Blaine Kitchenware, Inc.: Capital Structure
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HBS Professor Timothy A. Luehrman and Illinois Institute of Technology Adjunct Finance Professor Joel L. Heilprin prepared this case solely as
a basis for class discussion and not as an endorsement, a source of primary data, or an illustration of effective or ineffective management. This
case, though based on real events, is fictionalized, and any resemblance to actual persons or entities is coincidental. There are occasional
eferences to actual companies in the na
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T I M O T H Y L U E H R M A N
J O E L H E I L P R I N
Blaine Kitchenware, Inc.: Capital Structure
On April 27, 2007, Victor Dubinski, CEO of Blaine Kitchenware, Inc. (BKI), sat in his office
eflecting on a meeting he had had with an investment banker earlier in the week. The banker, whom
Dubinski had known for years, asked for the meeting after a group of private equity investors made
discreet inquiries about a possible acquisition of Blaine. Although Blaine was a public company, a
majority of its shares were controlled by family members descended from the firm’s founders
together with various family trusts. Family interests were strongly represented on the board of
directors as well. Dubinski knew the family had no cu
ent interest in selling—on the contrary,
Blaine was interested in acquiring other companies in the kitchen appliances space—so this overture,
like a few others before it, would be politely rebuffed.
Nevertheless, Dubinski was struck by the banker’s assertion that a private equity buyer could
“unlock” value inherent in Blaine’s strong operations and balance sheet. Using cash on Blaine’s
alance sheet and new bo
owings, a private equity firm could purchase all of Blaine’s outstanding
shares at a price higher than $16.25 per share, its cu
ent stock price. It would then repay the debt
over time using the company’s future earnings. When the banker pointed out that BKI itself could do
the same thing—bo
ow money to buy back its own shares—Dubinski had asked, “But why would
we do that?” The banker’s response was blunt: “Because you’re over-liquid and under-levered. Your
shareholders are paying a price for that.” In the days since the meeting, Dubinski’s thoughts kept
eturning to a share repurchase. How many shares could be bought? At what price? Would it sap
Blaine’s financial strength? Or prevent it from making future acquisitions?
Blaine Kitchenware’s Business
Blaine Kitchenware was a mid-sized producer of
anded small appliances primarily used in
esidential kitchens. Originally founded as The Blaine Electrical Apparatus Company in 1927, it
produced then-novel electric home appliances, such as irons, vacuum cleaners, waffle irons, and
cream separators, which were touted as modern, clean, and easier to use than counterparts fueled by
oil, coal, gas, or by hand. By 2006, the company’s products consisted of a wide range of small kitchen
appliances used for food and beverage preparation and for cooking, including several
anded lines
of deep fryers, griddles, waffle irons, toasters, small ovens, blenders, mixers, pressure cookers,
steamers, slow cookers, shredders and slicers, and coffee makers.
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O C T O B E R 8 , XXXXXXXXXX
For the exclusive use of D. Ghosh, 2020.
This document is authorized for use only by Devleena Ghosh in Behavioral Corporate Finance (Summer 2020) taught by DUCCIO MARTELLI, Universit?? degli Studi di Perugia from Jun 2020
to Aug 2020.
4040 | Blaine Kitchenware, Inc.: Capital Structure
2 BRIEFCASES | HARVARD BUSINESS SCHOOL
Blaine had just under 10% of the $2.3 billion U.S. market for small kitchen appliances. For the
period 2003–2006 the industry posted modest annual unit sales growth of 2% despite positive market
conditions including a strong housing market, growth in affluent householders, and product
innovations. Competition from inexpensive imports and aggressive pricing by mass merchandisers
limited industry dollar volume growth to just 3.5% annually over that same period. Historically, the
industry had been fragmented, but it had recently experienced some consolidation that many
participants expected to continue.
In recent years, Blaine had been expanding into foreign markets. Nevertheless in 2006, 65% of its
evenue was generated from shipments to U.S. wholesalers and retailers, with the balance coming
from sales to Canada, Europe, and Central and South America. The company shipped approximately
14 million units a year.
There were three major segments in the small kitchen appliance industry: food preparation
appliances, cooking appliances, and beverage-making appliances. Blaine produced product for all
three, but the majority of its revenues came from cooking appliances and food preparation
appliances. Its market share of beverage-making appliances was only 2%. Most of BKI’s appliances
etailed at medium price points, at or just below products offered by the best-known national
ands.
