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A New Financial Policy at Swedish Match

Harvard Business School Case 9-212-017
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Particulars
Interest Payment
Saving each year

SEK millions

Tax Shield(assuming 10 year bond)

180
50.4
398.80

Post-Recap, Swedish Match will have an additional SEK 4 billion in debt and have SEK 4.5 billion les
The pre and post recap balance sheetsas of 2004:-

Balance Sheet
Pre
Post
Cash and Short-term Investments
3002
3002
b
Current Assets
4884
4884
PP&E
2712
2712
Other Assetsc
4300
4300
Total Assets
14898
14898

Current Liabilitiesd
3776
3776
Total Interest-Bearing Debt
3529
7529
Of which: Long-term Debt
2559
6559
e
Other Liabilities
2533
2533
Equity, including minority interest
5060
1060
Total Liabilities and Equity
14898
14898

and have SEK 4.5 billion less inbook value equity.

Total Debt/EBITDA
7529
2344 3.21203

Part A
Immediately after announcing the leverage recap, Swedish Matchs market value of equity will increas
assuming that the book values of all tangible assets are equal to their market values

Balance Sheet
Cash & Short Term Investments
Current Assets
PP&E
Other Assets
Intangible Assets
Total Assets
Current Liabilities
Total Interest Bearing Debt
Of Which: Long-Term Debt
Other Liabilities
Equity & Minority Interests
Total Liabilities & Equity

Pre

Post

3002.00
4884.00
2712.00
4300.00
23394.00
38292.00

$3,002
$4,884
$2,712
$4,300
$23,793
$38,691

$3,776
$3,529
$2,559
$2,533

$3,776
$3,529
$2,559
$2,533
$28,853
$38,691

$28,454

$38,292

Part B
After it completes the debt issuance, the total interest bearing debt figure will increase by SEK 4 billio

Balance Sheet
Cash & Short Term Investments
Current Assets
PP&E
Other Assets
Intangible Assets
Total Assets
Current Liabilities
Total Interest Bearing Debt
Of Which: Long-Term Debt
Other Liabilities
Equity & Minority Interests
Total Liabilities & Equity

Pre

Post

$3,002
$4,884
$2,712
$4,300
$23,793
$38,691

$7,002
$4,884
$2,712
$4,300
$23,793
$42,691

$3,776
$3,529
$2,559
$2,533

$3,776
$7,529
$6,559
$2,533
$28,853
$38,691

$28,853

$38,691

Part C
After it completes the share repurchase, the cash figure will decrease by SEK 4 billion and the market

Balance Sheet

Pre

Post

Cash & Short Term Investments

Current Assets
PP&E
Other Assets
Intangible Assets
Total Assets

$7,002
$4,884
$2,712
$4,300
$23,793
$42,691

$3,002
$4,884
$2,712
$4,300
$23,793
$38,691

Current Liabilities
Total Interest Bearing Debt
Of Which: Long-Term Debt
Other Liabilities
Equity including Minority Interests
Total Liabilities & Equity

$3,776
$7,529
$6,559
$2,533
$28,853
$42,691

$3,776
$7,529
$6,559
$2,533
$24,853
$38,691

ue of equity will increase by the value of the tax shield

Post

$3,002
$4,884
$2,712
$4,300
$23,793
$38,691
$3,776
$3,529
$2,559
$2,533
$28,853
$38,691

ncrease by SEK 4 billion and the cash figure will increase by SEK 4 billion.
Post

$7,002
$4,884
$2,712
$4,300
$23,793
$42,691
$3,776
$7,529
$6,559
$2,533
$28,853
$38,691

billion and the market value of equity will decrease by SEK 4 billion.

Post

$3,002
$4,884
$2,712
$4,300
$23,793
$38,691
$3,776
$7,529
$6,559
$2,533
$24,853
$38,691

From Exhibit 7 and Exhibit 5:

EBIT
Interest
Coverage

EBITDA
Interest
Coverage

Altadis
BAT
Imperial Tobacco
Gallaher

5.4
6.8
4.4
3.9

6.4
7.7
5.8
4.5

Average BBB firm

Average BB firm

4.7
2.5

6.5
3.5

4.18

5.26

Firm

Swedish Match

Thus the credit rating of Swedish Match wil fall from A- to BBB which w
Swedish Match may take this new policy. However, it should not raise m
and retain some flexibility at the same time rather than becoming cash

Levera
Total
ge @
Debt/EBITDA Market
Values
2.9
2.5
3.2
4.3

24%
28%
28%
36%

Rating

ABBB+
BBB
BBB

2.2
3.5

24.50% BBB
35.50% BB

3.21

23.30% BBB

all from A- to BBB which will increase further costs in the future.
ever, it should not raise more debt to maintain a BBB rating at least
ather than becoming cash-strapped due to interest payments alone.

