Buyout Summary

7/28/2019 Buyout Summary

1/15

Buyout fund


2/15

Buyout Intro:

1. Mature and traditional industries

2. Single up front investment leading to 100%

ownership

3. Management allowed to buy 5-20% at favorableterms

4. High financial risks

5. 2-7 years before returns are realized


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Economic rule (BMC- OUC)

Business strategy

Mgt motivation

Culture Op Efficiencies

Utilisation of assets

Capital structure


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Buyout role to Economy (REOF)

Facilities pvt market for Restructuring

Improves Efficiency of listed market

Optimises global capital allocation throughcreative destruction

Possibly the only Financial source to save

Failing companies


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Typical Target Co (CF, SDAT)

1. Adequate and reliable cash flow

2. Opportunities to improve through:a. Strategic repositioning

b. Improved product offering

c. Better operational efficiency

d. Loosening of corporate constraints

e. Redeployable, non-core assets availability

f. Poorly incentivised management

3. Distressed/undervalued co4. Significant asset to collateralise loan

5. Non-cyclical industries without rapidly changing tech


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Why misplace in buyout (FE, CCfE)

Heavy use of financial engineering

Covenant lite term

Overly comfortable on cash flow financing andreduce the importance on asset

collateralisation

Buyers taking position in co without necessaryexpertise


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Buyout Skill Set (SOAP DNS)

Strategic and Operational Expertise

Savvy buyer at Auction

Project Management Skills Love for Deal Making and Negotiation

Stamina to manage stress


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Due di on target (UOR PAP)

Identifying real Underlying perf

Assessing growth and profit improvement Opp

Isolating keyR

isks Understanding business Plan Assumptions

Develop 100 day and full plan to capture

opportunities


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Add Value by: (CV UMBO)

Cash focused

Shareholder value oriented plan

Sense of urgency Better management team

Reconstitute board with experience

Ownership culture


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Valuing PE

Industry comparables

Target of return approach


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APV

Discount Rate: Risk Free + Asset Beta (E Risk P)

Asset Beta: equity beta * % cap in equity


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APV Structure2001E 2002P 2003P 2004P 2005P 2006P

Income Statement

Net Sales 537.3 618.8 711.6 817.3 938.8 985.7

EBITDA 88.7 109.1 134.2 161.6 169.7

EBIT 67.6 87.3 109.8 133.5 140.2

Interest Expense @ 9.6% 30.5 29.6 27.8 24.6 19.9

Pre-Tax Income 37.1 57.7 82.0 108.9 120.3

Taxes @ 40% 14.8 23.1 32.8 43.6 48.1

After-Tax Income 22.3 34.6 49.2 65.3 72.2

BALANCE SHEET ITEMSNet Working Capital @ 18% of Sales 96.7 111.4 128.1 147.1 169.0 177.4

Cash Flow

After-Tax Income 22.3 34.6 49.2 65.3 72.2

Plus: Depreciation & Amortisation 21.1 21.8 24.4 28.1 29.5

Less: Working Capital Requirements -14.7 -16.7 -19.0 -21.9 -8.4

Less: Capital Expenditure -19.5 -21.0 -21.5 -22.5 -22.5

After Tax Cash Flow 9.2 18.7 33.1 49.1 70.7

DEBT BALANCES

Beginning Debt (Staple Financing) 317.5 308.3 289.6 256.5 207.5

Debt Repayment 9.2 18.7 33.1 49.1 70.7

Ending Debt 308.3 289.6 256.5 207.5 136.7

Int Exp: 9.6% * debt

Capex: given


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Asset Beta

Risk Free Rate (10 Year Treasury Bond) 5.2%

Average Asset Beta of comparable companies 1.0

Equity Market Premium 7.7%

Equity Discount Rate = 5.2%+(1.0 x 7.7%) = 12.9%

Company Equity Beta

5-Year

Avergae

Leverage

5-Year

Avergae

Equity

Per Cent Asset Beta

Nike 1.0 8.4% 91.6% 0.9

Jones Apparel Group 1.1 17.1% 82.9% 0.9

Tommy Hilfiger 1.3 18.1% 81.9% 1.1

Liz Claiborne 1.2 4.4% 95.6% 1.1

Average Asset Beta 1.0

Selected Data From Exhibit 8 Calculations


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APV

CALCULATE EQUITY CASH FLOWS 2002P 2003P 2004P 2005P 2006P

EBITDA 88.7 109.1 134.2 161.6 169.7

Less Depreciation & Amortisation 21.1 21.8 24.4 28.1 29.5

EBIT 67.6 87.3 109.8 133.5 140.2

Less Taxes @ 40% 27.0 34.9 43.9 53.4 56.1

After-Tax Income With Equity Financing 40.6 52.4 65.9 80.1 84.1

Plus Depreciation & Amortisation 21.1 21.8 24.4 28.1 29.5

Less: Working Capital Requirements -14.7 -16.7 -19.0 -21.9 -8.4

Less: Capital Expenditure -19.5 -21.0 -21.5 -22.5 -22.5

Cash Flow With Equity Financing 27.5 36.5 49.8 63.8 82.7

Equity Discount Rate = 5.2%+(1.0 x 7.7%) = 12.9%

Calculate Present Value of Annual Equity Cash flows

Equity Discount Factor 0.886 0.785 0.695 0.615 0.545

PV of Year 1-5 Equity Cash Flow 171.9 24.3 28.6 34.6 39.3 45.1


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2002P 2003P 2004P 2005P 2006P

Cash Flow With Equity Financing 27.5 36.5 49.8 63.8 82.7

Growth Rate In Perpetuity 4.0%

Terminal Value = 82.7m x 1.04%/(12.9%-4%) = 965.9PV of Terminal Value 526.6

SUM PRESENT VALUES TO OBTAIN ENTERPRISE VALUE

PV of Year 1-5 Equity Cash Flow 171.9

PV of Terminal Value 526.6

PV of Interest Tax Shield 41.3

Enterprise Value 739.8

Less Initial Staple-On Financing -317.5

Equity Value 422.3

Buyout Summary

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