LBO Analysis

FINC 5670/6670/6676 ‐ Yost

LBO ANALYSISCHAPTER 5

LBO Analysis

FINC 5670/6670/6676 ‐ Yost

THE BIG PICTURE

• HOW DO WE MAKE MONEY?• _________________• _________________

• WHAT DO WE NEED?• _________________

THE PROCESS

• STEP 1: LOCATE AND ANALYZE THE NECESSARYINFORMATION

• STEP 2: BUILD THE PRE-LBO MODEL

• STEP 3: INPUT TRANSACTION STRUCTURE

• STEP 4: COMPLETE THE POST-LBO MODEL

• STEP 5: PERFORM THE LBO ANALYSIS

LBO Analysis

FINC 5670/6670/6676 ‐ Yost

STEP 2: BUILD THE PRE-LBO MODEL

A. BUILD HISTORICAL AND PROJECTEDINCOME STATEMENT THROUGH EBIT

B. INPUT OPENING AND PROJECTEDBALANCE SHEET ITEMS

C. BUILD CASH FLOW STATEMENT THROUGHINVESTING ACTIVITIES

BUILD HISTORICAL AND PROJECTED INCOME STATEMENT THROUGH EBIT

• HORIZON: PAST ___ YEARS AND PROJECTED ___ YEARS

• WHY ONLY THROUGH EBIT?

PROJECTIONS AND ASSUMPTIONS

A.

LBO Analysis

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INPUT OPENING AND PROJECTED BALANCE SHEET ITEMS

• PROJECTED LIKE A _________________

• INCLUDE ADJUSTMENTS COLUMNS FOR CHANGESDUE TO THE TRANSACTION

• OTHER DIFFERENCES:• DEFERRED FINANCING FEES (LONG-TERM ASSET)

• LINE ITEMS FOR EACH TYPE OF DEBT

B.

BUILD CASH FLOW STATEMENT THROUGH INVESTING ACTIVITIES• CASH FLOW FROM OPERATING ACTIVITIES

• FROM INCOME STATEMENT: ________________________• FROM BALANCE SHEET: ________________________

• CASH FLOW FROM INVESTING ACTIVITIES

• FROM CIM: ________________________

• SUM = ______________________________• CASH FLOW FROM FINANCING ACTIVITIES

C.

LBO Analysis

FINC 5670/6670/6676 ‐ Yost

STEP 3: INPUT TRANSACTION STRUCTURE

A. ENTER PURCHASE PRICE ASSUMPTIONS

B. ENTER FINANCING STRUCTURE INTOSOURCES AND USES

C. LINK SOURCES AND USES TO BALANCE SHEETADJUSTMENT COLUMNS

ENTER PURCHASE PRICE ASSUMPTIONS• NEED ____________________ TO DETERMINE FINANCIAL

STRUCTURE

• IF A PUBLIC TARGET:• EQUITY PURCHASE PRICE = • EV =

• IF A PRIVATE TARGET:• EV = • EQUITY PURCHASE PRICE =

A.

LBO Analysis

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ENTER FINANCING STRUCTURE INTO SOURCES AND USES• SOURCES OF FUNDS

• USES OF FUNDS• PURCHASE EQUITY• PAY OFF EXISTING DEBT• PAY TENDER/CALL PREMIUMS• FINANCING FEES• OTHER TRANSACTIONS FEES/EXPENSES

B.

LINK SOURCES AND USES TO BALANCE SHEET ADJUSTMENT COLUMNS

C.

LBO Analysis

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STEP 4: COMPLETE THE POST-LBO MODEL

A. BUILD DEBT SCHEDULE

B. COMPLETE PRO FORMA INCOME STATEMENTFROM EBIT TO NET INCOME

C. COMPLETE PRO FORMA BALANCE SHEET

D. COMPLETE PRO FORMA CASH FLOW STATEMENT

LBO Analysis

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BUILD DEBT SCHEDULE

• NEEDED IN ORDER TO…• ESTIMATE _____________ FOR THE INCOME STATEMENT

• CALCULATE ___________________ FOR THE BALANCESHEET

• CALCULATE ___________________ FOR STATEMENT OFCASH FLOWS

• FOR FLOATING RATE DEBT, NEED _______________

A.

