B/E Aerospace Case<br />Optimizing Capital Structure<br />Team 1<br />Wednesday, February 10, 2010<br />
Executive Summary<br />Background<br />Issues<br />B/E is a manufacturer of commercial and business jet airplane interiors...
Agenda<br />Situational analysis<br />Current concerns<br />Optimizing capital structure<br />Recommendation<br />Conclusi...
External Analysis<br />Economic climate<br /><ul><li> Recovering from 9/11 downturn
 GDP for advanced economies increased from 1.368% in 2001 to 3.174% in 2004</li></ul>Aerospace Industry<br /><ul><li> Cycl...
Airline capacity and OEM   production
Consumer habits
 Combined industry annual sales
 Commercial and business jets - $1.1B
 Aerospace grade fastener - $1.2B
Competitors: Boeing, Britax, Zodiac, C&D</li></ul>Despite recent turmoil, the industry is recovering and outlook is bright...
Internal Analysis<br />Growth through acquisitions<br />Focus on R&D<br />Manufacturer of commercial and business jet airp...
Revenue Projections<br />Assumptions<br /><ul><li> 10% Revenue Increase
 Backlog Clearance
 2% Revenue Increase
Economic shock
 No Backlog Cleared</li></ul>Worst case projections show revenues decreasing significantly.<br />6<br />
7<br />B/E Current Situation – Base Case<br />Debt Ratio<br />79%<br />WACC<br />8.93%<br />WACC <br />8.93%<br />Debt Rat...
8<br />B/E Current Situation – Worst Case<br />Debt Ratio<br />79%<br />WACC<br />8.93%<br />WACC <br />8.93%<br />Debt Ra...
B/E Current Interest Payments<br />9<br />Interest payments are too high, making B/E’s current capital structure unsustain...
Optimal Capital Structure<br />Optimal Capital Structure – <br />35% Debt/ 65% Equity<br />BEAV Current Capital Structure<...
B/E’s Debt Retirement Options<br />11<br />Any decisions made to retire debt should meet the following criteria:<br />Usin...
1. Reduce Debt with $50M Cash<br />12<br />Use $50M Excess Cash<br />Current<br />WACC<br />8.93%<br />Total Equity<br />1...
1. Reduce Debt with $50M Cash<br />13<br />Base Conditions<br />Worst Case<br />EV is $ 1,722.44 <br />EV is $ 1,077.85 <b...
Current<br />2. Reduce Debt by Issuing Equity<br />14<br />Raise $378M in Equity<br />44.5M Stocks @ $8.5 each<br />WACC<b...
2. Reduce Debt by Issuing Equity<br />15<br />Base Conditions<br />Worst Case<br />EV is $ 2,115.35 <br />EV is $ 1,186.29...
3. Reduce Debt Using Cash + Equity<br />16<br />Raise $348M in Equity<br />41.0M Stocks @ $8.5 each<br />Current<br />WACC...
3. Reduce Debt Using Cash + Equity<br />17<br />Base Conditions<br />Worst Case<br />EV is $ 2,115.35 <br />EV is $ 1,186....
Recommendation<br />18<br />Retire debt with cash and equity<br />Decision<br />Action<br />Results<br />Use excess cash a...
Risks<br />Dilution<br />How will stock issuance affect share price?<br />Underwriter fees<br />19<br />
Alternative Options<br />20<br />Decrease Debt with with Retained Earnings<br />Base Conditions<br />Worst Case<br />The n...
