STRATEGIC FINANCE COLECO CASE TOY STORY Coleco INC. Profile • • • • • • • Name – Coleco Industries Time – the end of 1980s Industry – toys Market - USA Market share – the fifth-largest manufacturer in the USA Head quarter - West HartFord, Connecticut Production line – Cabbage Patch Kids Plush Alf dolls and puppets Couch Potato Pals Play sets (The Flintstones,Sesame Street, Sylvanian Families) • • Company`s issue - annual sales were behind expectations egative equity position of $84 million The challenge - to determine whether the company’s capital could be restructured in a way that would satisfy its creditors without diluting the stock any further than was necessary Product line Economy and Industry Analysis 1988 • the economy - raising • unemployment and interest rates – low • demographic factors favorable • interest rate is decreasing • debt is becoming cheaper Economy Industry • favorable conditions toy industry • approximately 800 toy companies in the United States • diversification for reducing sales and profit volatility - only for the biggest companies
Sales of Coleco and its Major Competitors • In millions USD 1400 1200 1000 800 600 400 Coleco Hasbro Kenner Parker Mattel Tonka 200 0 Company Analysis Sales growth 40,00% 30,00% 20,00% 10,00% 0,00% -10,00% -20,00% -30,00% -40,00% 1983 1984 1985 1986 1987 Company Analysis Current ratio 3,00 2,50 2,00 1,50 Very fluctuating 1,00 0,50 0,00 1981 1982 1983 1984 1985 1986 1987 Company Analysis Debt ratio 1,4 1,2 High dependence on debt 1 0,8 0,6 0,4 0,2 0 1981 1982 1983 1984 1985 1986 1987 Company Analysis Net profit margin 0,15 0,1 0,05 0 -0,05 -0,1 -0,15 -0,2 -0,25 1981 1982 1983 1984 1985 1986 1987 Negative profits in last years
Company Analysis Return on equity 20 15 10 5 Non meaningful figures (Equity is negative) 0 1981 -5 -10 1982 1983 1984 1985 1986 1987 Company Analysis Return on assets 0,25 0,2 0,15 0,1 0,05 0 -0,05 -0,1 -0,15 -0,2 -0,25 High Volatility of ROA 1981 1982 1983 1984 1985 1986 1987 SWOT Analysis strengths 1)Experience in past of recovery from company`s crisis 2) Current ratio is satisfactory weaknesses 1) Sales reduction has resulted in losses that contributed to its negative equity position. 2)Negative or near zero sales growth in recent years. 3)Escalating dependency on debt. 4)Coleco’s capital position was uncertain. )Huge reduction in stock price. 1)The economy was entering its sixth year of overall strength. 2)Unemployment and interest rates at their lowest in years. 3)Demographic factors also were favorable; birth rates were increasing. 4)The toy industry had begun to consolidate. 5) Basic and technology-enhanced toys did well. 1)Of the approximately 800 toy companies in the United States, only the largest were able to minimize sales and profit volatility through diversification. 2)Each companies fortune rose and fell with the strength of its new products 3)Lack of exciting new toy introductions opportunities threats ALTERNATIVES . “drifting” approach - hoping that products will do well 2. “merge” approach - hoping that there might be some value in the company’s assets 3. “equity” approach - to issue more shares at market price 4. “debts” approach - to restructure debts 5. “disengagement” approach – to go for liquidation “Drifting” Approach • • • Net income for Coleco is negative ($105. 4mln in 1987) Net worth is also negative ($84. 9mln in 1987). Huge amount of debt ($620mln in 1987) • • • Equity deficit ($84,3mln in 1987) No any new “blockbuster” products Low prospects for increasing the company’s sales based on its current product line Low possibility to recover inappropriate decision “Merge” Approach Coleco is not attractive in the sense of M&A deals: - big debts (total assets < total liabilities) inappropriate decision “Equity” Approach • The company could issue more shares but the stock price is apparently small (Ex. 1) • Coleco’s equity is negative through last two years 1986 – ($7. 6) mln 1987 – ($ 84. 3) mln inappropriate decision “Equity” Approach Ex. 1 Stock price High 1984 1985 1986 1987 Apr May June July Aug Sept Oct Nov Dec 1988 Jan Feb 14-Mar $22. 250 21. 500 20. 500 11. 625 10. 750 11. 25 11. 000 10. 375 10. 250 9. 125 6. 000 4. 625 4. 250 3. 500 Low $9. 625 10. 125 8. 125 10. 000 9. 875 10. 250 9. 750 9. 125 8. 500 4. 250 4. 375 3. 625 3. 125 2. 625 Close 12. 125 16. 000 8. 375 10. 375 10. 500 10. 625 9. 750 9. 375 9. 125 5. 500 4. 625 3. 875 3. 500 3. 000 2. 500 167. 24 211. 28 242. 17 288. 36 290. 10 304. 00 318. 66 329. 80 321. 83 251. 79 230. 3 247. 08 257. 07 267. 82 266. 37 S&P 500 Closing Bond Prices 11. 13% $81. 875 82. 000 77. 750 76. 000 94. 000 75. 625 76. 125 72. 000 55. 250 50. 000 41. 500 41. 750 27. 000 14. 38% $90. 125 101. 875 100. 75 99. 500 96. 500 95. 000 95. 000 98. 625 96. 000 94. 375 68. 875 63. 500 50. 000 54. 125 34. 250 S&P longterm gov bond 40. 29 48. 93 58. 04 60. 69 51. 55 52. 42 51. 89 50. 40 47. 39 47. 17 50. 31 49. 89 51. 28 53. 67 52. 50 “Debts” Approach • Coleco is dependent on debt through years (also successful ones) • The company has a huge amount of total liabilities (in 1987 about $ 620 mln) • No resources to pay debts (Negative equity, Assets are generally composed of Accounts receivables) • Company by the moment already does not comply with the creditors requirements nappropriate decision “Disengagement” Approach The first reason for liquidation 700 600 500 400 300 Stock based insolvency 200 100 0 -100 -200 Debt Assets Equity “Disengagement” Approach The second reason for liquidation Zone of insolvency cash flow contractual obligations 1980 1981 1982 1983 1984 1985 1986 1987 Conclusion We consider “disengagement” approach the best solution for Coleco INC, as the firm is a prime candidate for bankruptcy. THANK YOU FOR ATTANTION QUESTIONS
