Brief Definition
Leveraged recapitalization is a financial strategy in which a company takes on significant new debt to pay a large dividend or buy back shares. The primary goals of leveraged recapitalization are to return cash to shareholders, restructure the company’s balance sheet, and potentially ward off hostile takeovers.
Further Explanation
Leveraged recapitalization is a financial strategy in which a company takes on significant new debt to pay a large dividend or buy back shares. This process changes the company’s capital structure by increasing its debt relative to its equity. The primary goals of leveraged recapitalization are to return cash to shareholders, restructure the company’s balance sheet, and potentially ward off hostile takeovers.
Example:
Consider a company with $100 million in equity and $50 million in debt. The company decides to implement a leveraged recapitalization by taking on an additional $30 million in debt. It uses this borrowed money to buy back $30 million worth of its own shares from shareholders. After the recapitalization, the company’s debt rises to $80 million, and equity falls to $70 million. The company aims to improve returns on equity and increase shareholder value by reducing the number of shares outstanding and potentially increasing earnings per share.