Exhibit 2

Swedish Match, Selected Financial Data, 19952004 (in SEK millions, except where noted)
1995

1996

1997

1998

1999

2000

2001

Summary Operating Data

Revenue

7,435

7,416

7,465

8,194

9,420

11,533

13,635

Cost of Goods Sold

3,900

3,653

3,615

4,096

5,138

6,647

7,627

Other Operating Expenses

2,062

2,179

2,281

2,620

2,639

3,035

3,843

1,473

1,584

1,569

1,478

1,643

1,851

2,165

294

270

268

332

381

543

670

1,179

1,314

1,301

1,146

1,262

1,308

1,495

107

178

65

182

323

427

407

EBITDA
Depreciation and Amortization
EBIT
Interest Expense
+ Other Items

EBT
Income Tax Expense
Net Income

504

394

322

234

4,341

829

752

1,576

1,530

1,558

1,198

5,280

1,710

1,840

473

439

512

482

638

556

589

1,103

1,091

1,046

716

4,642

1,154

1,251

804

942

563

2,876

7,296

2,960

1,606

3,099

3,108

3,278

4,089

3,808

5,730

6,587

2,002

1,939

2,050

2,239

1,866

2,576

2,970

741

888

1,241

1,358

3,700

5,015

5,460

6,646

6,877

7,132

10,562

16,670

16,281

16,623

4,566

2,798

3,248

2,732

3,290

3,253

3,879

129

1,019

209

4,331

5,873

5,699

5,483

209

2,098

5,093

4,638

5,072

289

692

683

1,191

1,405

2,125

2,389

1,662

2,368

2,992

2,308

6,102

5,204

4,872

6,646

6,877

7,132

10,562

16,670

16,281

16,623

Balance Sheet
Cash and Short-term Investments
Current Assets

PP&E
Other Assetsc
Total Assets
Current Liabilitiesd
Total Interest-Bearing Debt
Of which: Long-term Debt
Other Liabilitiese
Equity, including minority interest
Total Liabilities and Equity
Cash Flow Data and Stock Price
Capital Expenditures

302

217

292

393

452

331

633

Cash Acquisitions, netf

Dividends Paid
Share Repurchases
Shares Outstanding, M
Year End Share Price (krona/share)
Market Value of Equity

0
1,072
0
431
29.7
12,801

0
300
0
464
26.6
12,331

60
510
0
464
26.28
12,192

157
510
1,147
431
25.52
10,999

-2,259
474
0
431
28.62
12,336

1,660
539
1,967
375
42.52
15,944

962
490
1,169
350
69
24,150

Selected Growth Rates and Ratios

EBITDA Margin
EBIT Margin
Book Leverage (debt/debt plus equity) (%)
Market Leverage (debt/debt plus market capitalization) (%)
Book Equity / Assets

19.8%
15.9%
7.2%
1.0%
25.0%

21.4%
17.7%
30.1%
7.6%
34.4%

21.0%
17.4%
6.5%
1.7%
42.0%

18.0%
14.0%
65.2%
28.3%
21.9%

17.4%
13.4%
49.0%
32.3%
36.6%

16.0%
11.3%
52.3%
26.3%
32.0%

15.9%
11.0%
53.0%
18.5%
29.3%

Source: Capital IQ, accessed September 2011, and annual reports.

a

Other items include Investment Income, Income from Affiliates, Currency Exchange Gains, Restructuring Charges, Gain on Sale of Assets, Asset Write-downs, and Other Unu

Current Assets includes Accounts Receivable, Inventory, and Prepaid Expenses.

Other Assets includes Long-term Investments, Goodwill, Other Intangibles, and Other Long-Term Assets.

Current Liabilities includes Accounts Payable, Accrued Expenses, Current Income Taxes Payable, Deferred Tax Liabilities, and Other Current Liabilities.

e
f

Other Liabilities includes Pension and Other Post-Retirement Benefits, Deferred Tax Liabilities, Non-Current, and Other Non-Current Liabilities.
Cash used for purchasing businesses and subsidiaries, minus net proceeds from the divestiture and sale of businesses and subsidiaries.

