Abstract Management of White Hen Pantry, a subsidiary of Jewel Stores, undertook a leveraged buyout of the subsidiary in 1985 with the assistance of PruCapital. The case focuses on the valuation of the subsidiary and the structure of the financing of the transaction. Introduction In February 1985, management of White Hen Pantry (WHP), led by its President Bob Robertson, is considering buying the company from its parent, Jewel Companies, Inc., for $55 million. The management group has formed a company named ROBODAKS for the purposes of buying WHP. After the transaction, the company will retain the name White Hen Pantry. The leveraged buyout (LBO) is to be financed largely with loans made by PruCapital, Inc., a financing unit of Prudential Insurance Company of America. Among the issues to be considered are the price of the company and the structure of the financial agreement. American Stores acquired Jewel Cos. (Jewel) in a hostile takeover in June of 1984 in a transaction valued at nearly $1.2 billion. This acquisition created the nation's third-largest drug and supermarket retailing chain. American Stores has decided to sell certain units of Jewel including WHP to reduce its debt and to concentrate on drug store supermarket retailing. Franchise Arrangement WHP operates a chain of 317 convenience stores, 302 of which are franchise stores and 15 of which are operated by WHP. These stores average approximately 2,500 square feet in size, offer up-front parking, and are generally open 24 hours a day. WHP stores offer a broad array of grocery items and high quality items in delicatessen products, fresh baked goods and produce. WHP is the only company among the industry's top 50 that does not sell gas. Management strongly believes this policy contributes to a higher quality image and helps attract a broader group of customers WHP and Jewel management decided early in the development of the company to operate under a franchise system. The Franchise agreement covers a ten-year period and is conditionally renewable. Under the agreement, WHP owns the store and the franchisee owns the inventory and has the right to use the store premises, fixtures and equipment. The franchisee has no ownership interest in the physical property. The franchisee has total authority to manage the store with respect to purchasing, pricing, hiring, firing and other store operation matters provided he or she adheres to the company's strict quality standards. Each franchisee is required to maintain a certain minimum sales level