deluxe

Case Deluxe Corporation BA 280.2 Group 8: Quimpo, Villar, Yam R. Ybanez 2 July 2015 Deluxe’s Restructuring By all accounts, te restructurin! can be consi"ere" a success as te company post poste" e" !ro# !ro#t t in 20 2001 01 "esp "espit ite e te te sri srin$ n$in in! ! mar$ mar$et et,, an" an" as as outp outper er%o %orrme" me" e&pectations on te 'rm. A""itionally, sare price is at an all(time i! #it mar$et sare price )astly e&cee"in! te boo$ )alue. *espite s$epticism on te 'rm an" in"ustry in !eneral, *elu&e as so#n it can still continue to e&tract )alue an" !enerate re)enues on te basis o% its mar$et lea"ersip in te in"ustry. +n te topic o% teir operatin! an" in)estment strate!ies mo)in! %or#ar", one maor tin! tat stan"s out is teir optimistic )ie# o% te mar$et so#in! constant increases increases in sales o)er te ne&t 5 years. -eir capital e&pen"itures are also only enou! to oset te "epre "eprecia ciatio tion n e&pens e&pense, e, #ic #ic means means te compan company y is not loo$in loo$in! ! to !ro# !ro# te business beyon" its current size. All o% tis is in con!ruence #it te company/s statement tat tey only #ant to e&tract as muc )alue as tey can %rom te in"ustry be%ore mo)in! on, reco!nizin! tat te business #ill e)entually be pase" out.

Sensitivity Analysis Assumptions or te company to %all un"er a !i)en ratin!, te most rater tan all te in"ices a)e to be satis'e" since acie)in! all in"e& tar!ets are in%easible #it te current proections Year 20023. 4ort -erm *ebt 151.603 an" 7&istin! on! -erm *ebt 10.103 are '&e"9 any a""itional 'nancin! is "one trou! lon! term "ebt an" e&istin! retaine" retaine" earnin!s. +peratin! :ncome ; 4ales is a '&e" amount. Ratin!s %or BB an" B are immaterial "ue bein! consi"ere" non(in)estment !ra"e. •

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 -e %ollo#in! table belo# so#s te ma&imum amount o% lon! term "ebt tat can be borro#e" in or"er to maintain te tar!ete" ratin! in <4 millions3.

Rating

Addt’l Debt

LT 

AAA

150.00 

AA

=>5.00 

A

805.00 

BBB

1,6>5.00

 -e constraint tat #as most "i?cult to satis%y %or te company #as -otal *ebt ; @apital – ainly driven by lo! e"uity boo# value $%S&'( illion) 9 tis #as because euity #as '&e" at a certain amount #ile lon! term "ebt #as bein! a""e". o#e)er, since te !oal #as to !et a mo"al consensus o% te ratin! rater tan to satis%y te ratin! reuirements %or e)ery in"e&, te bin"in! constraint usin! tis assumption #as 7B:-*A :nterest @o)era!e9 tis #as a!ain "ue to te "ecision to only acuire lon! term "ebt, ence te !ro#t o% te "enominator in te ratio #as relati)ely i! #it increase" 'nancin!.

Debt : *"uity Ratio and +ACC At te ma&imum "ebt le)el un"er eac ratin!, te compute" *ebt(to(7uity Ratios at euity boo$ )alue3 are as %ollo#s

Rating AAA AA A BBB

D:* Ratio 26>C D=1C 12E0C 2=66C

 -e i! ratios are attributable "ue to te %act tat te mar$et ; boo$ ratio o% te stoc$s are ==.>1&. :n computin! %or te FA@@ an" assumin! increments o% 100 %or te "ebt. -e lo#est @ost o% @apital #as %oun" at te "ebt ratin! o% 1,600 #it a FA@@ o% E.E0C.  -is is primarily "ri)en by te muc i!er cost o% euity compare" to te cost o%  "ebt, te company #oul" tere%ore bene't %rom a)in! a i!er "ebt ratio assumin! tey can utilize teir a""itional capital. -e table belo# so#s computations %or te FA@@.

Recoendations:

*WACC (blue) graph shows the cost of capital as borrowing is increased; WACC2 (yellow) graph shows the cost of capital when share repurchases are done with the additional borrowing. :n or"er to acie)e te lo#est cost o% capital, te !roup recommen"s tat *elu&e tar!et a BBB ratin! by borro#in! 1.6 billion in lon! term "ebt. At tis ratin!, it/s important to note tat te 'rm #ill still be classi'e" as in)estment !ra"e. Borro#in! 1,600 to acie)e te lo#est cost o% capital #ill !i)e te 'rm a >5 million Ge&ibility le)el be%ore tey "rop to te ne&t ratin!. -e "ebt to euity ratio at tat le)el is 21>DC, as state" earlier o#e)er, te i! ratio is primarily "ue to te boo$ )alue o% euity bein! i!ly un"er)alue"9 a"uste" to mar$et )alue, an" te "ebt to euity ratio is a muc more mana!eable D5C.  -e !roup uestions o# *elu&e coul" create )alue %or sareol"ers !i)en issuance o% <41.6million "ebt. :"eally *elu&e soul" !ro# te business H trou! capital e&pen"itures an" i!er sales proections. o#e)er, "ue to te current outloo$ o%  te company, a""itional 'nancin! #ill more li$ely be use" to 13 pay "i)i"en"s or 23 %urter repurcase sares.
Appendix: Required ebt !e"els for #i"en $ond Rating