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In 1984, Laurel Everett, the managing lending officer of Drake and Hollinger Bank




Deep Sea Tuna;In 1984, Laurel Everett, the managing lending officer of Drake and Hollinger Bank (D&H Bank) was approached;by Crawford & Co. to help finance $59 million for a management-led leveraged buyout of Deep-Sea Tuna Inc.;from its parent company. Felicity Foods, Inc. Crawford was looking to find an institutional investor to purchase;$7 million in senior subordinated debt, which included the right to buy a 20 percent equity stake in the new;company for an additional $1 million. The remaining $2.3 million in equity would be divided between the Felicity;management team and Crawford. D&H Bank would be the sole creditor, thus, Felicity agreed to take back $15;million in junior subordinated notes.;Proposed Financing Structure;Senior Secured Bank Notes;Amount: $37 million Rate: 16% Maturity: 7 years Amortization: Debt to be paid down as quickly as profits allow;Senior Subordinated Notes (Institutional Investor);Amount: $7 million Rate: 16% Maturity: 15 years Amortization: 20% of face amount in years 11 through 15;Security: Inventory and receivables, no trademarks;Junior Subordinated Notes;Amount: $15 million Rate: 12% Maturity: 5 years Amortization: End of: 6 months, $1.5mm, 12 months, $1.5mm;18 months, $2.Omm, 3 years, $2.5mm, 4 years, $2.5mm, 5 years, $5.Omm Security: Trademarks, Puerto Rican;cannery leasehold, inventory, and receivables Subordination: Subordinated to principal and interest payments of;senior bank debt and interest payments of senior subordinated notes;Common Equity Amount: $3.3 million Investors: Institutional investor of senior subordinated notes ($1.0mm buys;20%) Crawford & Co. ($2.0mm buys 40%) Management ($0.3mm buys 40%);In early 1984, the managers of Felicity Foods decided to divest Deep-Sea Tuna because the tuna operation did not;fit well with the company's overall business strategy. Felicity managers approached Deep-Sea Tuna to propose a;possible management buyout. In addition, Felicity Foods hired/retained an investment bank to solicit bids from;other interested buyers. None of their bids, however, exceeded Deep-Sea's net book value and therefore Felicity;Foods decided to focus its efforts on the Deep-Sea management group.;To facilitate the deal, the parent company even agreed to charge only the risk-free interest rate of 12 percent on;the $15 million Junior subordinated debt. To reduce the risk, the junior notes were scheduled to retire in five;years, significantly sooner than the retirement of the senior subordinated notes. Two years earlier, Deep-Sea had;begun to experience difficulties after Felicity management had decided to expand capacity by entering into longterm contracts and by purchasing the largest tuna fleet in the industry.;Felicity's strategic intent was to gain market share nationally. However, Felicity's decision unfortunately coincided;with a period of overcapacity and stable demand in the tuna industry. Deep-Sea managers had to take cost-cutting;measures soon thereafter, thus relinquishing the goal of capturing national market share in order to maintain their;foothold in traditional markets. They also contracted their business by discontinuing certain operations and;closing down plants. After the company incurred some initial losses due to discontinued operations, the overall;cost cuts began to improve its bottom line.;Management believed that they could help continue this positive trend and that further improvement would;follow. In particular, the proposed new managers estimated that $9.6 million in annual savings would be realized.;Refer to the exhibits in the spreadsheets entitled Worksheets for Chapter 13 (in with the Lectures section on;Blackboard) before answering the questions.;1. Explain why the valuation is considering multiple discount rates, and how that is reflected in the model.;Could they have used another method for the discount rate(s), and discuss why or why not?;2. Why does this model reflect additional calculations for other stakeholders (basically;debtholders), and which stakeholder would you rather be (analyze their calculations, the total;wealth transfers, and justify your conclusion).


Paper#27799 | Written in 18-Jul-2015

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