Post on 19-Dec-2015
Joseph V. RizziJoseph V. RizziAmsterdam Institute of FinanceAmsterdam Institute of Finance
October, 2014October, 2014
Transaction: Buyout, Acquisition or Recapitalization Leverage: Resulting in highly leveraged (i.e., non investment
grade) obligor – fD/EBITDA > 3X Subject to market availability and pricing (function of risk
appetite Deal Types:
AcquisitionRecapitalizationRefinancePTP (Public to Private)STS (Sponsor to Sponsor, aka Pass the Parcel)
PE Importance: Provides 1/3 of all I/B Revenues and up to 25% of M&A
Amsterdam Institute of Finance October, 2014 2
7 Year High – 1.77TU.S. - 41% ROW - 59%
DriversCash Balances Low RatesExhausted Cost Cuts and BuybacksPent-up Demand Positive ResponseConfidenceRising Stock Prices
Increase in Hostile T/O
20% of total v single digits post crisis
PE: Dog that didn’t bark – Strategic Acquirers crowd-out
20% of total v 27% 4 year average
Reflects dearth of larger PTP deals
Volume up 6% 2014 v double digit M&A increase
PPX: 14X+
Drop in cash in favor of stock/stock + cashAll cash at lowest level since 2001
Averages reflect return of the “big deal”
Amsterdam Institute of Finance October, 2014
3
Activity1H14 1H13
Volume ($B) 1,768 1,023
Size (> 10B) 9 19 Return of Strategic Acquiror
Holcim – LaFarge April, 2014: $39.5B
Numericable – SFR March, 2014: $23.3B
Facebook – WhatsApp February, 2014: $19.5B
Suntory – Beam January, 2014: $15.7B
Bayer – Merck Cons May, 2014: $14.2B Drivers
Increased Stock Prices – Management confidence; Stock as Currency
Positive Shareholder Reaction: One Day Indexed Buyer Stock Price Reaction
1H14 2.9%
2H13 3.6%
1H13 3.1%
2012 1.8%
2011 .3%
2010 .3%
2009 <1.9%>
2008 <1.3%>
Source: S&P Capital IQAmsterdam Institute of Finance
October, 2014 4
FactorsDeal SizeTimingPriceFinancingConsiderationBuyerExecutionType
TestsBest OwnerIron Law
Amsterdam Institute of Finance October, 2014 5
(Euro/B)
7/31/14 38.8
2013 63.7
2012 29.0
2011 43.9
2010 39.4
2009 9.0
2008 69.3
2007 152.3
2006 164.5 Country
UK 28.57%
France 19.10%
Germany 12.59%
Netherlands 10.83%
Spain 6.45% European PE Dry Powder (Euro/B) – European Focused
Fundraising
7/31/14 225 58.4
2013 190 88.8
2012 175 73.8 Key Buyout Stats – 7/31/14
PPX 9X
Eq% 35%
FDX 5X Source: S&P Capital IQ
Amsterdam Institute of Finance October, 2014 6
European LL Volume:Highest Level Post Crisis June/JulyYTD Volume €59.5B up 19% same period 2013/LYIncludes M&A and PE
Leverage Up: 5X+
Return of Cov-lite: Reduced Terms
2L Increasing
CLO:Returning – 6 Mo 16 v 20 for YE13Costs dropped from E+200 2013 to E+100 1H14
MEZ N/A: 2L Wipeout
HYB (7/31/14): €61.3B v €47.2B LY
Amsterdam Institute of Finance October, 2014 7
Question Framework1. How will transaction achieve our goal? Acquisition Strategy
2. Which companies are good targets? Strategic FitSearch Screen
3. Best transaction types? M&A v AllianceJV and Minority Interests
4. Available Synergies? Scale, Scope and SkillStrategic and Due Diligence
5. What is target worth to us and potential bidders?
DCF, Comps (trading, transaction)ROV
6. Target assessment? Shareholder valueEconomic profit, other
7. Risks? Cost of Capital AnalysisSensitivity, Scenario and Simulation
8. Deal Structure? Asset v StockCash v StockFixed v Contingent
9. Integration Absorption v PreservationSymbiosis v Holding
10. Negotiations Planning and Strategies
Amsterdam Institute of Finance October, 2014 8
CEO only believer: headstrong; magazine cover effect
Only revenue synergies with no investment plan
Prefunctory Due Diligence
Reservation price changes during bidding
Must close deal
Failure to identify why buyer is best owner
Emphasis on time, effort, cost and reputation sunk into deal
Amsterdam Institute of Finance October, 2014
9
Stone Age Bronze Age Silver Age Golden Age Back-to-the-Future Maturity
(1974-84) (1985-90) (1990-2000) (2002-07) (2008-2012) (2013 - ?)
