Hey WSO'ers. I need help with an upcoming case study. I have the prompt and will share just a portion in this post. I am trying to understand what exactly they are asking for. I have reached out to company, but HR is handling and isn't too much help.
Take a look: "Based on the information below, please develop a financial model to evaluate the economics and financing considerations of the transaction. Be sure to include sources and uses, credit metrics, and equity returns. Please also include a 10-year pro-forma P&L forecast for buyer post-transaction. "
I have changed the number and metrics. I am not looking to cheat but to understand what is being asked. It starts to sound like a paper LBO but there is no eventual sale. They are just acquiring the company and holding it. Is this just looking for return on equity? Thoughts?
Transaction $50mm 50% Debt, 50% Equity
Buyer Yr1 EBITDA: 40 Yr2 EBITDA: 45 Yr3 EBITDA: 50 Yr4 EBITDA: 55 Yr5 EBITDA: 60 $2mm capex
Target Yr1 EBITDA: 12 Yr2 EBITDA: 14 Yr3 EBITDA: 16 Yr4 EBITDA: 18 Yr5 EBITDA: 20 $1mm capex
Sounds like typical M&A. Were you given anything else?
No. No EPS, or any info on equity. So not sure if I could create an accretion / dilution model with data given.
I did forget the assumption that the target is cash free and debt free.
What do you mean when you say your changed the metrics? Do you mean that it's a different transaction structure/amount? Or do you mean it's something other than EBITDA?
The credit stats aren't really informative because you can look at this for about two seconds and see that leverage is about .5x and coverage is like 7-10x depending on what interest rate you use. I guess maybe they just want to see that you know what they are. They'd be useful if there were some B/S figures given to you.
IMO, they're asking you to show a combined P&L for the companies, and take that data to show what debt coverage looks like and what type of financing structures you could obtain. Not really sure why they told you to do a 50/50% debt mix.
Think about your debt metrics (leverage: Debt / EBITDA, coverage: EBITDA - CapEx / Senior Interest, etc.). It really should be simple since they're just giving you an EBITDA line, which can conceivably be combined and treated as operating cash flow to back into change in cash.
For equity returns, you can probably assume (and if you do, footnote it and make it a toggle) that cash is being 100% swept to investors, which would give you a cash yield to equity (although, without being told the initial equity of the buyer, it's hard to create ratios). You could also split out the additional free cash flow - debt coverage from the target and show that as a return on equity.
What type of shop is this for? That may also give you a hint as to what they're looking for.
PM sent.
This is for a corporate development role.
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