Case Study
The Proposed Recapitalization of RoadShow

Prof. Ian Giddy, New York University

Truck StopRoadShow Ltd. is a South African retailer of truck accessories, including audio and wireless products. With outlets located at major transportation hubs and truck stops in Southern Africa, the company provides "lifestyle" products for long-distance owner-operator truck drivers. The company opened its first shop in Port Elizabeth in 1997 and went public in 2003.

Recently the founder and CEO of RoadShow had been considering options for a change in the company's ownership structure. He was seeking a method that would offer greater liquidity and diversification of his and his family's investment in the company, and at the same time giving key black officers a greater stake and control. He was also concerned about the share price, which was well below its 2005 peak of R41. The company had excess debt capacity and was growing steadily at 6%  per annum.

Among the options he was considering were a leveraged recapitalization, a share repurchase, an exchange of common stock for debt, and a dual-class recapitalization. At this time 30% of the 10 million shares outstanding were held by the founder and his family, 10% by black senior management, 20% by a black-owned venture capital firms, and the remainder was fairly widely distributed. The shares were trading at R24. Net operating income was R30 million. Other key indicators are listed below.

Balance sheet
Other current assets
Long term assets, net
Total assets

Noninterest bearing short term debt
Short term debt (10%)
Senior long-term debt
Subordinated debt
Total Liabilities & Equity
(ZAR mln)

Interest Coverage
Net Operating Income
Interest Expense
- Short term debt
- Senior long term debt
 - Subordinated debt

NOI/Interest expense




New Africa Capital, a private equity firm, had teamed up with a South African bank to propose a leveraged recapitalization to RoadShow. The proposal involved paying a large dividend to outside shareholders. The dividend would be R24 per share. Discussions with investors suggested the post-dividend share price would fall to R4. In lieu of cash, black managers would receive six additional shares of common stock. The firm's advisors had calculated that of the R216 million needed for the special dividend, R40 million could come from cash, R100 million from senior debt issuance provided by the bank, and the remainder from subordinated debt.

trck driver team

1. What would be the value of what outside investors received? Of what black management received?

2. What would be the percentage of ownership held by black owners after the recapitalization?

3. How receptive do you think senior and subordinated investors would be to this? Develop a pro-forma balance sheet and interest coverage analysis, after the recap, assuming senior debt pays 12% and subordinated debt pays 15%.  How soon would the company be able to pay down its senior and subordinated debt?

4. Can you suggest any alternatives means of providing empowerment ownership? Suggest, with a numerical example, how (a) a share repurchase, (b) an exchange of common stock for debt, or (c) a dual-class recapitalization might be structured for this firm. Which would be appropriate for this situation? | | | | contact
Copyright ©2006 Ian Giddy. All rights reserved