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2015 Simulia Uk David Winfield
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DLSU v. Bernardo, G.R. No. 190809, Feb. 13, 2017
Winfield Refuse Management Inc. Raising Debt vs. Equity
Ashish Gupta Amit Singh Amit kr Sinha Maneesh D Singh Prem Kumar Gaurav Kr. Singh
Executive Summary
Objective
Alternatives
Recommendation
What is the best financing option for the $125M acquisition of Mott-Pliese Integrated Solutions (MPIS)?
1. 2. 3.
Debt Debt with with Fixed Fixed Princ Principa ipall Rep Repay ayme ment ntss Debt Equity
Winfield should finance the $125M through issue of bonds with no principal repayments
Winfield Refuse Management
2
Concerns from Last Board Discussion Concern Andrea Winfield
Additional debt will increase risk and will lead to wild swing in stock price
Joseph Winfield
By issuing 7.5M shares, Winfield will only have to pay $7.5M in dividends
Ted Kale
Market price is too low (based on Price-to-book Price-to- book comparable). comparable). Issuing shares at low price and loss of management control is a disservice to current stockholders.
Joseph Tendi
Issuing Common Stock will dilute the EPS to $1.91. Using Debt could bump the EPS upto $ 2.51
James Gitanga
Other major companies have long-term debt in capital structure while Winfield is unusual Winfield Refuse Management
3
Introduction Winfield
MPIS
Net Income
Net Income
$27M
+
$15M
Winfield + MPIS
Net Income =
$42M
Region
Region
Region
Midwest
Mid-Atlantic & Midwest
Midwest & MidAtlantic
Winfield Refuse Management
4
Winfield’s Current Financial Position
Winfield’s Revenue and Net Income
Revenue
Net Income
$500
$50
$400
$40 )
) M $ $300 ( e u n e $200 v e R
M $ ( $30 e m o c $20 n I t e N
$100
$10
$0
$0 2006
2007
2008
2009
2010
2011
2012E
Industry: Debt-to-Equity Equity
Debt
50% 50%
Winfield Refuse Management
Financing Alternatives Capital Needs: $125M 1. Debt with Fixed Principal Repayments 15 years 6.5% interest rate $6.25M annual principal payment
2. Debt 15 years 6.5% interest rate Full principal paid at Year 15
Debt with Fixed Principal Repayment Repayment Schedule 45
Interest
Principal
40
Debt Schedule 140
10
Principal
125.00
120 ) M100 $ ( s w 80 o l f t u 60 O h s 40 a C
) 35 M $ 30 ( s w o25 l f t u20 O h s 15 a C
Int Interes rest
37.50
6.25 6.25
5 8.13 0
2.44
20
8.13
0
Year
Year
Winfield Refuse Management
6
Financing Alternatives Continued: Capital Needs: $125M 3. Equity 7.5M new shares @ $17.75 Dividend Policy is $1.00/Share
Dividend Payout Schedule Dividend
180
Dividend Terminal Value
160 140
) M $ 120 ( s w100 o l f t u 80 O h s 60 a C
40 20
7.50
0 2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
Year
Winfield Refuse Management
7
Decision Criteria
Impact on Firm: Total Cost of Financing •
Impact on Shareholders: Earnings Per Share •
Winfield Refuse Management
8
Cost of Financing
205.00 200.00 195.00
Debt With Pricinpal repayment
190.00 185.00 180.00
Debt with Full principal repayment
175.00 170.00 165.00 160.00 Cost of Financing
Among all the financing options considered, Debt (with no principal repayments) has the lowest cost of financing Winfield Refuse Management
9
Earnings Per Share Pre-acquisition EPS: $1.83 Debt
Equity
Pros
No impact on shares
No impact on earnings
Cons
Reduced earnings by interest
Increased number of shares
Expected EPS
$ 2.51
$1.91
Post-acquisition Earnings Per Share $3.50 $3.00 e r $2.50 a h S r $2.00 e P s g $1.50 n i n r a E $1.00
EPS (Debt)
Expected EBIT of 66M
$0.50
EPS(Equity)
EPS(Bond with principal repayment)
$0.00 $46
$51
$56
$61
$66
$71
$76
EBIT ($M)
Debt financing options provide the highest expected EPS under likely EBIT scenarios. Winfield Refuse Management
10
Adjusted Earnings Earnings Per Share •
•
Adjusted EPS = (NI-principal repayment)/ number of shares Higher earnings per share with the bond option, even treating principal repayments as “expenses” Adjusted Post-acquisition EPS $3.00 $2.50 e r a h S r e $2.00 P s g n i $1.50 n r a E d e t $1.00 s u j d A$0.50
EPS( Debt, including principal repayment)
Expected EBIT of 66M
EPS(Equity)
$0.00
EBIT ($M)
Even with Principal Repayments included on an Adjusted EPS basis, EPS with Debt Financing would be greater than EPS with Equity Financing Winfield Refuse Management
11
Winfield Refuse Management
12
Evaluation of Options & Summary
Decision Criteria
Debt
Debt with Principal Repayment
Equity
Cost of Financing Expected EPS
represents the better alternative •
represents the lesser alternative
Other considerations By issuing debt, Winfield would avoid control dilution Flexibilities – sufficient cash flow to meet commitments under all options
Winfield should finance the $125M through issue of bonds with no principal repayments Winfield Refuse Management
