LBO Case Study Interview

Curious if anyone has experience with case studies for interviews. I have one for a lateral position (IBD) but have never worked on LBOs before so I have some questions and a bit confused. I have Silver Bananas for your help

 
Best Response

Really depends on banks in terms of how detailed the case study will be. To play it safe, I suggest you prepare the case study as if you are interviewing for a PE shop - so something like a complete/3 statement model from scratch + brief write-up of investment thesis/supporting calculations, charts, etc. Grab K/Q of a company you aren't familiar with, and sit down for 3 hrs to work it thru. If you can't even finish the modeling part, practice speed and skill on simplification, then move upward on the "thinking part" i.e. why you recommend buying/not buying, and use data/analysis from the model to justify your recommendations/thesis.

There should be plenty of free resources online re PE case study/modeling, so do spend sometime on those. Just google them. The one on Macabacus is decent.

If you have never done an LBO before, key "technical" aspects of the model you need to practice on are really two parts: 1 - S&U and pro forma cap structure, and 2 - debt schedule/cash flow waterfall. Last thing is learn what trivial details to strip under timing constraint.

Good luck!

 

What are you assuming as a purchase price - 650? It is not typical to fund the revolver at close. You can always just finance with HY / Mezz structure. Not trying to be rude, but are you sure you are calculating FCF correctly? Unless this is a restructuring or distressed shop they wouldnt give you a company that doesnt cash flow very well as a case study.

 

So, $3.3 billion of revenue, $100mm EBITDA (razor thin margins), and FCF is 25% of EBITDA or 25mm? High capex or crazy working capital assumptions (likely high capex)....

doesn't look like a great LBO candidate or something that could be levered if the TEV is 650

TEV to EBITA is 6.5x but TEV to FCF is 26x

there is your problem....

who would buy this piece at 26x FCF? crappy LBO

 
MittRomney:
So, $3.3 billion of revenue, $100mm EBITDA (razor thin margins), and FCF is 25% of EBITDA or 25mm? High capex or crazy working capital assumptions (likely high capex)....

doesn't look like a great LBO candidate or something that could be levered if the TEV is 650

TEV to EBITA is 6.5x but TEV to FCF is 26x

there is your problem....

who would buy this piece at 26x FCF? crappy LBO

Question, if purchasing it for less than its worth...can i reduce existing goodwill or will i have to make adjustments to other assets

 

the company is really a crappy one....over the past few years it had EBITDA margins of 2% and the Capex is eating up most of its depreciation.

I checked liked 10 times and it seems that I am calculating UFCF correctly

EBIT(1-t) + DA - Increase NWC - Capex

The problem is Operating expenses are eating up all the margins...the company has unions etc and are overstaffed...there is just not enough cash flow for it to pay down interest and debt nevermind expand

Can my conclusion be not to bid for the company and give a lower valuation than BV for it to make sense

 
bobo:
the company is really a crappy one....over the past few years it had EBITDA margins of 2% and the Capex is eating up most of its depreciation.

I checked liked 10 times and it seems that I am calculating UFCF correctly

EBIT(1-t) + DA - Increase NWC - Capex

The problem is Operating expenses are eating up all the margins...the company has unions etc and are overstaffed...there is just not enough cash flow for it to pay down interest and debt nevermind expand

Can my conclusion be not to bid for the company and give a lower valuation than BV for it to make sense

Yeah of course you can recommend not bidding 650 for the company...i would probably pay $100mm MAX for the company, but i work with distressed stuff....compared to PE which bids stuff up...

Personally, i like to see what the value is unlevered - and in this case i can't justify 650mm...are you just applying a 6.5x multiple....analyses that base things solely off EBITDA are pretty shotty...its like capex doesn't exist and someone will magically pay it off...i base things off cash flow, not pure EBITDA

your company seems like a crap business - terrible returns on invested capital, no real competitive advantages (low margins)...

I would look at a liquidation value as well on this one - how much their assets are really worth...if you can buy a bunch of cash and receivables for below book, might be interesting, but if you buy inventory and PP&E below book, likely is more illiquid and not as interesting

 
I'm an AI bot trained on the most helpful WSO content across 17+ years.
 

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