Treasury & Risk's 6th Annual Alexander Hamilton Best Practices Summit — October 2 and 3, 2001
2001 — Corporate Finance Winners: Gold—Avon Products Inc. ; Silver: Whirlpool Corp.; Bronze: American Water Capital Corp.
CAPITAL MAKEOVER
Avon Products Inc. wins gold in Corporate Finance
GOLD CORPORATE MANAGEMENT WINNER—Avon Products took the gold in corporate finance this year for a leveraged-stock buyback in 1999 and a zero-coupon convertible bond in 2000, two bold moves that, together with an operational turnaround, not only helped boost shareholder return by 48% between 1999 and the end of 2000, but also dramatically cut the company's cost of capital.
When pessimistic fourth-quarter 1999 earnings forecasts drove Avon's share price down to $25 from its 52-week high of $55, Avon decided to take advantage of its high credit rating and underleveraged balance sheet with an $800 million buyback of its own stock. To do the deal, the company used a bridge facility, and then $500 million in five- and 10-year bonds that it later swapped to floating rate. The buyback initially generated a negative book equity level, but Avon bet the markets would recognize the true value of its brand and sales system
. The repurchase generated a 2 cents per share earnings increase in the fourth quarter 1999, and shares rebounded to $48 by the fourth quarter 2000, a $400 million gain on the repurchase. Avon kept its single-A credit rating, and the floating-rate swaps have increased in value to $53 million for year-to-date 2001.
But the company didn't stop there. In July 2000 Avon issued $400 million in zero-coupon convertible bonds yielding 3.75% with a 41% conversion premium, the highest of any convertible in nearly two years.
Thinking Boldly
Avon's total shareholder return for 2000 was 48%, versus -9.1% for the S&P 500 Index. Given this year's market collapse, even its -1.1% return this year through Sept. 26 looks great compared with the S&P's -23% in the same period.
:We learned that we can be bold in our thinking," says Treasurer Dennis Ling. "What we did was unconventional we increased debt significantly and maintained our credit rating. And by buying back stock, we were able to increase shareholder value despite reducing shareholder equity to negative levels."
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SILVER CORPORTAE FINANCE WINNER—Whirlpool's decentralized approach in late 1999 to analyzing fixed-asset financing was a problem. Inconsistency across the organization meant transactions were less than efficient. A decision's impact on other key financial ratios was rarely, if ever, taken into account, nonfinancial elements went entirely unaddressed or were seriously underweighted in decisions, and new financing structures were often adopted without being widely understood.
What was needed, management decided, was a centralized analytical process that could be used to review fixed-asset acquisitions, identify and define objectives and benchmarks and take the subjectivity out of decision-making. So treasury huddled with the real estate, tax and accounting units and consultants from Jones Lang LaSalle to create a cross-functional solution using an Excel-based evaluation model. A prime goal: Design a program easy enough for managers without any specialized financial skills.
Now the process of deploying capital resources and applying nonfinancial criteria in decisions for the appliance maker with more than $10 billion annually in revenues is consistent, centralized and efficient. And treasury has become the focal point for project financing, with appropriate input from other functions and units throughout the organization.
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BRONZE CORPORATE GOVERNANCE WINNER—For years, American Water Works allowed its 25 wholly owned utility subsidiaries in 20 states to maintain their own long-term and short-term debt financing programs. Each used a single bank for short-term loans, with long-term financing sold through private placement. But while capital needs were expected to keep rising, the company's relationship banks began tightening credit in 1999 and pushing the subsidiaries into fee-based services. At the same time private-placement investors were losing interest too.
United We Save
To escape this administrative and logistical nightmare, the company created American Water Capital. By aggregating its subsidiaries' borrowing needs in one financial unit, American Water could broaden its capital-market access and negotiate better pricing based on volume.
The strategy, which replaces the 29 individual lines of credit the units had previously, is paying off. In June 2000 American Water Capital negotiated a one-year, $600 million syndicated credit line with 12 banks. The pricing is better, to the tune of some 23 basis points on average. Multiple fee-based lines would otherwise have cost the utility company an additional $665 million.
American Water Capital entered the commercial paper market as an A2/P2 issuer, and its initial CP issuance in September 2000 further reduced unit borrowing costs.
—As seen in the November 2001 issue of Treasury & Risk magazine