Lbo presentation

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Lbo presentation

  1. 1. LEVERAGED BUYOUT
  2. 2. Meaning• A Leveraged buyout is a takeover of a company, orof a controlling interest in a company, usingborrowed money, usually amounting to 70% or moreof the total purchase price (with the remainder beingequity capital)• The goal of a Leveraged buy-out can be of a dualnature: a strategic-industrial nature and a financial-speculative nature SUMEET AKEWAR
  3. 3. History The leverage buyout market rose to prominence inthe late 1980s• Private equity firms such as Kohlberg Kravis &Roberts (KKR) and Fortsmann were makingheadlines with large buyouts including KKR’s $25billion buyout of RJR Nabisco in 1988• The success of these financial sponsors (i.e. PEfirms) and others earning favorable returns,attracted many other parties to the industry SUMEET AKEWAR
  4. 4. Theory of LBO• The Company / Private equity firm acquiring thetarget company will finance the acquisition with acombination of debt and equity• Portion of the debt incurred in an LBO issecured by the assets of the acquiredbusiness• The bought-out business generates cash flowsthat are used to service the debt incurred in itsbuyout• In essence, an asset acquired using leveragehelps pay for itself SUMEET AKEWAR
  5. 5. Theory of LBO• In a successful LBO, equity holders often receivevery high returns because the debt holders arepredominantly locked into a fixed return• Financial buyers invest in highly leveragedcompanies seeking to generate large equity returns• An LBO fund will typically try to realize a return onan LBO within three to five years SUMEET AKEWAR
  6. 6. Types of LBO• LBO: When a company is bought by another companymade just for this purpose. Stocks of the acquired companyare hold by a partnership of investors (usually institutional)• MBO: It occurs when the operation is set up by themanagers of the company and the objective being to takecontrol of the company. It is the company managementbuying back its shares, Management buyout• Family buyout: it occurs when the shares of the companyare held by a family group which retains control of thecompany as a result without actually having the financialmeans to make the purchase SUMEET AKEWAR
  7. 7. LBO Candidate Criteria•Steady and predictable cash flow•Clean balance sheet with little debt•Strong, defensible market position•Limited working capital requirements•Minimal future capital requirements•Heavy asset base for loan collateral•Divestible assets•Strong management team•Viable exit strategy•Synergy opportunities•Potential for expense reduction SUMEET AKEWAR
  8. 8. Valuation• Market Comparisons - Metrics such as multiples ofrevenue, net earnings and EBITDA that can becompared among public and private companies.Usually a discount of 10-40% is applied to privatecompanies due to lack of liquidity of their shares• DCF Analysis - Is based on the concept that thevalue of a company is based on the cash flows itcan produce in the future. An appropriate discountrate is used to calculate NPV SUNNY SANCTIS
  9. 9. LBO Transaction StructureOffering % of Cost of Lending Parameters LikelySources Transaction CapitalSenior 50 – 60 % 7 – 10 % 5 – 7 Years Payback Commercial BanksDebt 2x – 3x EBITDA Credit CompaniesMezzanine 20 – 30 % 10 – 20 % 7 – 10 Years Payback Public MarketFinancing 1x – 2x EBITDA Insurance Co’s LBO FundsEquity 20 – 30 % 25 – 40 % 4 – 6 Years Exit Management Strategy LBO Funds Investment banks SUNNY SANCTIS
  10. 10. Sources & Uses of Funds• Capitalization - Most leveraged buyouts make use ofmultiple tranches of debt to finance the transaction• Bank Debt - is usually provided by one of morecommercial banks lending to the transaction - Revolving Credit Facility: Source of funds that thebought-out firm can draw upon as its working capitalneeds dictate - Term Debt: Secured by the assets of the bought-outfirm, is also provided by banks & insurance companiesin the form of private placement investments SUNNY SANCTIS
  11. 11. Sources & Uses of Funds• Mezzanine Financing - It exists in the middle of thecapital structure and generally fills the gap betweenbank debt and the equity• Equity Component - Private equity firms typically invest alongsidemanagement to ensure the alignment ofmanagement and shareholder interests - Preferred equity is attractive because ofdividend interest & equity ownership component SUNNY SANCTIS
