Mueller Industries Revives The Leveraged Recap: The metal products manufacturer will distribute cash and debt securities to pay out excess cash

The leveraged recap is back – with 21st Century variations. The first major move in more than a decade to substantially increase corporate debt as a technique to unlock shareholder value emerged in early September when Mueller Industries Inc. unveiled a special dividend consisting of a package of cash and subordinate debentures worth $15 a share. Unlike the sometimes infamous recaps of the late 80s and early 90s, Mueller’s initiative was not in response to the pressure of a hostile bid, does not require the company to sell off large amounts of assets to pay debt, and will not involve issuance of a low-price stub in exchange for existing common. Instead, Mueller, which produces fittings, tubes, and other metal products, says it expects to service the increased debt with cash generated by existing operations. Mueller will pay $6.50 in cash and $8.50 in principal amount of the company’s 6% subordinated debentures that will expire in 2014 for each common share. Following the distribution, the company will have about a 50-50 mix of equity and long-term debt in its capital structure. The company announcement said that the special dividend would reward stockholders “by unlocking shareholder value, by permitting the company to continue pursuing its strategy of being the low-cost manufacturer in its core products.” Memphis-based Mueller voted in the special dividend after significant earnings gains in the last two years because of strength in demand from the construction industry. However, it’s the latest in a string of companies that have enacted large special payouts in response to the reduction in the federal tax on dividends to 15%, although it’s the first to bundle cash with a long-term debt security. The most publicized payout was by Microsoft Corp., with other notable payments this year by Value Line Inc., Anixter International Inc., and Brookfield Homes (which included some short-term notes). In addition, Blockbuster Inc. declared a $5 a share special in connection with its split-off by Viacom Inc. Robert Willens, a Managing Director and corporate tax expert at Lehman Brothers, says the debentures will be taxed at the 15% rate when they are received and this tax cannot be deferred until the securities mature. Interest payments will be taxed at the regular income tax rate. Mueller’s pressure-free dividend package should be closely watched by mature companies with strong cash flows that are seeking to bolster shareholder value or distribute excess cash with help from the sharply reduced tax rate on dividends. Analysts often point out that these companies have limited options for investing the cash in acquisitions or internal projects that will generate superior returns. Many cash-rich companies also fear hostile takeover bids by buyers covetous of the money Copyright 2004 Thomson Media Inc. All Rights Reserved. http://www.thomsonmedia.com http://www.majournal.com