Case 34

Introduction

Debra Dobrynin plays the role of the managing partner of Aurora Borealis LLC. Aurora Borealis LLC is an activist Hedge fund company. They are trying to buy a large stake in the Wrigley Jr. Company and thereby force the management to reorganize the capital structure by raising the debt and using it to pay cash dividends or repurchase common stock shares. Aurora Borealis LLC, like any other hedge fund, banks on immediate rise and fall in stock prices than the long term investment in growth and stability of the firm. The hedge fund plans to short the stock at the moment it rises to the optimal level due to strong signals the hedge fund is trying to pursue. The strategy of the case revolves around how should they use the $3 billion of debt to restructure its capital that would add the most value for the shareholders of Wrigley. The decision of how to use the debt will impact the firm’s stock price, cost of capital, debt coverage, earnings per share and voting control. The impact of these changes from the capital restructuring was analyzed to confirm that they are improving the value of the company and that they support with the company’s goals and strategic direction.

Financial analysis

A recapitalization based on a dividend will have no effect on the number of shares outstanding. However with a repurchase, the number of shares will change significantly. If we adjust the current stock price only for our estimate of tax benefits, the repurchase price would be $62.90 which is calculated by the beginning stock price of 56.37 plus the additional value of $6.53 from the tax benefit as seen on exhibit 1. If we adjust the current stock price for our estimate of tax benefits, the dividend payout price would be $61.53 which is calculated by the beginning stock price of $56.37 plus the additional value of $5.16 as seen on exhibit 1. Wrigley currently has 232.4 million common shares outstanding. In executing a stock repurchase at a price of $62.90, 47.69...