  12. 12. Leverage Statistics• Balance Sheet Transaction Adjustments : “Actual”& “Adjustments”• Pro Forma Financial Statements : Company’srevised financial projections post-LBO - Transaction Fee Amortization - Management Fees - Interest Expense - Transaction Goodwill• Equity Sponsor IRR Calculation SUNNY SANCTIS
  13. 13. Exit StrategiesSale Often the equity holders will seek an outright sale to a strategic buyer, or even another financial buyerInitial While an IPO is not likely to result inPublic the sale of the entire entity,Offering it does allow the buyer to realize a gain on its investmentRecapital The equity holders may recapitalize by re-ization leveraging the entity,replacing equity with more debt, in order to extract cash from the company SUNNY SANCTIS
  14. 14. FINANCIALANALYSIS
  15. 15. LBO AnalysisABC CO• Transaction Summary @ Deal Equity• Equity Purchase Price per Share 32.00• Common Shares Outstanding 113.5• Equity Value 3,631.0• Plus: Total Debt 694.5• Less: Cash (148.6)• Transaction Value 4,176 JAIKISHAN PARMAR
  16. 16. Sources of Funds INTEREST• Debt & Preferred Stock Amount Percent CashBank Revolver 5.0 0.1% 6.5%Acquisition Senior Debt 2,205.8 50.0% 6.5%Acquisition Mezzanine Financing 661.8 15.0% 15.0% Total Debt & Preferred Stock 2,872.6 65.1%Equity Amount Percent % EquityManagement 10.0 0.2% 0.6%Equity Sponsor 1,529.0 34.7% 99.4%Total Equity 1,539.0 34.9% 100.0% Total Sources of Funds 4,411.7 100.0% JAIKISHAN PARMAR
  17. 17. Use of FundsUses of Funds Amount PercentPurchase Common Equity 3,631.0 82.3%Refinance Short-term Debt 5.0 0.1%Refinance Senior Debt Refinance Short-term Debt 5.0 0.1% 689.5 15.6%Refinance Mezzanine Debt 0.0 0.0%Transaction Fees 86.2 2.0%Total Uses of Funds $4,411.7 100.0% JAIKISHAN PARMAR
  18. 18. Balance Sheet Adjustments Actual Adjustments LBO 06/29/03 Sources Uses Pro Forma• AssetsCash and Cash Equivalents 148.6 4,411.7 (4,411.7) 148.6Accounts Receivable 96.5 0.0 0.0 96.5Inventory 49.8 0.0 0.0 49.8Other Current Assets 21.8 0.0 0.0 21.8• Total Current Assets 316.6 4,411.7 (4,411.7) 316.6Net Property,P & M 1948.3 0.0 0.0 1,948.3Transaction Goodwill 0.0 0.0 0.0 0.0Transaction Costs 0.0 0.0 86.2 86.2Goodwill 279.5 0.0 0.0 279.5Intangibles 47.1 0.0 0.0 47.1Other Assets 193.3 0.0 0.0 193.3• Total Assets 2,784.8 4,411.7 (4,325.5) 2,871.0 JAIKISHAN PARMAR
  19. 19. Balance Sheet AdjustmentsLiabilities and Shareholders Equity ADJUSTMENT LBO ACTUAL SOURCE USE PROFORMABank Revolver 5.0 5.0 (5.0) 5.0Accounts Payable 91.0 0.0 0.0 91.0Other Current Liabilities 218.8 0.0 0.0 218.8• Total Current Liabilities 314.8 5.0 (5.0) 314.8Other Liabilities 201.0 0.0 0.0 201.0Senior Debt 689.5 2,205.8 (689.5) 2,205.8Subordinated Debt 0.0 661.8 0.0 661.8• Total Liabilities 1,205.3 2,872.6 (694.5) 3,383.5Existing Preferred Stock 0.0 0.0 0.0 0.0Acquisition PIK Preferred 0.0 0.0 0.0 0.0Common Equity 1,579.5 1,539.0 (3,631.0) (512.5)• Total Liabilities and Equity 2,784.8 4,411.7 (4,325.5) 2,871.0 JAIKISHAN PARMAR
  20. 20. Income statementPro Forma Income StatementEstimated ProjectedFiscal Year End 2003 2004 2005 2006 2007 2008Sales 3,139.8 3,532.3 3,973.8 4,410.9 4,852.0 5,288.7Cost of Goods Sold 1,591.2 1,766.1 1,947.2 2,117.2 2,304.7 2,512.1Gross Profit 1,548.6 1,766.1 2,026.6 2,293.7 2,547.3 2,776.6SG&A 273.4 282.6 317.9 352.9 388.2 423.1Other Operating Expenses 664.5 706.5 755.0 838.1 921.9 1,004.9EBITDA 610.7 777.1 953.7 1,102.7 1,237.3 1,348.6Depreciation 309.9 398.2 497.6 607.8 729.1 782.9Amortization 5.9 5.9 5.9 5.9 5.9 5.9EBIT 294.9 373.0 450.2 489.0 502.2 559.8Amortization of Transaction Fees 12.3 12.3 12.3 12.3 12.3 12.3Management Fees 1.0 1.0 1.0 1.0 1.0 1.0Interest Expense (net) 236.0 236.0 229.2 216.4 198.1 175.3Other (Income) / Expense 6.9 6.9 6.9 6.9 6.9 6.9Pre-Tax Income 38.7 116.8 200.8 252.3 283.9 364.4Provision for Taxes 14.2 42.9 73.8 92.7 104.3 133.9Net Income to Common 24.5 73.8 127.0 159.6 179.6 230.5 JAIKISHAN PARMAR
  21. 21. Cash flowCash Flow From Financing Activities 07 08 09 10 11Change in Revolver (5.0) 0.0 0.0 0.0 0.0Change in Senior Debt (64.7) (165.6) (253.4) (340.1) (390.4)Change in Subordinated Debt 6.7 6.7 6.8 6.9 6.9Existing Preferred Stock 0.0 0.0 0.0 0.0 0.0Plus: Non-cash Dividend 0.0 0.0 0.0 0.0 0.0Less: Common Dividend Paid 0.0 0.0 0.0 0.0 0.0Cash Provided / (63.1) (158.9) (246.6) (333.2) (383.4)(Used) by Investing ActivitiesBeginning Cash Balance 148.6 155.3 162.0 168.8 175.6Change in Cash 6.7 6.7 6.8 6.9 6.9Ending Cash Balance 155.3 162.0 168.8 175.6 182.5 JAIKISHAN PARMAR