• FROM STATEMENT OF CASH FLOWS: • *FCF = ________________________________________

• IF THERE IS CASH ON THE BALANCE SHEET, ___________• TERM LOANS HAVE SOME AMORTIZATION

• ____________________________

LBO Analysis

FINC 5670/6670/6676 ‐ Yost

• REVOLVERS:• COMMITMENT FEE + ADMINISTRATIVE FEE = ______________• IF DRAWN, RATE = LIBOR + 425 WITH 1.25% LIBOR FLOOR

• LINKED TO CASH AVAILABLE FOR OPTIONAL DEBT REPAYMENT

• IF NEGATIVE REVOLVER DRAWN

• FROM SOURCES AND USES• SET AMORTIZATION SCHEDULE AND BALANCE (BULLET PMT)• NO PREPAYMENT PENALTY• SWEEP ALL CASH TO REPAY DEBT• INTEREST = RATE X AVERAGE BALANCE• IDEALLY: SUFFICIENT CF TO REPAY BY MATURITY

LBO Analysis

FINC 5670/6670/6676 ‐ Yost

• BONDS NOT PREPAYABLE AND NOT AMORTIZED

• NO PAYMENT OF PRINCIPAL

• ASSUMED TO BE REFINANCED AT MATURITY (YEAR 8)• ONLY CASH FLOW = ___________________

COMPLETE PRO FORMA INCOME STATEMENT FROM EBIT TO NET INCOME• CASH INTEREST EXPENSE =

++

• TOTAL INTEREST EXPENSE = +

• NET INTEREST EXPENSE =-

LINK TO INCOME STATEMENT

B.

LBO Analysis

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COMPLETE PRO FORMA BALANCE SHEET

• LINK LIABILITIES TO ________________________ IN DEBT SCHEDULE

• CALCULATE EQUITY BY ADDING _____________ TO RETAINED EARNINGS

C.

COMPLETE PRO FORMA CASH FLOW STATEMENT

• LINK ____________________________ TOFINANCING ACTIVITIES

D.

LBO Analysis

FINC 5670/6670/6676 ‐ Yost

STEP 5: PERFORM THE LBO ANALYSIS

A. ANALYZE FINANCING STRUCTURE

B. PERFORM RETURNS ANALYSIS

C. DETERMINE VALUATION

D. CREATE TRANSACTION SUMMARY PAGE

ANALYZE FINANCING STRUCTURE• DOES THIS FINANCING STRUCTURE WORK?

WHAT ABOUT OTHERS?

• CAN THE FIRM SERVICE ITS INTEREST ANDMANDATORY DEBT REPAYMENTS?• LEVERAGE RATIOS:

• COVERAGE RATIO:

• ARE CREDIT STATISTICS IMPROVING OVER TIME?

A.

LBO Analysis

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PERFORM RETURNS ANALYSIS

• DOES THE FINANCIAL STRUCTURE PROVIDEADEQUATE RETURNS?

• STANDARD ASSUMPTIONS:• FULL SALE IN ___ YEARS

• EXIT MULTIPLE = ________________________

B.

RETURNS ANALYSIS EXAMPLE• EBITDA MULTIPLE: 8.0 X• INITIAL EQUITY INVESTMENT: $2,100• LTM EBITDA AT YEAR 5: $929.2• NET DEBT AT YEAR 5: $763.9 + $1,500• CASH AT YEAR 5: $0

LBO Analysis

FINC 5670/6670/6676 ‐ Yost

DETERMINE VALUATION

• REASONABLE ENTRY/EXIT MULTIPLES?

• APPROPRIATE IRR?

• TENDS TO BE A __________ VALUATION THAN DCF• NO ____________ OF STRATEGIC BUYER

C.

CREATE TRANSACTION SUMMARY PAGE

D.