KOHLR &Co (A&B)
Asish K Bhattacharyya
Chairperson, Riverside Management Academy Private
Limited
Herbert Kohlers Motive
Why does Herbert Kohler want to do the
recapitalisation?
Why does he want to buy the minority
shareholders out when he already controls about
90% of the company?
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Aversion To Publicity And
Public Disclosure
Is Herbert Kohler correct that private is better?
Is Mr. Kohler reaping private benefits of control?
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The Dissenters Motive
What do minority shareholders want?
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Valuation
How do you determine the share price to be
offered to dissenters?
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Comparable Companies
Kitchen and bath products
American Standard
American Wood mark
Masco
Power and generators
Briggs Stratton
Cummins
Detroit Diesel
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Valuation
Minority shareholders have de facto no voting rights.
Control premium and minority discount
Minority discount =
1 1/(1+Control Premium)
Control premium of 25% relative to minority share is
equivalent to minority discount of 20% relative to
controlling interest
Lack of marketability
Illiquidity
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Minority Discount
Sources of empirical data:
Acquisition premium: 36 49%
Voting premium (in dual class companies): 10
80% [Factors for variation: the degree of
shareholder protection and the possibility of
change in the management]
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Discount For Lack of
Marketability
Sources of empirical evidence:
Discount on sale of restricted stock
Private placement (before IPO)
Estimates: 25% - 40%
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Valuation: Cost of Debt
Interest expenses (Projected):
1998: 11,521 [Ex: 6b]
1999: 14,325 [Ex: 6b]
LT Debt:
1997: 228,940 [Ex: 3a]
1998: 243,939 [Ex: 6a]
Interest rate (pre-tax):
1998 5.03%
1999: 5.87%
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Valuation: Cost of Debt
Interest expenses (Projected):
1998: 11,521
1999: 14,325
LT Debt:
Average 1998: 236,440
Average 1999 : 223,939
Interest rate (pre-tax):
1998: 4.87%
1999: 6.40%
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Valuation: Cost of Debt
Interest expenses (Projected):
1998: 11,521
1999: 14,325
LT Debt:
1998: 243,939
1999 : 203,939
Interest rate (pre-tax):
1998: 4.72%
1999: 7.02%
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Valuation: Tax Rate
Tax Expense:
1998: 38,585[ Ex: 6b]
1999: 46,071
Income Before Tax:
1998: 87,175
1999: 106,103
Tax Rate:
1998: 44.26%
1999: 43.60%
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Post-Tax Cost of Debt
6.40(1 0.4360) = 3.61%
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Cost of Equity
What should be the risk-free rate of return?
What should be the ?
What should be the market premium?
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Risk-Free Rate of Return
20-year US Government Bond: 6% [Exhibit 8]
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Market Premium
Average difference between stock and bond
annual returns over the period 1926-1997
7.2%
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Determination of Beta ()
Net Sales [Ex: 4]:
Kitchen and Bath Group: 1,485,831 (67%)
Power systems Group: 540,260 (24%)
Interior Group: 145,414 (7%)
Hospitality& R. Estate Group: 50789 (2%)
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Determination of Beta ()
Net Income [Ex:4]:
Kitchen and Bath Group: 87,411(77%)
Power systems Group: 20,339 (18%)
Interior Group: 4,001 (4%)
Hospitality& R. Estate Group: 1,121 (1%)
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Determination of Beta ()
Sales and Net Income of two major Groups
Sales:
Kitchen and Bath Group: 1,485,831 (73.33%)
Power systems Group: 540,260 (26.67%)
Net Income:
Kitchen and Bath Group: 87,411(89%)
Power systems Group: 20,339 (11%)
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Determination of Beta (): Most
Current Data
ASD
AMW MAS
D
BGG
CUM DDC
Equity
Beta [7b]
0.82
0.76
1.28
0.66
1.09
1.30
E/V
0.59
0.95
0.89
0.81
0.65
0.84
Debt
Beta
0.00
0.00
0.00
0.00
0.00
0.00
Asset
Beta
0.49
0.72
1.14
0.53
0.70
1.09
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Determination of Beta ():
Average of Latest Three Years
ASD
AMW MAS
D
BGG
CUM DDC
Equity
Beta
0.82
0.76
1.28
0.66
1.09
1.30
E/V
0.55
0.87
0.82
0.89
0.75
0.80
Debt
Beta
0.00
0.00
0.00
0.00
0.00
0.00
Asset
Beta
0.45
0.66
1.04
0.58
0.82
1.04
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Determination of Beta ():
Most Current Data
Asset
Beta
E/V
Equity
Beta
Average of Kitchen and Bath
comparable companies
0.78
0.81
0.97
Average of Power and Systems
comparable companies
0.78
0.77
1.02
Average of six comparable companies
0.78
0.79
0.99
Weighted Average 80% Kitchen and
Bath and 20% Power and Systems
0.78
0.80
0.97
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Determination of Beta ():
Most Current Data
WACC
Equity
Beta
Cost of
equity
After
tax cost
of debt
Average of Kitchen and Bath
comparable companies
0.97
13.0%
3.7% 11.2%
Average of Power and Systems
comparable companies
1.02
13.3%
3.7% 11.1%
Average of six comparable
companies
0.99
13.1%
3.7% 11.1%
Weighted Average 80% Kitchen
and Bath and 20% Power and
Systems
0.97
13.0%
3.7% 11.2%
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Determination of Beta ():
Average of Latest Three Years
Asset
Beta
E/V
Equity
Beta
Average of Kitchen and Bath
comparable companies
0.72
0.75
0.96
Average of Power and Systems
comparable companies
0.81
0.81
1.00
Average of six comparable companies
0.77
0.78
0.98
Weighted Average 80% Kitchen and
Bath and 20% Power and Systems
0.74
0.76
0.97
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Determination of Beta ():
Average of Latest Three Years
Equity
Beta
Cost of
equity
After
tax cost
of debt
WAC
C
Average of Kitchen and Bath
comparable companies
0.96 12.9% 3.7% 10.6%
Average of Power and Systems
comparable companies
1.00 13.2% 3.7% 11.4%
Average of six comparable
companies
0.98 13.1% 3.7% 11.0%
Weighted Average 80% Kitchen
and Bath and 20% Power and
Systems
0.97 13.0% 3.7% 10.8%
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Total Beta
CAPM fundamental assumptions do not hold for
a family-owned company like Kohler.
Indeed, if most of the Kohler familys wealth is
tied to the company, they will not only be
exposed to systematic risk (measured by beta),
but also to Kohler Co.s idiosyncratic risk.
This may be true for Herbert Kohler, his sister,
and his children, as well as for those dissenters
who are Kohler family members, although not
for the outside shareholders, particularly the
Sogen and Franklin funds.
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Total Beta
One way to adjust the standard CAPM to account
for total risk is to use a total beta instead of
the usual market beta.
Total beta is defined as the ratio of the standard
deviations of the investment and the market,
without multiplying it by the correlation between
the investment and the market as we do for the
standard (market) beta
Total = i/m
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END
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