  22. 22. Balance sheetLiabilities and Shareholders Equity 2006 2007 2008 2009 2010 2011Bank Revolver 5.0 0.0 0.0 0.0 0.0 0.0Accounts Payable 91.0 96.8 106.7 116.0 126.3 137.7Other Current Liabilities 218.8 246.1 276.9 307.4 338.1 368.5Total Current Liabilities 314.8 342.9 383.6 423.4 464.4 506.2Other Liabilities 201.0 201.0 201.0 201.0 201.0 201.0Senior Debt 2,205.8 2,141.1 1,975.5 1,722.1 1,382. 991.7Subordinated Debt 661.8 668.4 675.1 681.9 688.8 695.7Total Liabilities 3,383 3,353 3,235 3,028 2,736 2,394Existing Preferred Stock 0.0 0.0 0.0 0.0 0.0 0.0Acquisition PIK Preferred 0.0 0.0 0.0 0.0 0.0 0.0Common Equity (512.5) (438.6) (311.6) (152.0) 27.6 258.0Total Liabilities and Equity 2,871 2,914 2,923 2,876 2,763 2,652 JAIKISHAN PARMAR
  23. 23. Objectives of LBO• Investors takeover a company when they see itundervalued or its assets are not being usedproperly• Investors takeover the company, improve itcausing its value to increase then sell it back to themarket at a higher price share• Sometimes they sell parts of it which could giveback a big amounts of money RITESH MACHHI
  24. 24. Objectives of LBO• Generally, the acquiring group plans to run theacquired company for a number of years, boost itssales and profits, and then take it public again as astronger company• In other instances, the LBO firm plans to sell offdivisions to other firms that can gain synergies, butthe inherent risks are great due to the heavy use offinancial leverage• Saving a lot of taxes because they are borrowing alot of money RITESH MACHHI
  25. 25. Pros & Cons Of Using LeveragePROS• Large interest and principal payments can forcemanagement to improve performance and operatingefficiency• As the debt ratio increases, the equity portion of theacquisition financing shrinks to a level at which a privateequity firm can acquire a company by putting upanywhere from 20-40% of the total purchase price• Interest payments on debt are tax deductible thus taxshields are created and they have significant value RITESH MACHHI
  26. 26. Pros & Cons Of Using LeverageCONS• Events such as recession, litigation, or changes in theregulatory environment can lead to financial distress• Weak management at the target company ormisalignment of incentives between management andshareholders can also pose threats• Increase in fixed costs from higher interest payments canreduce a leveraged firm’s ability to weather downturns• In troubled situations, management teams of highlylevered firms can be distracted by dealing with lendersconcerned about the company’s ability to service debt RITESH MACHHI
  27. 27. CASES
  28. 28. RJR Nabisco CaseA good example of an LBO is KKR’s buyout of RJR Nabisco• On October 28,1988 Ross Johnson, the company’s CEO,had formed a group of investors that was prepared tobuy allRJR’s stock for $75 per share in cash and take the companyprivate• RJR’s share price immediately moved to about$75,handlingshareholders a 36 percent gain over the previous day’s priceof $56• At same time RJR’s bonds fell, since it was clear thatexisting bondholders would soon have a lot more company• Johnson’s offer lifted RJR onto the auction block. VAIBHAV ATRI
  29. 29. RJR Nabisco Case• Four days later KKR bid $90 per share,$79 in cash plus PIKpreferred valued at $11• The resulting bidding contest had many surprises, but in theend it was Johnson group against KKR• KKR offered $109 per share, after adding $1 per share inthe last hour• The KKR bid was $81 in cash, convertible subordinateddebentures valued at about $10,and PIK preferred sharesvalued at $18.Johnson group bid $112 in cash and securities• RJR board chose KKR although Johnson’s group hadoffered $3 per share more, its security valuations wereviewed as “softer” and perhaps overstated VAIBHAV ATRI
  30. 30. Tata – Corus Deal• Tata Steels $8.23 billion leveraged buyout of UKsteel producer Corus is multi-faceted• The Deal Comprises: - $3.88 billion equity contribution from Tata Steel - Fully underwritten non-recourse debt package of $5.63Bn - Revolving credit facility of $669 million VAIBHAV ATRI
  31. 31. Tata – Corus Deal• £3.3 billion is being raised at the SPV level - Credit Suisse will provide 45% and - ABN AMRO and Deutsche will pick up 27.5%each• $1.8 billion bridge debt is being raised at the TataSteel level in India is being shared betweenStandard Chartered and ABN AMRO• In addition, Standard Chartered is providingsubordinated debt of £196 million to Tata Steel VAIBHAV ATRI
  32. 32. THANK YOU

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