Mirth Press, Inc

Abstract

In November 1994, a private equity fund is considering acquiring a controlling interest in the common stock of a small, rapidly growing publisher of humorous literature (both print and audio). In the process, the company is to be recapitalized substantially with debt and preferred stock, making this a highly leveraged transaction. The task for the student is to value the company and evaluate the attractiveness of the transaction from the standpoints of various participants. The case has three objectives: (1) to exercise students' valuation skills with respect to assets, debt, preferred stock, options, and equity; (2) to explore issues in transaction design as they affect the distribution of value; and (3) to consider the possible sources of wealth creation.

Excerpt

UVA-F-1196

In November 1994, Alexandra Pointer sat in her office at Quincyshire Management, Inc., and pondered a possible acquisition. Pointer was a principal at Quincyshire, a private equity investment firm engaged in the acquisition, ownership, and supervision of business enterprises for the account of the $ 100 million Quincyshire Equity Fund. Quincyshire had identified a humor book and audio publisher, Mirth Press, Inc., as a possible acquisition. In partnership with another private equity firm, Quincyshire had structured a winning bid for the company. The equity group had signed a letter of intent granting it the exclusive right to negotiate the purchase of Mirth. Because the due diligence research had been completed, the closing of the transaction was approaching. Pointer and her partners had to decide on the appropriateness of the proposed deal structure and whether to commit to the acquisition terms as finally negotiated.

Pointer was impressed with the firm's recent growth and prospects for growth in the future. Mirth's sales grew from $ 4,716,000 in 1992 to $ 21,595,000 in 1994. (See Exhibits 1 and 2 for historical financial statements.) That rapid growth was attributable to the introduction of a line of audio products. Those products included recordings of readings of classic humor literature, famous comedy acts, excerpts from films and TV shows, and compilations of the work of promising new comedians.

The Quincyshire group could buy the company for a price, including fees, of $ 48.4 million. The transaction would be structured as a management buyout. The current management, the company's founders, would buy into the new company. Management believed that the market for its audio products was largely untapped and that their innovative, interactive marketing program would continue to produce strong sales growth. Quincyshire, its partner, and current stockholders would contribute $ 13.4 million in equity (common and preferred). The remainder of the purchase price would be funded by a $ 23 million senior-term loan secured by Mirth's intellectual properties and a $ 12 million subordinated term note with warrants. The new company also planned to negotiate a$ 4 million revolving credit facility to fund any working capital shortfalls.

Quincyshire Management, Inc.

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Keywords: acquisitions, commercial banking, entrepreneurship, financial accounting, leveraged buyouts, mergers, preferred stock, small business, valuation, warranties, diverse protagonist