Pros & Cons of going after a Private company VS a Public company (for takeover)
Hello,
I just wanted to pick your brains about the the net positives or net-negatives of focusing on private companies (to do an LBO) vs a public firm (to do an LBO)
My rationale for looking at a public firm as a serious LBO candidate
- Came across 3 firms that are trading at low EBIDA multiples (between 6X to 9X)
- Is much easier to study a public company vs a private firm.
- Financing would be slightly easier to get at good terms for a public firm that has been on the stock exchange for 15+ years with little to 0 debt.
- Some public companies can provide insane in-place ROI (if a successful LBO is done) that can be done with less headache (which is very common in private deals).
Real World Public Company:
FX Exchange Inc.
Current State of the Company:
Industry: FX risk management for companies.
Revenue Model: Currently takes about 0.855% of their client's total transaction.
Current Transaction volume ~ $4.8B per year.
Net Operating Income margin - 13.5% = $5.5M
Revenues - $41.04M
Trading at a P/E ratio of 6X
Cap rate = 6.517%
Through an LBO ~
Purchase price - $85M (Market cap is about $80M right now)
LTV ratio ~ Assume 60% leveraged at 3.25%
net-debt pretax income - $2,777,500 (approx.)
In-place ROI = 8.16% (not enticing enough)
Path to grow the firm's revenues
i) Aggressive sales team (costing about $2M per year) Yielding $2B in transactional volume increases each year.
ii) Cut current costs (increases profit margin from 15% to about 16%-ish)
iii) Offer Commodities risk management services (Bringing in new clients).
After value-add metrics:
New avg Yrly Transactional volume = $8.5B
Invested amount = $34m (Down Payment) + $10m (Cap.Ex) + 13.6M (interest payments)
New Avg NOI = $10.9M
New Cap rate = 12.82% (based on original purchase price)
Pre-tax Returns = $17.434M (Cash Flow) + 24M (Sale of firm)
ROI = 93% over 5 Yrs. (Can hold or sell)
Or 18.79% annualized ROI
Provide your thoughts on this simplified Acquisition strategy.
Case Study #2:
But let's use a hypothetical scenario.
Let's say you're able to get your tender offer accepted for the target public firm.
We'll use Dell Technologies as an example.
Current state of the firm:
NOI = 4,679,666,000 | Growing at 25% - 33% Year over Year
Purchase price (15% above market cap) = $49.8B
P/E ratio = 6.41X
Cap Rate = 9.39%
LTV ratio = 60% % 3.25% (i-rate)
net-debt Income = $3,057,720,000
In place net-debt ROI = 15.35% | After 5yrs, total ROI = 99.77%
If we can find a much smaller company with similar traits, don't you guys think it's a net-benefit to look at public companies as possible LBO targets?
Cheers,
Understand you’re from RE (none of the rest of us know what a cap rate is) so will offer the following:
You’ll need a much higher premium than 6% to do a takeover successfully. Depends on geography but anything from 20-40%. Apart from that why not actually run the LBO maths on your candidate and see if it makes sense. If it does then buy some shares because you won’t be the only one to have spotted this and there are loads of PE funds looking for small to mid cap targets. Also maybe do some benchmarking against competitor margins, I.E. are they materially lagging with room for improvement or substantially below.
Thinking about your thesis a bit more, how would you exit? IPO? Are there natural trade buyers? Could you quickly flip it to a trade buyer at a post-synergy multiple comparable to what you paid for it?
Thank you for your response!
You'll need a much higher premium than 6% to do a takeover successfully. Depends on geography but anything from 20-40%.
- What are you referring to? the Cap rate? Please specify
If it does then buy some shares because you won't be the only one to have spotted this and there are loads of PE funds looking for small to mid cap targets.
- Makes sense but buying public shares won't be as productive as having full ownership. The whole point is to take it private with full ownership. Although it's true many other firms would see what I see, ultimately the best offer would be accepted.
Also maybe do some benchmarking against competitor margins, I.E. are they materially lagging with room for improvement or substantially below.
From what I found at the most extreme end would be
i) Are existing private firms that are transacting $100B for clients each year (FX risk management)
ii) Are existing private firms transacting $10B for clients each year.
iii) I believe there is room for improvement. I believe this because I spoke to over 34 potential customers who sell about $10M internationally who would benefit from FX risk management strategies.
Thinking about your thesis a bit more, how would you exit?
a) Ideally I would like to hold it for 10+ years if the business is sound and growing. The industry is highly correlated to international trade which is not going away anytime soon.
b) Would exit to a larger PE firm or a strategic owner (ie - larger firms that do the same thing but want consolidation).
Velit et at a dolor at. Et quod tempora iste qui qui. Ut consequuntur suscipit qui qui est eius molestias.
Illum labore aliquid reprehenderit possimus accusantium fugit. Ea corporis eum velit exercitationem omnis. Voluptatem reprehenderit ducimus temporibus quidem in non.
Culpa illo aut a sint fugit veritatis. At quam vitae est non quos. Numquam explicabo provident deserunt eos sapiente rerum asperiores qui.
Eius molestiae quisquam hic harum voluptates soluta corrupti. Consectetur quasi quia voluptas blanditiis voluptas. Et dolor a quia consequuntur maiores commodi. Reiciendis veniam dolor enim animi velit autem aut. Nam consequatur omnis veniam est quia praesentium provident. Quibusdam consequatur modi fugiat assumenda. Mollitia libero quo esse doloribus.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...