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Aurora Borealis LLC functions as an active investor hedge fund that has an investment strategy that is focused on merger arbitration, recapitalization, and change of control of the distressed companies. As the managing partner of the company, Banka Dobrynin, identifies opportunities for an entity to restructure, make investment in the stock of the target firm, then make a persuasion to the management of the company to restructure its capital by raising the level of the debt and using the raised debt to buy back share or pay dividends. The overall effect of restructuring the company on various financial parameters will be looked at and discussed in this analysis.
Dobrynin is considering Wrigley Company as a potential investment opportunity where they can buy Wrigley serves as the leading distributor and manufacturer of the chewing gum. In the period under analysis, the branded consumer foods and candy industry in which Wrigley operates was very intensively competitive, and it was dominated by only a few players. The company’s revenue grew an annual rate of 10% and earnings by 9% over the last two years. The company has the leading market share and uses no debt in its capital structure where it has conservatively been financed using equity, making its stock outperform S&P significantly. The large issue for Aurora Borealis LLC is whether or not the Wrigley Company is financed inefficiently, and how much change in its capital structure will bring more efficient operation.
A recapitalization that is based on dividend will most affect the company’s outstanding shares (Meng, 2015). However, with a repurchase the outstanding shares of the company will have a material change. If the current stock is adjusted only for the tax benefits estimate, the repurchase price would be $61.53. The company currently has 232.4 million shares that are outstanding. Using this price, 48.755 million shares will be purchased using the $3 billion loan which will leave $183.686 million shares as outstanding. The increase in EPS, as a result of a reduction in outstanding shares, will single toward a more positive market sentiment that would lead to a high share price. One way in which the announcement would change the stock of the company is reflected in the exhibit 1.0.
Adding $3 billion debt to the capitalization of Wrigley and returning the same amount to the shareholders, will lead to $1.2 billion additional………………………….