Blaine Kitchenware, Inc.: Capital Structure

For the exclusive use of X. Liu, 2016.

4040

OCTOBER 8, 2009

TIMOTHY LUEHRMAN

JOEL HEILPRIN

Blaine Kitchenware, Inc.: Capital Structure

On April 27, 2007, Victor Dubinski, CEO of Blaine Kitchenware, Inc. (BKI), sat in his office

reflecting on a meeting he had had with an investment banker earlier in the week. The banker, whom

Dubinski had known for years, asked for the meeting after a group of private equity investors made

discreet inquiries about a possible acquisition of Blaine. Although Blaine was a public company, a

majority of its shares were controlled by family members descended from the firm’s founders

together with various family trusts. Family interests were strongly represented on the board of

directors as well. Dubinski knew the family had no current interest in selling—on the contrary,

Blaine was interested in acquiring other companies in the kitchen appliances space—so this overture,

like a few others before it, would be politely rebuffed.

Nevertheless, Dubinski was struck by the banker’s assertion that a private equity buyer could

“unlock” value inherent in Blaine’s strong operations and balance sheet. Using cash on Blaine’s

balance sheet and new borrowings, a private equity firm could purchase all of Blaine’s outstanding

shares at a price higher than $16.25 per share, its current stock price. It would then repay the debt

over time using the company’s future earnings. When the banker pointed out that BKI itself could do

the same thing—borrow money to buy back its own shares—Dubinski had asked, “But why would

we do that?” The banker’s response was blunt: “Because you’re over-liquid and under-levered. Your

shareholders are paying a price for that.” In the days since the meeting, Dubinski’s thoughts kept

returning to a share repurchase. How many shares could be bought? At what price? Would it sap

Blaine’s financial strength? Or prevent it from making future acquisitions?

Blaine Kitchenware’s Business

Blaine Kitchenware...