Wrigley Case

Rex Chandler, V.P for chewing gum giant Wrigley, has been tasked by his Board to provide an immediate analysis regarding the firm’s capital structure. Specifically, the Board has requested to fully understand the impact of Wrigley borrowing money to perform a leveraged recapitalization. This recapitalization can take the form of either a share repurchase or a dividend. As the Wrigley family already owned 58% of the superior Class B stock, Chandler would perform his analysis of stock repurchase with respect to common stock only. Chandler was instructed to evaluate this opportunity based on borrowing either $1B, $2B, or $3B. Chandler knows that Wrigley is a mature company with significant market share and no debt. At first glance, Wrigley appears to be an especially inviting target for this strategy. Based on Wrigley’s current 13.1 billion common equity, Chandler decided that Wrigley could borrow up to $3 billion at a credit rating between BB and B with an expected yield of 13%. Chandler decided to create a pro forma statement contemplating the borrowing. Based on the last two years performance, he decided to use a 10% annual increase in sales in his pro forma. These were parameters Chandler used to begin the evaluation.

Chandler is a well-regarded analyst, and has helped Wrigley perform very well over the last 15 years of his tenure. However, this assignment was a bit different, and Chandler knew it. Wrigley, is a company that is a powerhouse in its market category, has outperformed both the S&P 500 and its industry index, has growing revenues, yet has no debt. Chandler was comfortable running the numbers, but knew the analysis of key factors such as the impact on share value, cost of capital, earnings per share, and, perhaps most importantly, the impact to the current voting control position (the Wrigley family owns 58% of the Class B common stock) were very important. Since he had not analyzed the company through this lens, he decided to enlist the help of some former co-workers who had formed the financial firm Twin Sails Consulting. He knew that Twin Sails had worked on recapitalization opportunities in the past with firms similar to Wrigley. As he reviewed his initial numbers for the third time, he reached for the phone.

...