1. Valuation Analysis and Structured
Management Buy-Out of SolarTech Inc.
City University of Seattle: MBA FIN 541

2. Outline
 Market & Financial Analysis
 Pro Forma Financial Plan
 Financing Proportions (Debt/ Equity Mix)
 Proposed Financing Structure
 Recommendation

3. Market & Financial Analysis - Profitability
Hist.
Hist.
Hist.
Hist.
Hist.
2010
2011
2012
2010
2011
2012
net sales
31,0
32,0
34,0
growht rate

Hist.
n/a
3,23%
6,25%
2,1
n/a
2
-4.76%
2
25.00%
net income
growth rate
Solartech Inc. demonstrates stable increase in net sales for the last two years by reaching the
level of $34.0 million for 2012;

Comparing the Net sales in 2012 to those in previous years, the Net Income in 2012 indicated an
increase.

4. Market & Financial Analysis – Key Ratios
Hist.
2012
Equity ratio
Debt retirement ratio
Operating cash flow margin
Return on assets (ROA)
Operating profit margin
20,4%
7,5
21,2%
-30,0%
19,1%
Hist.
2011
20,0%
6,6
18,4%
-25,6%
16,3%
Hist.
2010
20,8%
6,7
19,7%
-27,4%
17,4%
Rating
good
average
very good
danger

A good equity ratio that guarantees more free cash for future growth;

Each dollar of sales Solartech Inc. makes 19 cents before interest and taxes;

Negative ROA – Solartech Inc. invests a high amount of capital in
production, while receiving a little income.

5. Market & Financial Analysis:
Comparison with industry
Solartech Inc. operates in Renewable Energy Services & Equipment Industry;
Solartech Inc. has average if not marginally better ratios than its rivals;
The industry appears to be in infancy/ is made up of underachievers.

6. Market & Financial Analysis – Industry Forecast
(Altenergymag. 2013)
The solar PV capacity is expected to continue to grow in the future – growing
market;
The substantial fall in solar PV cost suggests fall in prices of Solartech Inc.’s
products and put under condition the current price of its inventory;
The global cumulative installed capacity for solar PV is expected to reach 330,424
MW by 2020, growing at a CAGR of 23.7% during 2011-2020.

7. Market & Financial Analysis
Debt leverage and coverage ratios
Financial Covenants:
Net Debt/Equity
Net debt/EBITDA
EBITDA/Interest expense
FCF/(Interest + Principal)
1,2
0,8
10,3
3,1
1,3
0,9
9,8
2,4

Net Debt/ Equity: Moderate/ Some Headroom;

Net Debt/ EBITA: Low/ Headroom;

EBITDA/Interest Expense: High/ No Headroom;

1,2
0,9
10,2
Min./Max. Values
max. 2.0
max. 3.5
min. 3.0
min. 1.0
FCF: High/ No Headroom.
The set up financial covenants and Solatech's ratios show that the company is
in compliance with covenants.

8. Pro Forma Financial Plan

The Free Cash Flow is designed to measure a company’s financial
performance by calculating the firm’s operating cash flow from its
capital expenditures.

9. Financing Proportions – Debt/Equity Mix
Debt/ Equity Mix is a balance between funds
available, what the returns and covenants dictate, and
the financial structure can support.
Scenario 1 - an ideal mix of 60% Debt, 40% Equity
Scenario 2 – a mix of 15% Debt, 85% Equity.

10. Management Buy-Out
This transaction is when an equity interest in the business is
acquired by its management (with the cooperation of outside
finance).

11. Financing Sources
Management buyouts - too risky for banks to finance
through a loan in itself;
They typically finance at 4x cash flow;
Financing structure for Solartech Inc. - partially leveraged
through private equity financing (co-investor);
Co-investor exits the business within 5 years while
minimizing the risk.

12. Valuation
For the financing structure, we will utilize the DCF value for
Solartech Inc.

13. Scenario 1
Scenario 2
Financial Structure

14. Evaluation
Investors
hedge
their
investment bets based on
a balance of return.
Scenario 1 is presented as
a baseline or ideal to
contrast Scenario 2.
−a roughly 60% Debt/ 40%
Equity split;
−it would provide an IRR
of 15% in year 2016;
−more debt heavy then
equity (compared to
Scenario 2);
−comes closer to the
ceilings of the financial
covenants.

15. Evaluation, Cont.
Scenario 2
-never hits an IRR
of
15%,
the
minimum desired
by an investor in
the 5-year period;
- high
equity
investment;
-adequate
headroom
on
each
covenant,
with
the exception of
IRR.

16. Mezzanine Finance?
Use of mezzanine finance
could be considered in
scenario 1 or scenario 2, if:
- purchase price
exceeded the amount
that could be financed
using a loan/debt.
Mezzanine capital treated
as equity, but is essentially
debt;
Has a higher service fee
or cost than a traditional
loan;
The IRR is significantly
impacted due to the cost
of this capital –but the
return preference is not
there for a co-investor.
Evaluation Cont.

17. Recommendation
SolarTech Inc. appears to be a good candidate for a
management buyout.
Take in mind:
Part of a growing, but immature industry segment with
growing sales and good cash flow management;
Concern over a lackluster ROA => poorly utilized capital
internally.
Proposal:
The deal structure - a 60% Debt/ 40% Equity balance - best
meets parameters such as Covenants and IRR.

19. References
Altenergymag, (2012). Solar Photovoltaic (PV) Power - Global Market Size and Key Country
Analysis to 2020. Retrieved on June 21, 2013 from:
http://www.altenergymag.com/emagazine/2012/02/solar-photovoltaic-pv-power--globalmarket-size-and-key-country-analysis-to-2020/1849
CSImarket, (2013). Renewable Energy Services & Equipment Industry. Retrieved on June
21, 2013 from: http://csimarket.com/Industry/Industry_Profitability.php?ind=605
Deloite (2004). Making The Break: A Practical Guide to MBO. Retrieved June 21, 2013 from:
http://www.deloitte.com/assets/DcomUnitedKingdom/Local%20Assets/Documents/Guide%20to%20mbos.pdf
Eayers, Willis E., Mergers & Acquisitions: A Corporate Finance Perspective, 2013 Class
Presentation
International Energy Agency, (2012). World Energy Outlook 2012. Retrieved on June
21, 2013 from
http://www.worldenergyoutlook.org/media/weowebsite/2012/WEO2012_Renewables.pdf
Investopedia (2013). Debt/Equity Ratio. Retrieved June 21, 2013 from
http://www.investopedia.com/terms/d/debtequityratio.asp
TrcSolutions, (2013). Outlook bright for Future of Solar Energy. Retrieved on June 21, 2013
from: http://blog.trcsolutions.com/solar-energy/