Cottage Industry KKR Fund proliferation Goes global Shakeout/consolidation Exits
Bootstrap deals High Yield Represents 40% higher equity levels Fund Raising
of M&A smaller deals Dry Powder
Mega Funds Operating improvements Diversification
focus. Increase in PIPE
and minority interests?
Amsterdam Institute of Finance October, 2014 10
PE Fund Performance Persistence – declining due to competitionAccess
Networks
Signaling
Crowded (> 5,000)2,200 funds seeking funds as of July, 2014
Raise $750B
Dry Powder
LP Selection IssuesStrategy
Returns
Team
Terms
Relationship
Amsterdam Institute of Finance October, 2014
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Amsterdam Institute of Finance October, 2014 12
Tax – Legal – Accounting Knowledge
Network ManagementIndustry ExpertiseCorporate Finance Delivery
FundRaising
Investing Managing/Monitoring
Exit
VALUE
• Buy Right: PPX
• Financial Engineering: FDX
• Operating Improvements: (pf) EBITDA
• Multiple Expansion: Exit X
13Amsterdam Institute of Finance
October, 2014
Corporate PE
Valuation WACC based DCF Equity returns and cost of equity based
Debt Capacity Investment Grade (company determined)
Maximum debt capacity (lender/market determined)
Residual Value Growing Prep Exit X
Value Added Synergies Financial Engineering
Search Focused Opportunistic
Affordability Dilution IRR on required equity
Deal Size Large Depends
Capital Structure Permanent Temporary
Debt Structure Simple Complex
Flexibility No financial covenants Cov-lite
Horizon Long Term 5+ years
Integration Risk High Low
Thesis Strategic Transaction
Amsterdam Institute of Finance October, 2014
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Sponsor ShareCVC 10.13%
Carlyle Group 5.06%
Astorg Partners 5.06%
Permira 5.06%
Clayton, Dubilier & Rice 3.80%
Goldman Sachs 3.80%
Montagu Private Equity 3.80%
Advent International 2.53%
Bain Capital 2.53%
Koch Industries 2.53%
Cinven Ltd 2.53%
Apollo Management 2.53%
Bridgepoint Capital 2.53%
Teachers’ Private Capital 2.53%
Investcorp 2.53%
Triton Managers 2.53%
Ardian 2.53%
Electra Partners 2.53%
ATP Private Equity Partners 1.27%
3i pic 1.27%
Source: S&P Capital IQ
Amsterdam Institute of Finance October, 2014
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Up CycleSpreads NarrowMultiples IncreaseLeverage IncreasesExits AccelerateFundraisingDry Powder
CharacteristicsGovernment Bond RatesHigh Yield Spreads
Amsterdam Institute of Finance October, 2014
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Amsterdam Institute of Finance October, 2014 17
Deal marketDisappoint returnsImpacts fundraising
Deals chase money Superior returns Attracts capital
Capital chasings deals
Macro
Financial Markets
Fund manager
Carried interest
partner
General
Partner
LP
A
LP
B
LP
C
US Investors
US Exempt
Investors
Non-US
Investors
FUND
Investment Investment InvestmentInvestment
Hold Co.
Hold Co.