2002

2003

2005

2004

13,643

13,036

13,007

7,451

7,103

7,027

3,842

3,722

3,636

2,350

2,211

2,344

651

665

479

1,699

1,546

1,865

337

283

266

764

911

1,829

2,126

2,174

3,428

648

572

1,345

1,478

1,602

2,083

2,016

2,666

3,002

5,742

5,310

4,884

2,938

2,862

2,712

4,751

4,264

4,300

15,447

15,102

14,898

3,093

2,929

3,776

5,283

5,381

3,529

4,518

4,535

2,559

2,378

2,185

2,533

4,693

4,607

5,060

15,447

15,102

14,898

751

551

486

53
508
499
334
61.95
20,691

78
535
1,012
328.5
78.71
25,856

-64
558
658
322.1
88.34
28,454

17.2%
12.5%
53.0%
20.3%
30.4%

17.0%
11.9%
53.9%
17.2%
30.5%

18.2%
14.3%
41.1%
11.0%
34.0%

2344 5.255605
1865
446 4.181614

Write-downs, and Other Unusual Items.

lities.

Exhibit 7

Comparable Company Data, 12/31/2004 (in SEK millions, a except as noted)

Swedish
Match

Imperial
Tobacco

UST

BAT

Summary Operating Data

Net Sales
EBITDA
EBIT
Interest Expense
Net Income
Dividend Payout Ratio (%)

13,007
2,344
1,865
266
2,083
28%

11,888
6,377
6,060
551
3,527
65%

36,447
15,915
12,189
2,741
5,349
73%

137,096
36,528
31,982
4,723
35,993
30%

Balance Sheet and Cash Flow Data

Cash and Short-term Investments
Total Assets

3,002
14,898

3,390
11,027

4,010
77,282

24,662
226,308

3,529
6,309
5,060

8,238
2,726
64

50,549
23,664
3,069

91,353
57,074
77,881

14.2x
28,454

15.0x
52,823

23.4x
131,484

17.6x
233,667

-0.2%
18%

5.3%
54%

-5.3%
44%

1.8%
27%

Leverage at Book Values (debt/debt plus

equity cap), (%)

41%

99%

94%

54%

Leverage at Market Values (debt/debt plus

market cap), (%)
EBIT Interest Coverage (x)
EBITDA Interest Coverage (x)
Total Debt/EBITDA (x)

11%
7.0
8.8
1.5

13%
11.0
11.6
1.3

28%
4.4
5.8
3.2

28%
6.8
7.7
2.5

A-

BBB

BBB+

Total Debt
Non-Interest Bearing Liabilities
Total Equity
Stock Price Data
Price/Earnings Ratio
Equity Market Value
Select Ratios
Sales Growth
EBITDA Margin

Credit Rating

Source: Thomson Reuters, except credit rating data from Standard & Poors Ratings Direct; accessed September 2011.
a

The year-end exchange rate was 6.645 SEK per US$.

Gallaher

Altadis

32,428
8,811
7,677
1,974
4,558
55%

86,469
9,624
8,112
1,496
4,852
45%

9,689
55,154

9,954
96,446

37,831
18,087
-764

27,720
55,893
12,833

17.9x
65,865

23.1x
86,425

-1.5%
27%

2.5%
11%

102%

68%

36%
3.9
4.5
4.3

24%
5.4
6.4
2.9

BBB

A-

ssed September 2011.

Exhibit 5

U.S. Industrial Firms, Aggregate Average Financial Ratios by Credit Rating, 20022004

AAA

AA

Credit Rating
BBB

BB

EBIT interest coverage (x)

23.8

19.5

4.7

2.5

EBITDA interest coverage (x)

25.5

24.6

10.2

6.5

3.5

0.4

0.9

1.6

2.2

3.5

7.2

16.1

24.5

35.5

Total debt/EBITDA (x)

Market leverage (debt/debt plus
market capitalization) (%)

3.1

Source: Compiled from Standard & Poors RatingsDirect, CreditStats Adjusted Key U.S. Industrial Financial Ratios, Aug
2005, pp. 3-4, accessed September 2011.

, 20022004

g
B

CCC

1.2

0.4
1.9

0.9

5.3

7.9

53.5

78.2

ustrial Financial Ratios, August 11,

Exhibit 4

European Corporate Bonds, Constant Maturity Yields by Credit Rating, January 2005

1-year

Maturity
5-year

3-month

6-month

10-year

Credit
AAA
AA
A
BBB

2.179
2.246
2.284
2.463

2.218
2.262
2.336
2.484

2.348
2.389
2.474
2.688

3.15
3.269
3.349
3.819

3.762
3.918
4.024
4.541

Benchmarka

2.065

2.119

2.225

3.028

3.695

Source: Bloomberg, accessed September 2011.

a

Benchmark interest rate refers to the average of euro-area AAA-rated government debt (sovereign bonds issued by Franc
Germany).

ating, January 2005

20-year

30-year

4.394
4.612
4.624
5.151

N/A
4.539
4.97
5.077

4.293

4.383

debt (sovereign bonds issued by France and