Do Corp Dev teams use LBO valuation?
lbo models are ubiquitous in PE--the sponsor's trying to lever up and then exit in reasonable time frame. Question: is LBO valuation used in corporate development as valuation methodology? For instance if you're looking at a target and want to fund 60% of the transaction with debt. Are there justifications to use LBO approach?
My guess is not... because you're not a sponsor who's looking to exit (assume you're doing it for strategic reasons) but I don't work in corp dev so not sure. Any thoughts welcome.
I can't imagine why you would since, as you mentioned, there's no exit. With no exit, then there's no way to get to the liquidity event that pays down the debt.
That said, I know a guy at one of the BBb groups everyone here dreams about and he said they pretty much only do LBOs (not a sponsors group not even that involved with sponsors) so who knows.
What's a BBb group? My only other thought was if there's a way to use LBO approach to figure out how much debt you can take on / pay off. But that didn't seem to make a whole lot of sense either because as a strategic, it's not about how much debt the target can take on but about how much you as acquirer can take on. And that's closer to merger model when figuring out funding capacity right? You're looking at acquirer debt capacity and PF cash flows for debt paydown.
Yes, it's pretty common practice to do LBO analysis for acquisitions at corporations. We've done it for every acquisition we've ever made. Even without an exit, an exit multiple or cap rate can still be used as a proxy for future cash flows beyond the exit horizon, thus the analysis still has some value in determining the levered returns.
In general though, corporations mostly look at / reference unlevered returns in press releases and company presentations, but the LBO analysis is still used for internal purposes.
Good to know, thanks for clarifying.
Does your team do the actual model or do the bankers?
Our team does the model. Ultimately, it's your internal expertise (operations, marketing & sales, etc.) that drive the expected cash flows, so it's a concentrated internal effort putting the cash flow model together. Any company with a corporate development individual or team is going to be doing the modeling internally. Most of the time you see bankers doing the actual modeling these days is for the purposes of fairness opinions, in which they'll look at street estimates, management's projections, etc. to come up with a valuation range.
I have not seen LBOs used in Corp Dev. However, I could see them being used to figure out how much a PE firm might pay for a company that the Corp Dev team is interested in bidding on.
YES! this and also figure out the return a PE firm stands to make on the sale of their portfolio company (used in negotiations if buying it)
This is what we would use an LBO for, if we thought a target we were looking at could attract PE bids.
Every shop is different. We usually run our acquisition/divestiture models in-house but if we were going to do an ability-to-pay model for a competing bid for a PE, we'd probably make the bankers do it. Plus, they'd have a better idea of what's realistic on the debt side of things (especially in this market).
We've used lbo models in the past to get an idea of what a PE buyer may be willing to bid or get a sense of what a PE seller needs in order to get a decent return. It's a very fast and light model and not something that's used regularly.
Typically, we move discussions that involve price away from the headline figure and focus on the pros of having a strategic buyer vs. the leveraged price and obligations from a PE buyer. I can't say it always works or is received well but it does have its advantages.
i agree with mr. mmbanker14. there are nice discussion about LBO valuation.
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