2.11.09 stone_container.ppt1 what stone did on april 8th, stone announced that the equity offering...
TRANSCRIPT
2.11.09 Stone_Container.ppt 1
What Stone did• On April 8th, Stone announced that the equity
offering was being canceled
• Stock price recovered 1 1/2 points (16.7%) on the announcement, but continued to trade in the $8-$9 range for the rest of April. The junk bonds lost about 6% of their value.
• Subsequent financial moves:
– Renegotiated bank loans
– Sold $150 million of 12 5/8% Senior Notes due 1998
– Sold $250 million of 8 7/8% Convertible Senior Subordinated Notes due 2000; convertible at $11.55
2.11.09 Stone_Container.ppt 2
More …• Other actions
– Sold Mexican subsidiary
– Sold minority interests in Canadian and British newsprint subsidiaries
– Shut down 220,000 tons of U.S. capacity
• Linerboard prices began to rise in last half of 1993, eventually rising $180 per ton above 1993 lows by 1995
• Stone lost $205 million in 1994, but reports 1995 PAT of $255 million
• Stone’s stock hit $18 1/2 in 1994
• Stone issued 16.5 million new shares at 15 1/4 ($250 million), but leverage was still high at (72%)
2.11.09 Stone_Container.ppt 3
Human and market imperfections
• “I’ve told the junk bond people they won’t be seeing me anymore.”
Roger Stone
• “Given his past, why should we believe him?”
- Sharyl Van Winkle
Merrill Lynch analyst
Two-day wrapup
2.11.09 Stone_Container.ppt 4
Optimal/Target capital structure—Checklist
• Can company pay interest—coverage ratios?– EBIT/Int, EBITDA/Int– In good times and bad
• Industry volatility or cyclicality?– Operating leverage makes cash flow more volatile/cyclical
• Industry standards—what are competitors doing?
• Is company able to make use of its ITS?
• Costs of financial distress?– What will customers and suppliers do in shadow of bankruptcy?
• Agency costs?– High leverage=>Mgrs take negative NPV projects with high risk– Low leverage=>Mgrs have few incentives to be efficient, may
consume excess perks (private jets, plush offices…)
• Leverage needed to control renk-seeking?– Unions and/or regulators
• Does company need strategic flexibility?– Will covenants interfere with strategy?
2.11.09 Stone_Container.ppt 5
Getting to your optimal capital structure
• From low leverage, it’s easy: do a leveraged recap
• From high leverage, it’s hard
• Assume D+E is approx constant (Ignore value of ITS)
• Each 1% decline in D/V => $55MM in new equity
• To go from 78% to 50% requires ~ $1.5 Bn in new equity!
• At least 100 MM new shares (1.5 B/$15)
• Dilution = 100/(100+71) = 58%
• Family share = 42% of what previous holdings
2.11.09 Stone_Container.ppt 6
Stone’s V = D+E = 4323 +1189 = 5512
And that’s before announcement effects!• Two explanations for the drop in Pstk on announcement of
equity issue
• Debt overhang– Transfer of value from new equity to impaired debt– Arises under symmetric information when D/V is high
• Signaling– Action (debt or equity) communicates true state of company to
market– Arises under asymmetric information when D/V is anything
• Net result => Companies are reluctant to issue equity– … even when company is over-levered and experiencing costs of
financial distress (out of bankruptcy)– … when a company bucks the trend, it is punished
• Converts can be “backdoor equity”
2.11.09 Stone_Container.ppt 7
2.11.09 Stone_Container.ppt 8
Epilogue
• Merged with Jefferson Smurfit Corp. on May 8, 1998 in an exchange of shares implying a value of $20.30 per share ($2.12 billion market cap).
• Jan. 27, 2009: Smurfit-Stone Container filed for Chapter 11 bankruptcy protection with debt of $5.6 billion.
Today, they are learning firsthand about the bankruptcy process
2.11.09 Stone_Container.ppt 9
2.11.09 Stone_Container.ppt 10
“Indeed, indeed, repentance oft beforeI swore – but was I sober when I swore?”
-Rubaiyat of Omar Khayyam