Background
Instead of comparing what would happen with an EBITDA of SEK 3 billion as analyst
expects, we decided to use an EBITDA of SEK 2.344 billion which is the 2004 result.
We decided to base our worst case scenario on an EBITDA SEK 1.5 billion as the board
asked.
Argument:
A company wants to recapitalize towards more debt and less equity to increase its share
price. This makes the acquisition of a company less attractive. It has been proved that the
share price does not increase automatically after a repurchase of the company’s shares
outstanding. Further to this, investors could decrease the PE ratio of the firm as it is more
leveraged and consequently more risky. For Swedish Match, the recapitalization plan, may
increase the share price from $80 to almost $83, based upon the PE ratio remaining
consistent at 22.4 (see Attachment 1). If an investor decides that according to the higher
risk of the firm, this ratio should decrease to 20, the share price would then become $74.
The PE ratio should not decrease if the firm’s debt was below optimum before
recapitalization. This is what we should analyze. According to the financial data of the
company disclosed, the firm is equal highest in terms of its leverage position with
Equity/Assets listed at 34%. Thus, according to this, the firm may be below its optimum
level and could recapitalize with no drop in the PE ratio.
For recapitalization of this nature, determining if the firm has a sustainable cash flow level,
is considered to be an important criteria should there be a drop in sales. Swedish Match
must ensure that they have adequate cash to settle both interest and principle requirements.
Over the last 3 years from 2001 to 2004, the company has increased its cash flow with
only a marginal decrease in PP&E and Liabilities. However, the company lost market
share (sales), and uniquely increased Net Income through a decrease in expenses. Despite
this when analyzing the company’s cash position, Swedish Match may qualify for the
recapitalization plan.
The current increase in cash and a low share price may expose Swedish Match to a
takeover because these are two factors that would render this an attractive option to any
potential investor. In light of this, a recapitalization plan would be a cohesive option.
However, in saying that, there is no information to suggest that Swedish Match is under
