Chapter 7 - THE FIRST REAL RED FLAG
Priya Shah reviewed the deal economics.
Her finding surprised Ethan.
The $6.5 million investment was not wildly unfair.
Comparable rescue-capital range:
9% to 14%.
Conversion rights were aggressive but negotiable.
The valuation formula was within market practice.
Then Priya found the issue.
Carter Packaging had received another proposal two weeks before the Hayes term sheet.
Midwest Growth Credit.
Offer:
$5.5 million subordinated debt.
Interest:
12.5%.
No equity conversion.
Higher cash burden.
Less ownership dilution.
Robert rejected it.
Why?
He said the company could not handle the interest.
Possibly true.
Then Priya modeled cash flow.
In base case, it could.
Barely.
In downside case, maybe not.
Still, Midwest was a legitimate alternative.
The Midwest Growth Credit proposal had its own ugly terms.
12.5% interest.
Quarterly cash pay.
Additional 2% payment-in-kind if leverage remained above target.
A lender observer seat.
Restrictions on:
capital spending,
owner distributions,
and acquisitions.
Ethan had called it “cleaner.”
Priya corrected him.
“Cleaner governance is not cheaper capital.”
If operations weakened, Midwest debt could drain cash faster than Hayes preferred capital.
Robert used that aggressively.
“Your preferred deal could bankrupt us.”
Ethan answered:
“Then show the board.”
That was the point.
A difficult alternative did not need to be chosen.
It needed to be disclosed honestly before being rejected.
Robert had screened it partly because he believed he knew the board would say no.
That was governance by prediction.
Again.
Did the Carter board see it?
No.
Robert kept it at executive level.
Lauren defended that.
“Management screens financing options all the time.”
True.
Then came Robert’s email to Victoria:
MIDWEST IS CLEANER ON GOVERNANCE BUT WORSE FOR US LONG TERM.
Victoria replied:
AGREED. IF CARTER RECOVERS, CONVERSION UPSIDE MATTERS.
“For us.”
Who was “us”?
The two families?
The investment partnership?
Robert and Victoria personally?
May you like
Ambiguous.
That ambiguity became important.
