1. Deluxe Corporation
Group 6
郭育丞、徐翌展、黃子豪
張暘全、林思妤

2. Case Introduction 1
CONTENTS
Case Analysis 2

3. 01
CASE INTRODUCTION

4. Introduction to Deluxe Corporation
Dominant player in the check-printing industry.
In 2002, Deluxe retired all its long-term debt, and the company had not issued bond in more than ten years.
Deluxe had been pursuing share repurchases aggressively, leading to its best stock performance in nearly ten years.
Demand for paper checks had declined, and credit and debit cards had become more and more popular.
The changes in technology led to the restructuring of the company.

5. History of Deluxe Corporation
1915
Deluxe was founded in Minnesota and was specialized in imprinting personalized information on checks and checkbooks.
1965
Became publicly traded company and traded on the New York Stock Exchange in 1980.
Peak years. Revenues grew at a compound rate of 12%.
1998
Deluxe’s earnings slump
The appearance of other payment methods, the check-printing business faced an annual decline of 1%-3% in check demand.
Deluxe undertook reorganization
1990s The check printing industry was highly concentrated, with only a few firms controlling 90% of the market.
Late 1990s

6. Recent Financial Performance
Due to the decline in demand for paper checks, the company went through a series of reorganization.
It went from 62 printing plants to 13, reduced labor force from 15,000 to 7,000, and outsourced technology functions.
In 2000, Deluxe spinned off its technology-related subsidiaries, eFunds and iDLX Technology Partners.
The CEO insisted that there were still growth opportunities for the company in paper-check business, so he refused to abandon it.
The market responded favorably after their effort since the share price had grown by more than 65%. However, the company’s compound annual rate of sales was -4.0%.

7. Recent Financial Performance
Sold to customers
Through direct mail
and the internet
Financial Services
The paper-payments segment had three primary business units
20 employee firms

8. Current and Future Financing
Deluxe required additional financing for working capital, capital asset purchases, possible acquisitions, repayment of outstanding debts, dividend payments and repurchasing the firm’s securities.
In January, 2001, the board of directors approved a stock-repurchase program, and authorized a repurchase of up to 14 million shares/19% of total shares outstanding.
Singh also believed that cash dividends would be held constant later on.
The money for repurchasing comes from operations and from issuances of commercial paper.

9. Considerations in Assessing Financial Policy
Deluxe’s long-term debt was rated A+/A1 while short-term was A1/P1.
Yields on noninvestment-grade debt were higher but issuing this kind of debt depended greatly on the economy and the credit market conditions.
Singh wants flexibility. and with that flexibility, they can issue more debt, which then lowers the cost of capital.
Any EBIT lower than $200 million would be the worst of times.
It is important to choose financial policy that minimizes the cost of capital.

10. If the grade drops, there may be higher costs and even damage to the brand.
Deluxe should preserve investment grading, but where should Deluxe be positioned? Minimum and Maximum amounts of debt?

11. Summary
The board and the management team are committed to maximizing the shareholders’ value.
The options Singh give should continue to create value for shareholders.
Singh’s plans need to afford Deluxe low costs and continued access to capital under all kinds of scenarios so it could pursue any options it considers.

12. 02
Case Analysis

13. Cost of debt(after tax) 3.4461 3.465 3.591 3.969 5.67 7.56
AAA AA A
BBB BB B
Cost of debt
5.47
5.5
5.7
6.3
9.0
12.0
tax rate
37%
Cost of debt(after tax)
3.4461
3.465
3.591
3.969
5.67
7.56
Cost of equity
10.25
10.35
10.5
10.6 12
14.25
Debt Equity Ratio of cost
0.33
0.34
0.37
0.47
0.53
Deluxe planned to do some projects, such as M&A and other financial demands, so they need cheap capital. From the table above, we find out that if we adopt the rating of AAA&AA, it lowers the Deluxe’s debts that they can borrow, therefore, we decide not to choose AAA&AA. On the other hand, because BB&B rating are neither including in risk of investment rating, so that they may face financial distress. Thus Deluxe should choose plans between A and BBB.

14. WACC of 2001
Financial Ratio (Total debt/capital in Exhibit 6) to calculate the highest debts that the firm can borrow in this industry.
Then, we add long-term debt +short-term debt compared to equity to calculate the weight, so we use book value of equity=64.102x10= (million).
Based on our consequences, we found that the lowest WACC is under BBB rating, however, we still need to compute Firm value to justify which is better.

15. Firm Value A(computing process below) BBB (use the same way) WACC
7.5931
7.5129
Firm Value

16. By adopting BBB, Deluxe can create more tax shield effect, which lower the cost of capital. Besides that, if we use EBIT interest coverage to compute, adopting BBB can still be 8.4 which belongs to Rank A.

17. Other consideration-Operating perfomance
Rating: In the past , lot of the companies were downgraded not because of their leverage level but their operating performance.
Deluxe may think about how to use the capital they raise from bond holders.
Because if they perform poorly, there still has a chance to be downgrade.
But if they got thorough and promising
plan, they can raise their leverage level.
Even if they might be down grade.
可以舉很多債 其實對rating影響不高
但應著重在如何運用在未來業務上
tradeoff theory 用在實務上，發現BBB 是對大部份產業最佳的 rating，此時的 market leverage ratio = 30%~60%

18. Conclusion
We suggest BBB is the best choice for the amount of debt would be higher than A while the interest of BBB is just a little bit higher than A.
In addition to leverage level, operating performance also plays an important role in determining rating. Deluxe should make good use of the capital they raise from bondholders to enhance operating performance in order to maintain their rating.
Singh’s conclusion
Preserve investment-grade rating
Selection of desired proportion of ST & LT bond, and the desired interest rate of ST & LT bond.
Recommend to board the MIN & MAX amount of debt Deluxe could carry to achieve the desired rating