Palm, Inc. – Leveraged Recapitalizations and Business Value
Palm, Inc. (PALM) announced a "strategic relationship with the private-equity firm of Elevation Partners ("Elevation" and a recapitalization plan" designed to "position Palm to lead the next phase of the smartphone and mobile-computing markets" on June 4th, 2007. At the time of the announcement (immediately before), Palm's stuck traded at $16.27 per share, the company had no debt, and more than a half billion dollars in cash. And Palm was seen by the markets as lagging, not leading in the development of its key markets.
Leading up to the announcement, Palm's board considered a number of "strategic alternatives," including the outright sale uf the business. Rather than a sale, the board agreed to the announced leveraged recapitalization with Elevation. As part of the deal, Jon Rubenstein, former SVP of hardware engineering and head of the iPod division at Apple, Inc., will join Palm as executive chairman of the board. Two principles of Elevation will also join Palm's board, and there will be one resignation.
The leveraged recapitalization. Given Palm's debt-free, cash-rich balance sheet, the potential for a leveraged recapitalization and the creation of New Palm existed, and one will occur, with the following features:
- Existing Palm shareholders will receive a dividend of some $9.00 per share (or about $940 million for the 102.6 million pre-transaction shares).
- Elevation will invest $325 million in exchange for a convertible preferred series with a conversion price of $8.50 per share. This was represented as about a 16% premium to the "implied post-distribution price over the 10 trading days ended June 1, 2007, excluding the $9 per share distribution," or $7.33 per share. This investment will convert into 25% of the equity of New Palm (fully diluted to give effect to certain existing and new options).
- The $940 million distribution will be financed with Elevation's $325 million investment, some $215 million of New Palm's cash, and about $400 million in new long-term debt.
- In addition, New Palm will have a $40 million revolving credit facility, which can be used for working capital purposes.
- New Palm has a pro forma current ratio of 1.46x and a long-term debt to equity ratio of 97%.
So what do the shareholders have? Palm's pre-announcement price was $16.27 per share. If we subtract the $9.00 expected distribution, shareholders would be left with implied value of $7.27 per share.