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LBO - Uncompleted

You have been hired to assess the feasibility of a leveraged management buyout of Widget Inc. You need to build an LBO model to calculate the internal rate of return and multiple of money that could be achieved. Key questions you need to answer include determining an appropriate acquisition premium and leverage level, and how sensitive returns are to changes in these assumptions. You should also build a sensitivity table showing IRR at different premiums and exit multiples to fully evaluate the potential transaction. Additional financial and operating details would help make the analysis more accurate.

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Rachel Tang
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44 views10 pages

LBO - Uncompleted

You have been hired to assess the feasibility of a leveraged management buyout of Widget Inc. You need to build an LBO model to calculate the internal rate of return and multiple of money that could be achieved. Key questions you need to answer include determining an appropriate acquisition premium and leverage level, and how sensitive returns are to changes in these assumptions. You should also build a sensitivity table showing IRR at different premiums and exit multiples to fully evaluate the potential transaction. Additional financial and operating details would help make the analysis more accurate.

Uploaded by

Rachel Tang
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as XLS, PDF, TXT or read online on Scribd
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You have been hired by the management of Widget Inc.

to assess the possibility of a leveraged management buyout. The Company


would like you to assess the multiple of money and internal rate of return (IRR) that can be achieved and has sent you an excel file with a
number of key financial and operating assumptions which they feel are conservative and achievable.

Please build an LBO model in order to calculate these returns. While doing so, please be prepared to answer the following questions:

1) What is a sensible acquisition premium?

2) How did you determine the appropriate level of leverage?

3) How sensitive are the returns to the leverage ratio?

4) Please build a sensitivity table that shows the IRR at various acquisition premiums and at various exit multiples of LTM EBITDA.

5) What other key information would you require to make your analysis more accurate?
Assume Entry on 31/10/2010 10/31/2006 10/31/2007 10/31/2008 10/31/2009
(4) (3) (2) (1)
Input Drivers
Name LBO Co
Current year end 10/31/2010
Number of historic years 4
Currency MM GBP
Current share price GBP 4.30
Offer Premium 35.0%
NOSH MM 450.0
EPS GBP 0.14

Net debt GBP MM 1,000


Stock options
ITM options MM 10
Average exercise price GBP 0.90
Tax rate 28.0%
Base rate 1.50%
Revolver Interest Rate 6.0%
Cash Interest Rate 2.5%
Fees
M&A @ Entry 0.75%
Exit Fee 1.50%

Valuation
Entry AV/LTM EBITDA
Exit AV/LTM EBITDA 10.0x
Exit Year 4

Hurdles
Minimum Equity Requirement 40.00%
Total Debt / EBITDA 5.0x

Sources and Uses of Funds


Sources Size Proportion (x) EBITDA Term
Senior A 6
HY / Mezzanine 10
Total Debt

Uses

Equity Returns
Operating model drivers
Sales growth 7.1% (21.3%) 18.6%
EBITDA margin 4.9% 11.9% 11.2% 8.0%
Capex (as % of sales) 7.9% 6.7% 7.8% 5.7%
Capex/depn 229.2% 263.2% 230.0% 181.8%
Decr/(incr) in WC as % of sales growth 2.0% 4.3% 2.9%

Cash flow
Sales 3,500 3,750 2,950 3,500
Operating profit 50 350 230 170
Depreciation 120 95 100 110
EBITDA 170 445 330 280
Decr/(incr) in working capital 5 (34) 16
Capex (275) (250) (230) (200)
Net Interest paid (25) (40) (35) (60)
Tax (90) (85) (75) (20)

Debt Schedule
Net Debt

Tax Working
10/31/2010 10/31/2011 10/31/2012 10/31/2013 10/31/2014 10/31/2015 10/31/2016 10/31/2017 10/31/2018
-- 1 2 3 4 5 6 7 8

Type Spread Cash Rate PIK Rate


Amortising 4.5% 6.0% --%
Bullet 6.0% 7.5% 8.0%
15.0% 13.0% 12.0% 10.0% 8.5% 8.0% 7.5% 7.0% 7.0%
8.5% 9.0% 9.5% 9.5% 9.7% 10.0% 10.5% 11.0% 11.0%
5.5% 4.5% 4.2% 4.0% 3.5% 3.5% 3.2% 3.0% 2.8%
180.0% 170.0% 160.0% 150.0% 140.0% 130.0% 120.0% 110.0% 105.0%
2.2% 2.0% 1.9% 1.7% 1.6% 1.5% 1.4% 1.3% 1.2%

(5)
10/31/2019 10/31/2020
9 10

Amortising
Bullet
6.5% 6.0%
11.5% 11.5%
2.5% 2.4%
100.0% 90.0%
1.1% 1.0%

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