Hey all - I have access to Capital IQ which I used to filter public companies by geography, market cap, & industry. Now that I have a relatively smaller list of companies how do I go about identifying good LBO targets? What are ratios/financial metrics I should be looking at? I know FCF conversion is important however I'd have to manually calculate the FCF for each company right? Would appreciate any advice on this!
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For FCF just take EBITDA - Capex if you don't have the values for whatever reason.
In terms of ratios:
- Consensus estimates for FCF yield - The higher the FCF yield, the more debt you will be able to pay down each year. (roughly speaking, as FCF yield is based of market cap and not EV, but it should be a decent proxy). Maybe try FCF/EV for a better ratio.
- Net Debt / EBITDA - You are going to have a hard time trying to LBO a company that's already at 4x ND/EBITDA...
- Anything related to sales/EBITDA/FCF growth - You will be able to sell the company for more without multiple expansion
Thanks so much - super helpful! Quick follow-ups: when you say consensus estimates of FCF yield - these are forward looking right? Is this something you can find on capital IQ? same for sales/EBITDA/FCF growth - are these forward looking as well?
Lastly for the net debt/EBITDA multiple - would this be relevant even if all debt is refinanced?
Yes, FCF estimates (from which you can get FCF yield or EV/FCF) are forward looking. You should be able to get them from CapIQ though honestly I'm not sure how as I use Bloomberg mostly (I'm not in IB, disregard my "Title").
On the Net Debt multiple, absolutely, you are right. I explained myself incorrectly. Current capital structure should not matter for an LBO, however, if a firm currently has a lot of debt there can be some procedural complications, there's maybe a limit on early repayments with hefty premiums...etc. This is something to keep in mind but maybe don't use it as a filtering criteria as its really a case by case basis.
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