LBO

LBO MODEL / IRR MODEL

 Acquisition using significant debt level at an
attractive interest rate…

 … of a company with sustained and resilient

cashflows

 To be comforted by a strategic due diligence (growth,

margins, investment needs…).

 Company generates i) the cashflows necessary to debt

repayment, and ii) the growth required to a rise in
enterprise value.
 LBO MODEL / IRR MODEL
 At exit,

 1) enterprise value has increased (EBITDA is up, and if you

have « played » the cycle well, the multiple is up as well)

 2) debt has decreased

 Thus significantly increasing the value of invested equity

 EXECUTION
Entry, year N Exit, year N+5
EBITDA 13 EBITDA 20
Net debt 90 Net debt 50

Enterprise value at 10x 130 Enterprise value at 10x 200

EBITDA EBITDA
Net debt (90) Net debt (50)
Equity value 40 Equity value 150

 IRR : 30.3% = (150 / 40) ^ (1/5) -1

 Cash on cash: 3.75x = 150 / 40
 Value sharing with management (subscription rights)
THE PLAYERS
THE STRUCTURE

HOLDING
THE STRUCTURE – CONT’D
FUND mgmt

IRR & CoC Mgt Package

BANK

HoldCo
Principal & Interest

OpCo Dividends

Cashflows
 SOURCES & USES
What you finance (« Uses ») With which ressources
(« Sources »)
Shares 100 Bank debt / Bonds 90
OpCo Debt 30 Equity – Fund 45
Transaction costs 10 Equity – Mgt 5
Total financed 140 Total Ressources 140
 EXECUTION - FUNDING
Type Description

Amount • The maximum the bank is willing to lend you!

• One limit: the ability of the company to repay principal &
interest
Types • Senior Tranche A: amortising, 5-7 years
• Senior Tranche B: payment in fine “bullet”, 6-8 years
• Mezzanine
Cost • Senior debt: EURIBOR (LIBOR) + margin (300bp, 400bp,
etc.)
• Mezzanine: [5]% cash + [5]% PIK + warrants with target IRR
Control • Key ratios (covenants): net debt / EBITDA, (EBITDA-capex) /
net interest costs, debt coverage ratio
Risk • Debt callable in case of default; banks may take control
(pledge of shares, debt to equity swap)
 REIMBURSEMENT OF DEBT
 OpCo cashflow:
 + EBITDA
 - Capex
 - Change in working capital
 - All other cash in/outflows (taxes, net interest, etc)
 = Operational Cashflow

 Reimbursement of OpCo debts

 Dividend payments to HoldCo, allowing it to:

 Reimburse principal on acquisition debt
 Pay due interest
 BUILDING THE MODEL
1. Insert operational assumptions for OpCo
 Scenarii for P&L / cashflow?

2. Insert price and financing assumptions

 Price paid
 Financing (“sources & uses”)
 Debt structure (amount, maturity, rate, cash and “PIK” components)
 BUILDING THE MODEL
3. HoldCo opening balance sheet from “Sources & Uses”
4. Modeling of HoldCo financials (P&L, tax integration, cashflow,
balance sheet)
5. Observation of debt and covenants movements
6. Computation of IRR
7. Construction of sensitivities

Some basic rules:

 Each “input” must be inserted only ONCE
 Input cells must contain ONLY inputs
 Formula cells must contain ONLY formulae