Congoleum Lbo Case

Case: Congoleum: LBO

Date: January 25, 2012

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Group Members: GANPAA Gayatri, HONG Sung Uk, LU Jianning, MUNZER Gabrielle

Is Congoleum a good LBO candidate? In other words, does this company have a lot of debt capacity?

Congoleum is a good LBO candidate for the following reasons:

1. It has low levels of debt and a low debt to equity ratio

  | 1977 | 1978 |

Long Term Debt | 16,067 | 14,949 |

Equity | 153,068 | 187,485 |

LTD/E | 9.5% | 7.4% |

2. It has excess cash and a high current ratio

  | 1977 | 1978 |

Cash | 55,053 | 40,424 |

Current Assets | 165,355 | 220,505 |

Current Liabilities | 87,359 | 110,397 |

Current Ratio | 189.3% | 199.7% |

3. It has a strong, defensible market position

* Congoleum’s floor covering business and automotive/industrial maintenance parts business have patents which have been successfully defended against infringements in the past

* The shipping subsidiary, in particular, has an excellent reputation for quality work and has a backlog of naval contracts from the government

4. The LBO would create savings of $5m annually as a result of Congoleum being a private company

5. Opportunity for value creation on interest tax shields and depreciation tax shields if the company is in LBO format since the tax rate of 48% is very high

6. Relatively stable earnings, underpinned by strong, stable revenues

7. Debt is structured to minimise conflicts between senior and junior claim holders

8. Strong management team with relatively low ownership at present

  | # of Shares | % |

Byron C. Radaker | 60,000 | 0.49% |

Eddy G. Nicholson | 39,000 | 0.32% |

Harry F. Pearson | 64,492 | 0.53% |

All directors | 457,722 | 3.75% |

Total Shares | 12,200,000 | |

The management team would be even more incentivised under the LBO structure, given the amount of stock they would be allowed to purchase (eg. Radaker and Nicholson would be...