Wrigley

The Case

The setting for this case study centers on the William J. Wrigley company. Wrigley is the largest producer of chewing gum. The gum industry is very competitive and controlled by several large corporations in which Wrigley is debt free and holds the largest market share among them. Wrigley has been conservatively financed and in 2001, their reported total assets were $1.76 billion dollars. The value of Wrigley’s stock outperforms the Standard and Poor’s 500 Index.

Discussion Questions and Responses

1. What is Blanka Dobrynin hoping to accomplish through her active-investor strategy?

As an active and aggressive investor, Blanka Dobrynin appears set on getting Wrigley to restructure their financing. She immediately identifies Wrigley has no debt and certainly understands capital restructuring can change the leveraging and efficiency of financial operations. As a managing partner of the investment company, she has an opportunity for personal profit or gain by purchasing stock and then convincing the corporate heads to restructure in a way that will increase stock value.

2. Based on the theory and research papers read during the semester, what do you think will be the effects of issuing $3 billion of new debt and using the proceeds either to pay a dividend or to repurchase shares on:

Wrigley’s outstanding shares? The only change in the number of outstanding shares occurs with a repurchase decisions. Early in the class, we discussed in depth leverage effects. The starting position for this case is the fact Wrigley is unlevered and therefore likely has a substantial flow of cash subject to full taxation. With no interest on debt, Wrigley’s cash flow after interest is deducted from earnings is substantially lower due to taxes. This tax break will apply to both dividends and repurchase because that was the purpose of assuming the debt to begin with.

Exhibit 5 lists the market price of Wrigley’s stock as $56.37. We know the unlevered and dividend payouts...