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BEA - Corporate Strategy

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  • Takeaway: B/E’s strategy is to offer the broadest range of products, despite underperforming of certain divisions
  • BEA - Corporate Strategy

    1. 1. B/E Aerospace Case<br />Optimizing Capital Structure<br />Team 1<br />Wednesday, February 10, 2010<br />
    2. 2. Executive Summary<br />Background<br />Issues<br />B/E is a manufacturer of commercial and business jet airplane interiors<br />Post 9/11 <br />Recovering industry<br />High levels of uncertainty due to cyclical nature of industry<br />Company is over levered with 79% Debt & 21% Equity<br />Company cannot cover interest with projected earnings<br />Current sales backlog of $615M<br />Optimizing Capital Structure<br />Recommendation<br />Lowest WACC: 8.077%<br />Optimal Capital Structure: 35% Debt/ 65% Equity<br />Reduce debt with $50M cash on hand<br />Issue equity for remainder<br />Achieve capital structure of 35%<br />Use tax carry forward of $175M<br />2<br />
    3. 3. Agenda<br />Situational analysis<br />Current concerns<br />Optimizing capital structure<br />Recommendation<br />Conclusion<br />3<br />
    4. 4. External Analysis<br />Economic climate<br /><ul><li> Recovering from 9/11 downturn
    5. 5. GDP for advanced economies increased from 1.368% in 2001 to 3.174% in 2004</li></ul>Aerospace Industry<br /><ul><li> Cyclical industry
    6. 6. Airline capacity and OEM production
    7. 7. Consumer habits
    8. 8. Combined industry annual sales
    9. 9. Commercial and business jets - $1.1B
    10. 10. Aerospace grade fastener - $1.2B
    11. 11. Competitors: Boeing, Britax, Zodiac, C&D</li></ul>Despite recent turmoil, the industry is recovering and outlook is bright.<br />International Monetary Fund, World Economic Outlook Database, October 2009<br />
    12. 12. Internal Analysis<br />Growth through acquisitions<br />Focus on R&D<br />Manufacturer of commercial and business jet airplane cabin interiors and distributor of aerospace fasteners<br />Broad product and services offering<br />International presence<br />BEAV Business Segments<br />
    13. 13. Revenue Projections<br />Assumptions<br /><ul><li> 10% Revenue Increase
    14. 14. Backlog Clearance
    15. 15. 2% Revenue Increase
    16. 16. Economic shock
    17. 17. No Backlog Cleared</li></ul>Worst case projections show revenues decreasing significantly.<br />6<br />
    18. 18. 7<br />B/E Current Situation – Base Case<br />Debt Ratio<br />79%<br />WACC<br />8.93%<br />WACC <br />8.93%<br />Debt Ratio<br />79%<br />Revenue Growth<br />10%<br />Terminal Growth<br />5%<br />Terminal growth <br />5%<br />Revenue growth<br />10%<br />B/E is unable to meet interest payments through earnings.<br />
    19. 19. 8<br />B/E Current Situation – Worst Case<br />Debt Ratio<br />79%<br />WACC<br />8.93%<br />WACC <br />8.93%<br />Debt Ratio<br />79%<br />Revenue growth<br />(-8% ) yr 1<br />2% > yr 1<br />Terminal Growth<br />2%<br />Terminal growth <br />5%<br />Revenue growth<br />10%<br />B/E cannot sustain another shock with current capital structure.<br />
    20. 20. B/E Current Interest Payments<br />9<br />Interest payments are too high, making B/E’s current capital structure unsustainable.<br />
    21. 21. Optimal Capital Structure<br />Optimal Capital Structure – <br />35% Debt/ 65% Equity<br />BEAV Current Capital Structure<br />Currently, B/E is operating with a sub-optimal capital structure. There is room to reduce WACC. <br />10<br />See Appendix 1 for Calculation<br />
