the family gains more control. Although stock price might
increase for a short period of time, the ownership percentage can decrease which is
detrimental to shareholders. Shareholders should accept the proposal cause it can
increase the company’s value, and stocks which can increase the value of selling the
stocks which is beneficial for shareholders.
A stock repurchase for any company is based on timing, and certain financial and non
financial factors need to be met in order for the purchase to realize any benefit. BKI has a
strong and healthy cash flow, matched with an optimal need for debt restructuring that
could benefit the company. The benefits that are realized from this repurchase can be
very beneficial for BKI, and because of the financial position it is in, along with a family
favoring of the repurchase BKI should perform the repurchase. In all, the short and long
term benefits arising from the stock repurchase greatly outweigh the costs of not
performing any capital restructuring.

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