Case study
Spacemakers of Kuwait

Prof. Ian Giddy, New York University

qSpacemakers of Kuwait, is the largest independent owner-operator of large-scale automated self-storage complexes in the greater Kuwait City area. The company opened its first self-storage complex in Kuwait in 1994 and now has facilities throughout downtown Kuwait City and nearby residential areas. The business is based on a franchise management company based in Cincinnati, USA.

Hamid Lahcen, Chairman and CEO of Spacemakers, is considering options for a change in the company's financial structure. He is in discussions with two banks about borrowing additional funds based on the security of the real estate and the company's cash flow. Since the company now has good stable prospects, he’s considering paying a substantial special dividend to himself and fellow Lahcen family shareholders. Spacemakers' banks have suggested that if the company borrowed up to KWD5m more, the cost of debt would rise by 1.5%, or by 3% if more tham 5m. The borrowing rate is now 8.25% p.a.

The book value of the company’s assets is KWD24 million. He has had a professional estimate of the replacement value, and it was KWD28 million. While his company is private, the market value of other companies in the industry is trading valued at 2x book value of equity, or more. Hamid has discussed his eventual goal of going public – first though, he plans additional expansion through acquisitions and construction of new storage units.

He has asked your advice, and provided the following information.

Currently the company has debt of KWD19m
Management estimates EBIT this year at KWD6.1m, and EBITDA at KWD8.3m
Based on this business, the banks' minimum EBIT interest coverage ratio is 2.7
Currently US government bonds yield 4.50%
The estimated beta from comparables is 1.7
The global stock market "risk premium" is estimated at 5.50%
The estimated value of the physical assets is KWD28m
The future growth rate is about 4.00% per annum
The firm's marginal tax rate is 30%


1. How much leverage does the company have now?
2. How much additional debt can the company afford to take on?
3. What is the best use for funds raised with additional debt? | | | | contact
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