A leveraged buyout (LBO) involves using borrowed money to purchase a company, with the acquired company's assets and cash flows used to repay the debt over time. An LBO is similar to buying a house with a mortgage, where the "down payment" is equity and the "mortgage" is debt. Sources of funds for an LBO include bank loans, bonds, mezzanine debt, and seller financing. Successful LBOs involve mature companies with strong management, competitive advantages, and potential for cost cutting. Returns are measured using metrics like internal rate of return and cash-on-cash return, typically targeting 2-5x returns. Notable Indian LBOs include Nirma's acquisition of

1. “LEVERAGE BUYOUT”
(GROUP-8)
Financial statement analysis & credit appraisal
‘Under guidance of Mr. Vineet Gupta’
Presented by,
Jithin Koshy
Swati
Anjana

2. WHAT DO YOU MEAN BY LEVERAGE BUYOUT?
A leveraged buyout (LBO) is the purchase of a company using a large
amount of debt or borrowed cash to fund the acquisition.
The buyout involves a combination of equity from the buyer, along with
debt that is secured by the target company’s assets. The deal is structured
so that the target company’s assets and cash flows are used to pay for most
of the financing cost.

3. LEVERAGE BUYOUT ANALYSIS CONCEPT
• Consider that the concept of leveraged buyout is very similar to buying a house.
• Suppose you want to buy a big house what will you do?
• Due to rising real estate prices, definitely it is not possible to do the entire down
payment.
• Then what do you do? Yes, ofcourse you go for a loan.
• And most of the times it forms a major part of the entire process. Similar is the
concept in LBO analysis.

4. • If we break down it to simple terms, in an LBO, the “down
payment” is the equity cash and the “mortgage” is called debt.
• In leverage buyout the acquisition of the another company is
significantly by borrowed money (bonds or loans) to meet the
cost of acquisition.

6. STEPS INVOLVED IN LEVERAGE BUYOUT
• STEP 1: Finding the Business to be Acquired
It is simple to say that you want to complete an acquisition, but is much harder to
find the one that fits best with your business. It is important to start off by evaluating
your own financials and the potential risks that your balance sheet can withstand. If a
company takes on too much risk, it can fail. A good acquisition is one that has the
capital and equity to grow from the additional assets that are purchased.
• STEP 2: Finding the Right Kind of Capital Provider
There are many different types of capital that can be used to complete a leveraged
buyout such as, senior cash flow debt, integrated debt, seller financing, asset-based
financing..

7. CONTINUED…..
• STEP 3: Receiving the Capital – Due Diligence
For a lender to provide the capital to the leverage buyout, the company must provide
sufficient financial information that documents the financial strength of the company.
This may include, balance sheets, profit and loss statements, and cash flow
statements. The lender will do due diligence to make sure that the assumptions and
projections specified by the company are plausible.
• STEP 4: Completion of the Acquisition
Legal documentation of the acquisition is the final stage where the buyer works with
his lawyer to finalize the purchase agreement with the seller and the loan agreement
with the lender. It is important to ensure that all salient business points are covered in
the purchase agreement. The purchase agreement should detail all of the
representations and warranties, as well as other key points

8. SOURCES OF FUNDS IN LEVERAGE
BUYOUT
• Bank financing
• Bonds
• Mezzanine, Junior or Subordinated Debt
• Seller notes
• Common equity

9. KEY CHARACTERISTICS OF LBO
CANDIDATE
• Mature industry and the company.
• Clean balance sheet with low amount of outstanding debts.
• Strong management team and potential cost cutting measures.
• Strong competitive advantage and market position.

10. RETURN ON LEVERAGE BUYOUT
• In Leverage buyout the financial buyers evaluate investment opportunities by
analyzing expected internal rates of return (IRRs), which measure returns on
invested equity.
• Sponsors must measure the success of an LBO investment using a metric called
“cash on cash”.
• Typical LBO investments return range between 2x – 5x cash-on-cash. If an
investment returns 2x cash on cash, the sponsor is said to have “doubled its money”.

11. LEVERAGE BUYOUT IN INDIA
• More than eight out of every 10 leveraged buyouts (LBO) that happened in post-
liberalization India took place after 2007, 83 such completed deals since 1991, 68 have
happened after 2007.
• There are many restrictions for leverage buyout in India by RBI and SEBI. To protect the
interests of domestic companies, the RBI prohibits banks and financial institutions from
granting loans for acquisition of shares in any Indian company.
• Domestic banks are allowed to advance loans to Indian companies for acquisition of shares
in foreign joint ventures and wholly owned subsidiaries.

12. “LEVERAGE BUYOUT DONE BY INDIAN
COMPANY”

13. • Gujarat-based soda ash, soap and detergent manufacturing company Nirma Ltd has signed
an agreement to acquire Lafarge India Pvt Ltd’s assets for Rs.9,400 crore ($1.4 billion). The
largest leveraged buyout (LBO) that the Indian market has seen.
• Funding of the deal
o 4000cr- though bond issue
o 3400cr- though loans
o 1900cr- though equity
• Nearly 80% of the total deal value is been paid through borrowed funds, making it a
textbook LBO. Nirma will use the cash flows of Lafarge India to back the bond issue.

14. • 2007, TATA STEEL BOUGHT CORUS IN A $12 BILLION DEAL
THE BIGGEST FOREIGN ACQUISITION BY AN INDIAN COMPANY.