Sealed Air Business Case

Harvard Business School

9 - 2 9 4 -122

Rev. December 5, 1997

Sealed Air Corporation's

Leveraged Recapitalization (A)

by

Karen Hopper Wruck*

Shortly after the close of trading on April 27, 1989, Sealed Air Corporation issued a press release

announcing a one-time special cash dividend of $40 per share payable on May 11, 1989. (Exhibit 1

contains a copy of the press release.) Over the 30 days prior to this announcement, the stock had

been trading between $441/8 and $457/8 a share. In its 10 year history as a New York Stock Exchange

(NYSE) listed firm, Sealed Air had paid quarterly dividends, but never one larger than 18¢ per

share.

With 8.245 million shares of common stock outstanding, the total cash payout amounted to 329.8

million or 87% of the total market value of the firm's common stock at $457/8 per share. With only

$54.3 million in cash and short-term investments, the company borrowed most of the funds required

to pay the dividend. After completing the transaction, Sealed Air would have a debt-to-book

value ratio of 1.36 (up from .13) and negative net worth of $160.5 million. The financial press dubs

transactions where a firm increases leverage substantially and makes a large cash payout to

shareholders "leveraged recapitalizations."

The Company

Founded in 1960, Sealed Air manufactured and sold a wide variety of protective

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Sealed Air Corporation's Leveraged Recapitalization (A)

and foam, were sold through distributors. Salespeople for these products often made calls on endusers, but always pulled the sale through a distributor. Engineered products, such as Instapak, were

sold partly through distributors and partly directly to end-users.

Sealed Air succeeded in growing rapidly during its first 25 years of business. Many of its products

had strong patent protection, and so during this period management emphasized the development

of a strong sales force to exploit its revolutionary products. By the late 1980s,...