Kennecott Copper Corporation Case Solution
There were basically four options which had been considered by the management of Kennecott Copper Corporation for the divestiture of the Peobody Corporation which were as follows:
Public offering of the shares of Peobody
A spin off of the shares to the current shareholders of Kennecott Copper Corporation
A private sale of Peobody
A rights offering to the current shareholders of the Kennecott Copper Corporation at a significant discount to the market value of the shares.
The final divestment option which had been selected was the private sale of the Peobody Corporation. The arguments which were put by Kennecott’s board and the investment bankers were correct but not strong. The main argument was that the shares which would be offered to the public or in the spin off situation would be valued low because the valuation would be based upon the historical performance as well the as future performance of the company and in this case the past performance record of the Peobody Company was quite weak. However, overall the divestment option chosen by the management of Kennecott Copper Corporation was in the best interests of the shareholders of Kennecott Copper Corporation.
Cash Distribution to Shareholders post Peobody Divestiture
At the time of the divestment of the Peobody Coal Company, the prevailing average share price of the company was around $ 28 per share. Looking at this low share price and the high book value per share of the Kennecott Copper Corporation of $ 42.50 per share, most of the shareholders had hoped for a direct cash distribution from the sale proceeds of the Peobody Coal Company. If the full cash from the sales proceeds of Peobody Company had been distributed to the shareholders of Kennecott Copper Corporation then each of the shareholders would have received $ 29 per each share of Kennecott Copper Corporation.
One of the shareholders of the Kennecott Copper Corporation had also brought suit against the management and the directors of the Kennecott Copper Corporation in order to force this result however, the suit was unsuccessful. If the shareholders of Kennecott Copper Corporation had received the full amount from the divestiture of the Peobody Company, then they would have been better off by receiving $ 29 per share as compared to the current low average share price of $ 28 per share.
Problems faced by Kennecott in mid-1977
There were three main problems which were faced by the management of Kennecott Copper Corporation in the mid of 1977. Firstly, the prices of the copper had declined significantly and sharply and thus, the producer and the consumer inventories were at the all-time high. The second problem was related to the share price of the outstanding shares of the Kennecott Copper Corporation which was significantly low than the book value per share of the company. The book value per share of Kennecott Copper Corporation was $ 42.40 per share whereas; the average market price per share prevailing in the mid 1977 was just $ 28 per share. ……………….
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