Apax Partners And Xerium S.A. Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Apax Partners And Xerium S.A. Case Solution

Question 3

Though the Paper industry was not performing well, but the Apax’s ownership of Xerium had coincided with such industry’s cyclical patterns. The company had generated huge profits even in a downturn and it had the potential to outperform the market if the slowdown in the industry turned around. It was expected that the paper industry would flourish in 2003. As a result, the company could take advantage of refinancing by using cost cutting approaches in a growing industry environment. The other recapitalization strategy for the company could be the acquisition of complementary businesses or the competitors’ business, which could make Xerium the largest or the second largest player in the market.

In order to opt for recapitalization; the company needed to maintain an ideal capital structure, which could generate handsome cash flows for the company, turning out to be useful in paying off its debt obligations and paying the vendor’s obligations of about $50 million to Invensys, and the cash flows could be used in the repayment of shareholder’s obligations with 10% coupon. But the recapitalization tended to increase the company’s exposure to risk as the company’s debt structure would increase from $425 million to $775 million. The company needed to determine how much debt could be generated in different debt classes and at what rates. (See Appendix 3 for the company’s financing proposals).

The possible challenge in recapitalization would be getting debt refinancing at a reasonable refinancing rate. The refinancing has the potential to lead towards a higher refinancing rate as the market has been unable to see the upside potential of the paper industry and the Xerium company, and the investors are expected to demand more interest rate for a company with a bare growth rates of 3-5%. Lastly, the company would be paying 1.2 times higher cost in refinancing, which is much higher than the sale of the Xerium Company, if it is sold at a value greater than $975 million.

Question 4

The sale of Xerium would lead towards an appositive NPV of $71.85 million, with an internal rate of return amounting to 4.7%. The IRR is greater than the weighted average cost of capital, which is 2.31% (See Appendix 4). Despite of positive NPV and IRR; the company is recommended to go for recapitalization instead of selling such a profitable business unit.

The company should go for the recapitalization of Xerium Company, as the paper industry would recover in 2003 according to analyst, increasing the chances for Xerium Company to recover, with an increased sales and profit generation, which is the reason why the company is recommended to opt for recapitalization.

Another reason to recapitalize the Xerium Company is its tendency to generate High cash flow, which could then be used in paying off the current debts obligations of the Apax Company as well as in in repaying its shareholders loans.

Selling the company would not generate an ideal deal, because the investors would not see any upside potential in Xerium Company, and the company would be able to generate a fair price through its investors, as they only see the company with a growth potential of minimum 3-5%, so-recapitalization would be a better as well as a viable option for the company’s sustainable future growth, as refinancing uses are greater than the Xerium Company’s selling price.

Conclusion

In 2002, Apax Partners needed to conclude whether to acknowledge an inexact ideal proposal for one of its portfolio organizations or to renegotiate it. Being a private equity company;it had to make a decision on either selling its private equity investment or renegotiating its portfolio investment, in order have future potential gains in terms of financing. The company should go for recapitalization as Xerium has outperformed the Apax’s expectation and it possesses a huge growth potential, which has an ability to generate more cash flows that could be further used could in paying off the debt and shareholder’s as well as the vendors obligations, for the sustainable future operations of the company, in the long run.........................

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Apax Partners And Xerium S.A. Harvard Case Solution & Analysis