BKI’s market research consistently showed that the Blaine
and was well-known and well-regarded
y consumers. It was associated somewhat with “nostalgia” and the creation of “familiar,
wholesome dishes.”
Recently, Blaine had introduced some goods with “smart” technology features and sleeker styling,
targeting higher-end consumers and intended to compete at higher price points. This strategy was in
esponse to increased competition from Asian imports and private label product. The majority of
BKI’s products were distributed via a network of wholesalers, which supplied mass merchandisers
and department stores, but its upper-tier products were sold directly to specialty retailers and
catalogue companies. Regardless of the distribution channel, BKI offered consumers standard
wa
anty terms of 90 days to one year, depending on the appliance.
Blaine’s monthly sales reached a seasonal peak during October and November as retailers
increased stock in anticipation of the holiday season. A smaller peak occu
ed in May and June,
coinciding with Mother’s Day, a summer surge in weddings, and the seasonal peak in home
purchases. Historically, sales of Blaine appliances had been cyclical as well, tending to track overall
macroeconomic activity. This also was the case for the industry as a whole; in particular, changes in
appliance sales were co
elated with changes in housing sales and in home renovation and household
formation.
BKI owned and operated a small factory in Minnesota that produced cast iron parts with specialty
coatings for certain of its cookware offerings. Otherwise, however, Blaine, like most companies in the
appliance industry, outsourced its production. In 2006 BKI had suppliers and contract manufacturers
in China, Vietnam, Canada, and Mexico.
Victor Dubinski was a great-grandson of one of the founders. An engineer by training, Dubinski
served in the U.S. Navy after graduating from college in XXXXXXXXXXAfter his discharge, he worked for a
large aerospace and defense contractor until joining the family business in 1981 as head of operations.
He was elected to the board of directors in 1988 and became Blaine’s CEO in 1992, succeeding his
uncle.
Under Dubinski’s leadership, Blaine operated much as it always had, with three notable
exceptions. First, the company completed an IPO in XXXXXXXXXXThis provided a measure of liquidity for
certain of the founders’ descendants who, collectively, owned 62% of the outstanding shares
For the exclusive use of D. Ghosh, 2020.
This document is authorized for use only by Devleena Ghosh in Behavioral Corporate Finance (Summer 2020) taught by DUCCIO MARTELLI, Universit?? degli Studi di Perugia from Jun 2020
to Aug 2020.
Blaine Kitchenware, Inc.: Capital Structure | 4040
HARVARD BUSINESS SCHOOL | BRIEFCASES 3
following the IPO. Second, beginning in the 1990s, Blaine gradually moved its production a
oad.
The company began by taking advantage of NAFTA, engaging suppliers and performing some
manufacturing in Mexico. By 2003, BKI also had established relationships with several Asian
manufacturers, and the large majority of its production took place outside the United States. Finally,
BKI had undertaken a strategy focused on rounding out and complementing its product offerings by
acquiring small independent manufacturers or the kitchen appliance product lines of large
diversified manufacturers. The company carefully followed changes in customer purchasing
ehavior and market trends. Victor Dubinski and the board were eager to continue what they
elieved had been a fruitful strategy. The company was particularly keen to increase its presence in
the beverage appliance segment, which demonstrated the strongest growth and where BKI was
weakest. Thus far, all acquisitions had been for cash or BKI stock.
Financial Performance
During the year ended December 31, 2006, Blaine earned net income of $53.6 million on revenue
of $342 million. Exhibits 1 and 2 present the company’s recent financial statements. Approximately
85% of Blaine’s revenue and 80% of its operating income came from the sale of mid-tier products,
with the line of higher-end goods accounting for the remainder. The company’s 2006 EBITDA
margin of nearly 22% was among the strongest within the peer group shown in Exhibit 3. Despite its
ecent shift toward higher-end product lines, Blaine’s operating margins had decreased slightly over
the last three years. Margins declined due to integration costs and inventory write-downs associated
with recent acquisitions. Now that integration activities were completed, BKI executives expected the
firm to achieve operating margins at least as high as its historical margins.
The U.S. industry as a whole faced considerable pressure from imports and private label products,
as well as a shift in consumer purchasing preferences favoring larger, “big box” retailers. In response,
some of Blaine’s more aggressive rivals were cutting prices to maintain sales growth. Blaine had not
followed suit and its organic revenue growth had suffered