Essay About Leading Market Share And Recapitalization Of Wrigley Jr. Co

Recapitalization of Wrigley Jr. Co
To:From:Date:Subject:December 31, 2002Recapitalization of Wrigley Jr. CoPurpose:The purpose of this memo is to analyze the impact of restructuring the capital structure of Wrigley. Currently, the capital structure is all equity with no debt on the balance sheets. With interest rates at the lowest point in 50 years, we believe that adding leverage to the company could create significant new value at virtually no additional risk. As you know, the additional value created through this restructuring would come from the tax shields on interest. This memo will breakdown the analysis of this recapitalization through issuance of bonds at Wrigley’s current credit rating. Additionally, calculating the net present value (NPV) of all tax shields would give us the additional value created.   Business considerations in undertaking debt:Wrigley has a leading market share in a low-technology business of making chewing gum. Its industry – branded consumer foods and candy – is intensively competitive but Wrigley is well positioned in this market. As a result of this, we believe the risk is relatively small (there is not a lot of systematic risk), and that it can safely take on debt.The company’s continued success is dependent upon its ability to create and market products which appeal to the changing consumer preferences. Failure to adequately anticipate and react to changing demographics and product preferences could result in decreased cash flows which would be amplified because of leverage. International business presents risks including currency exchange rate fluctuations. Wrigley’s foreign sales account for 58% of its total revenue and it has manufacturing plants across different countries. The volatility in foreign exchange could affect the company’s operating cash flows, thus impacting interest payment on debt.Wrigley is geographically diversified in multiple markets, is a market leader in an anti-cyclical industry, and has a strong growth in foreign markets, making it immune to systematic risk. This is evident from its low value of beta of 0.75.