As recently appointed CFO of Swedish Match, I would like to analyze the proposal of a bond offering and repurchase of company stock.
Swedish Match has proven to be a stable and growing company, holding a significant position in the smokeless tobacco market worldwide
with strong revenue and net income growth. Swedish Match has always maintained a conservative financial policy towards leveraging debt. I
believe a more aggressive approach to financing the company with debt could lead to further success for Swedish Match and our
shareholders. However, we need to analyze the effect on stock price, EPS, bond rating, and other metrics before making a final decision.
As mentioned before, Swedish Match has maintained a conservative financial policy relative to their international peers. Exhibit 7 illustrates
Swedish Match financial data comparable to their international peers. We calculated that Swedish Match had the second lowest debt to equity
of 1.94 (3529 + 6309/5060), only second to BAT, who had a debt to equity of 1.91. Other companies such as UST, Imperial Tobacco and
Altadis had debt to equities of 171.3, 24.18 and 6.52, respectively.
Let’s take a look at some of the characteristics of a debt offering. There are three definitive features of leveraging debt; 1) we will owe the
lender/lenders a fixed amount at predetermined dates. We have calculated (via Appendix C) that Swedish Match’s EBITDA Interest Coverage
with the proposed issuance of debt, would be 4.2, demonstrating financial durability to pay off interest and principal. 2) Swedish Match will
not have to forgo any control over the management (As seen with raising capital through stock offering), and 3) Swedish Match’s interest
expense will be tax deductible. Interest that is tax deductible would allow for stronger earnings, a dollar of earnings may only be worth 72
cents (28% Corporate tax rate) once tax is paid, in contrast, that dollar of earnings might still be worth a dollar with interest that is tax
deductible. These are all great advantages of a debt offering. However, there are also disadvantages that we will discuss below such as
increased risk, a lower credit rating, and less financial flexibility for future opportunities.
The size of the offering would be SEK 4 billion. After our discussions with bankers we decided that an offering around SEK 3 billion would
be too expensive and inappropriate. Our bond offering will have interest and principal repayments in euros, and we will use interest rate
