Tango vs. Victor - Part A 2022

110-062-1
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Taught by Gregory Moscato, from 26-Oct-2022 to 1-Mar-2023. Order ref F460621.
Tango vs. Victor – Part A
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This case has been written by Franco Quillico and Gregory Moscato,
International University of Monaco. It is intended to be used as the basis for class
discussion rather than to illustrate either effective or ineffective handling of a
management situation.
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Tango vs. Victor – Part A
On Tuesday 28h August, 2006 Bob Fisher, managing partner of Tango, a pan-
European private equity fund, was sitting in his office in the West End of
London. He had just come back from a long weekend in Ireland and he was
considering whether or not his fund should invest in the leveraged buyout (LBO)
of Victor, a French company in the soft drinks industry, which was exporting to
Italy, Switzerland and the Benelux. This industry was considered a mature
business with steady cash flows, and this made Victor an attractive candidate for
an LBO. Bob and his colleagues believed that Victor's shares were undervalued
in the market, and that there was room for realizing a substantial value by way
of stand-alone improvements and divestiture of a non-strategic division.

Moreover, the top 20 managers at Victor were ready to invest in the buyout and
they were also ready to commit themselves to remain with the company for the
next five years.
During the month of July Bob had received the due diligence reports that he had
commissioned to a well-known strategy-consulting firm and to his auditors and

he felt very positive about the deal. He had also travelled to Paris to have lunch
with Peter Clark, the CEO of Victor, and he was impressed by his personality
and professional attitude.
Exhibit A1 shows the estimate of the Income Statement of Victor for the year
ending 31st December 2006. (These estimates were available to Bob and his
colleagues at that time).
Victor was listed on the Paris stock exchange: in August 2006 the share price was
€20 per share. According to Mike & Company, Tango's investment bankers, a
tender offer at € 25 per share would be accepted by Victor's shareholders. There
were 20,000,000 (twenty-million) shares outstanding.
Tango planned to take over Victor through a leveraged vehicle ("New Victor").
New Victor would be financed through a mixture of debt and equity. The debt
would be composed of Senior Debt1 and Mezzanine (Subordinated Debt)2. The
Senior Debt was going to be provided by a group of commercial banks: it would
amount to € 280 million and it would carry an interest rate of 5%. The
Subordinated Debt would be provided by a group of financial institutions: it
© 2010, International University of Monaco. All rights reserved.

1
Senior debt is normally unsubordinated and secured. This means that the lenders receive specific assets as
collateral to the loan and, in case of liquidation, they have priority over other lenders.
2
Mezzanine debt is normally subordinated and unsecured. This means that the lenders have only a generic
claim on the assets of the firm and, in case of liquidation, they have lower priority than the senior lenders.
2
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would amount to € 90 million and it would carry an interest rate of 10%. The
repayment of the principal of both Senior and Subordinated Debt would be
linear over eight years (in other words New Victor would have to repay the
principal from the first year onwards in eight equal instalments).
However, the pattern of interest payments would be different:
 for the Senior Debt all interest would be paid in cash;
 for the Subordinated Debt 70% of the interest would be paid in cash,
while the remaining 30% would be paid-in-kind (PIK)3.
Finally, the Equity would be provided by Tango and by Victor’s management

team. The managers would buy € 38 million worth of shares in New Victor: they
would actually invest € 19 million and would borrow an additional € 19 million
from Tango at an interest rate of 11.50% per annum. The principal on this loan
was repayable upon the exit from the deal (i.e. when New Victor would be sold).
Tango, on the other hand, would invest in the equity of New Victor the balance
required for the acquisition. Once the transaction was completed, New Victor
would be merged with Victor. Due to the covenants imposed by the lenders, it
would not be possible to pay a dividend in excess of 30% of the Free Cash Flow
to Equity (FCFE)4 of New Victor. The balance of the FCFE would then be added,
each year, to the “excess cash” account5. Of course this covenant would cease to
be binding once both Senior and Subordinated Debt will be repaid in full.
The analysts at Tango estimated that:
- Victor had excess cash of € 5 million that could be used to finance the
buyout;
3 The term “Payment in Kind (PIK)” indicates that the borrower (New Victor in this case) has the
option to either pay the interest in cash or roll it over until the exit from the deal (as in a zero-
coupon bond). Here we assume that New Victor elects the second option and, therefore, PIK
interest will be rolled over until the end of 2011.
4 Free Cash Flow to Equity (FCFE) is defined as the free cash flow available to the shareholders
and it can be calculated as:

FCFE = Net Earnings + Depreciation - Capex - Change (OWC) - Principal Repayment.
where Capex = Capital Expenditures.
In case of disposals of assets (divestitures) the book value of these assets should be added in the
FCFE formula.
5
We assume that the “excess cash” will yield an interest rate of 2% after-tax and that such
interest will be reinvested every year. At the exit (end of 2011) the balance in this account will
become a component in the calculation of the Equity TV.
3
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- the Senior Debt which was on Victor's Balance Sheet prior to the
buyout (as we will see here below) had to be repaid in order to
complete the acquisition: this Debt amounted to € 50 million;
- transaction costs6 would be composed of the following items (all to be

paid at closing):
- a success fee, due to Mike & Company, equal to 1% of the

Acquisition Enterprise Value7;
- a banking fee, due to the lenders (for both Senior and Subordinated
Debt), equal to 2% of the loan amount;
- due diligence and legal fees, estimated at € 2.15 million.

The analysts at Tango had made a number of estimates and projections for the
following 5 years (2007/2011):
 if Victor remained independent (Scenario 1) Revenues were expected to grow

at 7% in 2007, and then: 6% in 2008 and 2009; 5% in 2010 and 2011. EBITDA
Margin (which was estimated at 20% in 2006) was expected to stay at 20% in
2007, but then it would slide to 19% in 2008, 18% in 2009, and further to 16%
in 2010 and 2011. For the next five years Operating Working Capital (OWC)8
should stay at 15% of Revenues, as in 2006. Victor had recently completed an
investment program to renew the plant and equipment, and, therefore,
estimated Capital Expenditures were limited: € 12 million in 2007, € 15
million in 2008, €17 million in 2009, € 20 million in 2010 and 2011.
Depreciation and Amortisation charges would be: € 15 million in 2007, 2008
and 2009; € 18 million in 2010 and € 20 million 2011. At 31st December 2006,
Victor would have € 50 million of Senior Debt on the Balance Sheet, carrying
an interest rate of 4.5%: the repayment of the principal would be linear over
five years;
 on the other hand, if "New Victor" was successful in the takeover of Victor
(Scenario 2) a number of stand-alone improvements would be implemented.
These improvements would have been made possible by Tango’s remarkable
6
Please assume that transaction costs will not be tax deductible and will not be amortized.
7
The Acquisition EV is calculated at the acquisition date. It is defined as: price paid for the
Equity + old debt – Excess cash
8
Operating Working Capital (OWC) is defined as:
OWC = Accounts Receivable + Inventories – Account Payable
In financial modeling it is common practice to express OWC as a percentage of Revenues (as in
our case).
4
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financial and managerial expertise, which was backed by an impressive track

record. As a result, EBITDA Margin would stay at 20% in 2007 and 2008, but
then climb to 21% in 2009 and 2010, and climb further to 22% in 2011.
Operating Working Capital as a percentage of Revenues would stay at 15% in
2007, but then would decrease to 11% in 2008 and stay at that level thereafter.
At the end of 2007 one division of Victor (the fruit juices division) would be
divested for € 50 million. (The book value of this division was € 40 million, so
"New Victor" would realize a capital gain on the divestiture, which would be
taxed at the ordinary corporate tax rate). The Revenues growth would be
6.5% in 2007, while in 2008 (due to the divestiture of the fruit juices division
at the end of the previous year) Revenues would grow by only 3.5%; from
2009 onward Revenues would grow at 8% per annum. The analysts at Tango
believed that - due to the recently completed investment program at Victor -

there would be no need for additional heavy investments. Therefore, Capital
Expenditures would be the same as in Scenario 1: and the same would apply
to Depreciation & Amortisation charges.
Finally, the corporate tax rate was expected to stay at the current 33% in both
Scenarios.
The analysts at Tango estimated that the appropriate cost of equity (ke) for Victor
"as is" (i.e. with the current leverage) was 12%, but it would increase to 18% after
the leveraged buyout (due to the well known fact that the additional leverage
increases the risk for the shareholders).
Bob looked at his diary and figured out that, in order to close the deal by the end
of the year, he should launch the bid within a month. The following day he was
going to meet with his investment bankers and his lawyers to discuss the steps
and the timetable of the bidding process.
5
EBIT
EBITDA
Revenues
Year Ending
Net Earnings
Taxes (@ 33% )
Profit Before Tax
Interest Expenses
Operating Expenses
Depreciation & Amortisation
6
67.3
90.0
450.0
45.1
31-Dec-2006
70.0
(22.2)
(2.7)
(20.0)
(360.0)
[€ Million]
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Tango vs. Victor - Part A 2022

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Usage permitted only within these parameters otherwise contact info@thecasecentre.org

© 2010, International University of Monaco.

Distributed by The Case Centre North America Rest of the world