Operating Entity
Bank
Bridge finance
Syndicate participants
Leverage finance
syndicate participants
Nominee
High Yield
Investors
Mezzanine
InvestorsFLL
SLL
CLO
Hedge funds
18Amsterdam Institute of Finance
October, 2014
Now In 5 yrs
EBITDA of Acquired Firm 125 188 (c)Sale value @ 8 x EBITDA 1,000 1,500
Financing Plan: Equity @ .20 200 Debt @ .80 800
Total Capital Raised 1,000
Fees 30 50
Net Sale Proceeds on Exit 1,450
Original Debt 800 Less: Debt pay down over 5 years 260Debt at end of 5 years -540 540Return of Original Equity -200Net gain to be allocated 710 10% to mgmt options 71(a) 20% to general partner 142 70% to limited partners 497 (b) Total 710
Amsterdam Institute of Finance October, 2014 19
(a) Share to CEO 2% points or $14.2 x 1 = $14.2Share to next 4 senior officers 1% points or $ 7.1 x 4 = $28.4 Share to next 8 key players 1/2% points or $ 3.6 x 8 = $28.4 Total Management share $71.0
(b) Equals a 28.4% compound annual rate of return on investment.(c) Assumes $12 taken out of cost structure immediately and 6.5% growth/year in EBITDA thereafter.
Source: Casewriter – The Role of Private Equity Firms in Mergers & Acquisitions TransactionHarvard Business School case 9-206-1 Rev 10/16/06
- $ millions -
Price ≠ Value
eventually converge, but…
using price to justify M&A – increases overpaying
Most valuations are really disguised Pricings
Academic Surveys – DCF
Reality – Name Only
TV in DCF >60% Value
TV calculated using market multiple
Venture Capital Valuation
Football Field: Flaw of Averages
V x
x
x Average Fit Line
x
x
Asset DCF Comp Comp Other Value Trade Trans (ROV?)
Goose that Lays the Golden Egg Story: Price v Value
Amsterdam Institute of Finance October, 2014
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Stupidity & BiasFantasyCompetitive NecessityOutlook/Information AdvantageSynergiesLower Buyer WACCUndervaluation
ROT: Greater than 40% premium over pre-bid market price is difficult to justify for any sizeable acquisition.
Amsterdam Institute of Finance October, 2014
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Focus on return: what is the maximum price I can pay based on given set of projections and earn X% return not risk adjusted?
Tradition Valuation =Projected cash flowsDiscounted rateTerminal value
LBO Perspective = IRR (Equity discount rate)Projected cash flowsPurchase PriceSale Price (Terminal Value)
Debt PolicyRatings/CorpValue Transfer from LP’s
Amsterdam Institute of Finance October, 2014 22
How much can I borrow (XEBITDA)
Usually 4 - 6X depending on market
Equity Percentage Required (% of PP)
Usually 30% - 45% dependent on market
Compare
Market PPX
IRR
Adjustments
FD
Exit Multiple
Equity
PP
EBITDA adjustment (pro forma EBITDA)
Example – assume €100 EBITDA
FDX – 5X
Equity % - 35%
Affordable bid 7500 or 7.5x EBITDA
Amsterdam Institute of Finance October, 2014 23
DCF
Net Income+ Dep/Amt+/_ Change in deferred taxes+/- Other noncash items+/- Change in working capital Cash flow from
operations+After tax interest (hypo Ƭ)- CAPEX- Unleveraged FCF
Amsterdam Institute of Finance October, 2014 24
CFADS
Net IncomeDep/AmtChange in deferred taxes Other non cash changesChange in working capitalCash flow from operationsNon interest expense adjustmentCapexCFADS
IRR Equivalent MOIC Over 6 Years
10% 1.8X20% 3.0X30% 4.8X40% 7.5X50% 11.4X
Amsterdam Institute of Finance October, 2014
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Future ValueMarket Size (Year 6) 1,000
Market Share 10%
Revenue 100
Revenue Multiple 5
Value 500
Ownership NeedInvestment (today) 10
Required Return (40%) 7.5X
Expected Exit Value 75
Today’s Ownership RequirementExpected Exit Value 75
Projected Value 500
% Ownership 15%
Amsterdam Institute of Finance October, 2014
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Amsterdam Institute of Finance October, 2014 27
Fixing the Broken Deal – Price and
Structural Flex
Increase spread Recycled
Original issue discount
Eliminate PIK
Reduce debt
Add a subordinate tranche
More equity
Add covenants
Reduce Price
Seller Paper