LEVERAGED BUYOUT ANALYSIS

Money today is worth more than Money 5 years from Now

 LEVERAGE
 Leverage: the ratio of a company’s loan capital (debt) to the value of its ordinary
shares (equity).
 Financial leverage : basically an investment where borrowed money or debt is
used to maximize the returns of an investment, acquire additional assets or raise
funds for the company.
 When an individual or company borrows funds (debt) for funding the acquisition
of assets in the hopes that the income from the new asset or capital gain would
surpass the cost of borrowing.
 Individuals or businesses create debt by borrowing money or capital from lenders
and promising to pay this debt off with the added interest.
 WHAT IS LBO?
 A leveraged buyout (LBO) is the acquisition of public or private company using a
significant amount of borrowed money (bonds or loans) to meet the cost of
acquisition.

 The buyer typically wishes to invest the smallest possible amount of equity
& fund the balance of the purchase price with debt.

 The assets of the company being acquired are often used as collateral for the
loans, along with the assets of the acquiring company.

 A leveraged buyout (LBO) occurs when the acquisition of another company is

completed almost entirely with borrowed funds.

 In an LBO, there is usually a ratio of 90% debt to 10% equity.

 LBO-INTRODUCTION
A buyout with the use of Debt Financing as the major source

The target’s cash flows are used to repay the debt; Target’s assets used as a
collateral

Target company gets recapitalized to a highly levered structure

Usually performed by a Private Equity / Financial Sponsor

Aims to earn a return of 30-35%

Looks for an exit in a 3-5 years

 LBO-IDEAL CANDIDATES
Clean Balance Sheet – Low or No debt

A huge base of tangible assets

Flexible Exit Options

Low Capex – a mature and non cyclical company might work

Strong Management Team

Steady Cash Flows – Low working Capital Requirement

 LBO-NON IDEAL CANDIDATES
Start up Companies

Less Credit worthy companies

Not Asset Heavy

Companies in early stage

Moderate to High EBITDA Multiple

Consistent Management Turnover

 LBO VS DCF
 A leveraged buyout (LBO) analysis is similar to a DCF analysis. The common
calculations includes cash flows, terminal value, present value and discount rate.

 However the difference is that in DCF analysis we look at the company present
value. In contrast, we look for Internal rate of return (IRR) in LBO

 LBO analysis focuses on whether there is enough projected cash flows to operate
and pay debt principal and interest payments.
 EXIT OPTIONS
IPO

Sale to a secondary Investor

Liquidating the assets

Sale to a strategic acquirer

TYPES OF DEBT

Bank Debt Bonds Mezzanine

Preferred Sotck /
Lower cost of capital Higher cost of capital
Convertible

Lower Interest rate. LIBOR

Fixed coupon Usually PIK Interest
based

5-8 years maturity with 7-10 years maturity with no 7-10 years maturity with
amortization option amortization; only bullet typically no amortization

Most senior- Secured by

Generally Unsecured Less Senior
assets

Maintenance and Incurrent

Incurrence Covenants Light Covenants
Covenants
 STEPS IN LBO MODEL
Step 1: Assumption of purchase prise or Ebitda Multiple

Step 2 : Creating Source and Use of funds

Step 3 : financial projections

Step 4 : Balance-sheet Adjustments

Step 5 : Exit

Step 6 : Calculating IRR on the Initial investment

Buy a company - Fix it up - Sell It