    22. 22. B/E’s Debt Retirement Options<br />11<br />Any decisions made to retire debt should meet the following criteria:<br />Using excess cash and equity is the optimal method of reducing debt.<br />See Appendix 2a & 2b for assumptions and projected financials<br />
    23. 23. 1. Reduce Debt with $50M Cash<br />12<br />Use $50M Excess Cash<br />Current<br />WACC<br />8.93%<br />Total Equity<br />180M<br />Total Debt<br />679M<br />Debt Ratio<br />79%<br />Debt Ratio<br />78%<br />Total Equity<br />180M<br />Total Debt<br />649M<br />WACC<br />8.93%<br />Terminal growth <br />5%<br />Revenue growth<br />10%<br />Projections<br />
    24. 24. 1. Reduce Debt with $50M Cash<br />13<br />Base Conditions<br />Worst Case<br />EV is $ 1,722.44 <br />EV is $ 1,077.85 <br />
    25. 25. Current<br />2. Reduce Debt by Issuing Equity<br />14<br />Raise $378M in Equity<br />44.5M Stocks @ $8.5 each<br />WACC<br />8.93%<br />Total Equity<br />180M<br />Total Debt<br />679M<br />Debt Ratio<br />79%<br />Debt Ratio<br />35%<br />Total Equity<br />558M<br />Total Debt<br />300M<br />WACC<br />8.08%<br />Terminal growth <br />5%<br />Revenue growth<br />10%<br />Projections<br />
    26. 26. 2. Reduce Debt by Issuing Equity<br />15<br />Base Conditions<br />Worst Case<br />EV is $ 2,115.35 <br />EV is $ 1,186.29 <br />
    27. 27. 3. Reduce Debt Using Cash + Equity<br />16<br />Raise $348M in Equity<br />41.0M Stocks @ $8.5 each<br />Current<br />WACC<br />8.93%<br />Total Equity<br />180M<br />Total Debt<br />679M<br />Debt Ratio<br />79%<br />Debt Ratio<br />35%<br />Total Equity<br />526M<br />Total Debt<br />283M<br />WACC<br />8.08%<br />Terminal growth <br />5%<br />Revenue growth<br />10%<br />Projections<br />
    28. 28. 3. Reduce Debt Using Cash + Equity<br />17<br />Base Conditions<br />Worst Case<br />EV is $ 2,115.35 <br />EV is $ 1,186.29<br />
    29. 29. Recommendation<br />18<br />Retire debt with cash and equity<br />Decision<br />Action<br />Results<br />Use excess cash and issue stock to reduce debt<br />Issue 41M shares at $8.5 each<br />Debt ratio 35%<br />Using proceeds from stock issuance and excess cash will result in an immediate debt ratio reduction from 79% to 35%<br />
    30. 30. Risks<br />Dilution<br />How will stock issuance affect share price?<br />Underwriter fees<br />19<br />
    31. 31. Alternative Options<br />20<br />Decrease Debt with with Retained Earnings<br />Base Conditions<br />Worst Case<br />The net income for the projected years are negative; therefore, the accumulation of retained earnings is not a feasible option<br />
    32. 32. Going forward<br />Consider divesture of underperforming division (Business Jets)<br />Buyer synergies<br />Work to increase margins<br />Reduce COGS & Reduce SG&A<br />Increase plant capacity<br />Will reach capacity by 2008<br />Direct R&D towards manufacturing processes<br />21<br />
    33. 33. 22<br />Appendix<br />
    34. 34. Appendix 1 - Optimal Capital Structure<br />23<br />WACC Calculation<br />WACC Graph<br />Used to determine beta unlevered<br />
    35. 35. Appendix 2a: General Assumptions<br />Tax Rate = 35% (2004 US Federal Rate)1<br />Debt Extinguishment Penalty = 0.59% (Historical)<br />RD= 9.34%<br />Tax Credit = 179<br />24<br />1. KPMG Corporate Tax Rate Survey – January 2004, KPMG <br />
    36. 36. Appendix 2b:Snapshot of Projected Financials<br />
    37. 37. 26<br />1. Reduce Debt Using $50M Cash - Base<br />
    38. 38. 27<br />1. Reduce Debt Using $50M Cash - Worse<br />
    39. 39. 28<br />2. Reduce Debt Using Cash+Equity - Base<br />
    40. 40. 29<br />2. Reduce Debt Using Cash+Equity - Worse<br />
    41. 41. 30<br />3. Issue New Equity - Base<br />
    42. 42. 31<br />3. Issue New Equity - Worse<br />

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