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Lbo Course Notes Sample

Leveraged buyouts involve acquiring a company using a significant amount of debt in addition to equity from private equity investors. The company takes on high leverage, becoming highly indebted. Private equity firms hope to profit by selling the company later to repay debts and provide returns to investors, such as through an IPO or sale to another company. Recent deal activity and valuations have increased, putting pressure on private equity firms to put more capital to work through leveraged buyouts.

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Hamza Meuri
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270 views20 pages

Lbo Course Notes Sample

Leveraged buyouts involve acquiring a company using a significant amount of debt in addition to equity from private equity investors. The company takes on high leverage, becoming highly indebted. Private equity firms hope to profit by selling the company later to repay debts and provide returns to investors, such as through an IPO or sale to another company. Recent deal activity and valuations have increased, putting pressure on private equity firms to put more capital to work through leveraged buyouts.

Uploaded by

Hamza Meuri
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Leveraged Buyout

(LBO) Modeling

v
Leveraged buyout (LBO)
• Acquisition where a significant part of the purchase price
is funded with debt
• The remaining portion is funded with equity by the
financial sponsors (private equity “PE” investors).
• Company undergoes a recapitalization to a now highly
leveraged financial structure
• Company becomes a new company – from oldco to
newco
• Companies acquired by PE can be either private or public
LBO analysis on a cocktail napkin

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What is the basic intuition underlying an LBO?
• Sponsors hope to monetize their profits by:
1. Selling the target
to a strategic or
another PE firm
2. Selling to the
public via IPO
• Alternatively, sponsors can monetize without a complete
exit by giving themselves dividends financed via newly
borrowed debt (dividend recap)
Deal environment
• PE deal volume of
$183b in 1H14 was
the highest since
the crisis
• Global PE exits
climbed to an
all-time high of $260b in 1H14
• $192.5b to strategics
• $67.7b to secondary buyouts
Deal environment
• EBITDA multiples
came back (and
eclipsed) to pre
crisis levels
• This is especially
true for public-to-
private deals
• Smaller middle market deals (<$250m) averaged 7.0x
EBITDA through 2013
Go-privates
• Despite rise in
LBO volume,
public-to-private
deals continue
to be low
post-crisis
• High valuations
and re-emergence
of strategic buyers often prices sponsors out
The private equity landscape
• PE firms and other investors have a lot of cash waiting to
be deployed (“dry powder”)
The private equity landscape
• Pressure to put capital to work contributes to higher
valuations/multiples
• Increases in exits has relieved pressure on older vintages
How PE funds work

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Distribution waterfall exercise
Capital structure
• LBO capital structure is cyclical, but has also seen a
structural shift from equity/debt ratios of 10% / 90% in
the 1980s to around 35% / 65% more recently
Capital structure - equity
• Sponsors: Represent the largest source of LBO equity
• Rollover: In some cases, oldco mgmt
roll over their existing equity into the
newco and even contribute new capital
alongside the sponsors1
• Option pool: In addition, since most LBOs have oldco
mgmt stay on to run the newco, sponsors reserve
anywhere from 3%-20% of total equity for them
• Warrants: Certain lenders may receive equity as a
sweetener for providing financing (mezzanine lenders)
1 Management rollover has historically ranges from 2 to 5% of the total equity in LBO
LBO debt
• Leveraged loans: Revolver & term loans A/B/C/D
• Bonds: High-yield (“speculative-grade” or “junk”) bonds
• Mezzanine finance

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Leveraged loans – term loans and revolver
• Priced at LIBOR + spread
• Scheduled principal
amortization (TLs)
• No call protection
(borrower can repay
anytime)
Note: loans syndicated to banks is referred to as “pro rata” debt

• Most common LBO package


is an institutional (nonbank)
term loan B/C/D and a
revolver
High yield bonds (HYB)
• HYD (credit rating BBB- or worse) enables sponsors to
increase leverage to levels that bank debt (leveraged
loans) won’t support

High yield debt investors

Other Pension
30%(1) funds
28%

Mutual fundsInsurance
13% companies
29%

Source: S&P CIQ, LCD


1‘Other’ includes ETFs, HNW individuals,

commercial banks, hedge funds


High yield bonds (HYB)
• Fixed coupon paid
semiannually,
maturity 7-10 years,
no principal pay-
down until maturity
(bullet)

•
High yield bonds (HYB)
• HYBs are usually (but not always) unsecured
Full sources of funds in Dell’s $25b LBO

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Expanded LBO analysis on a cocktail napkin

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