How do you model an LBO with a strategic instead of private equity buyer?

Operating/3-Statement model + merger model + credit metric analysis.

LBO you are analyzing returns over a given time period - I imagine your strategic acquirer plans on holding the assets indefinitely.

Ok, but wouldn't I need to build out a debt schedule and layer in the tranches like an LBO? Yea, the strategic plans on holding it, so how would you evaluate the returns? Just via Accretion?

BTW, these are both private cos. so I wasn't sure how relevant NI was compared to some type of EBITDA measurement.

ibprospect29:

Ok, but wouldn't I need to build out a debt schedule and layer in the tranches like an LBO? Yea, the strategic plans on holding it, so how would you evaluate the returns? Just via Accretion?

BTW, these are both private cos. so I wasn't sure how relevant NI was compared to some type of EBITDA measurement.

To answer your first question - yes you would and it should be incorporated into the operating model (it will essentially look like the top half of an LBO). How much guidance have you been given as to maintenance covenants, amortization, prepay, etc.?

Edit: You won't be building accretion/dilution with private cos.

Not enough apparently. The problem is, I'm working under a VP that is traveling this week so he is hard to get in touch with. The associate that gives me guidance is on vacation. So I'm stuck with this.

I was given min cash, have rates and maturities for each piece of debt, plus rates and maturities of existing debt for the acquiring co.

I was trying to think of how to put this into our LBO template (BB-style model, don't work at a BB) so it would flow through.

Also, how would you measure returns or shareholder value it provides if you can't run accretion/dilution or an LBO analysis (assuming no exit)?

Thanks for your help so far duff, sorry for allo of the ?s.

As far as what I know I think it is ok to do a LBO analysis; at lease that is what my boss always asks me to do. He regards a LBO model as an acquisition model. For private firms as you stated it is meaningless to calculate accretion/dilution however, that is what a merger model is mainly for. So, what we do is perform a LBO analysis. I think it works and calculating IRR after 5 years down the road may give the buyer an indication of how much return he can get or how profitable this add-on acquisition is worth.

I don't work on many buyside mandates so I would take everything I say with a grain of salt.

Were you asked specifically for a returns analysis? That seems a bit strange to me for a strategic acquisition, the rationale for which should be realizing synergies, growth, earnings accretion, etc. Assuming the asset is integrated into current company operations, there wouldn't really be a planned exit scenario. You could go ahead and do the LBO returns analysis, but it would more be a reference point than anything else.

This should really look like your standard merger model. You just need to do some credit analysis on the post-merger entity. I imagine the rationale for this exercise is to evaluate the company's ability to leverage the acquisition, so you should probably build in some different operating scenarios (management, upside, downside, etc).

Do you have a merger model template to work with?

Good stuff. I was not directly asked to do a returns analysis, but I assumed (I know, I shouldn't do that) that the buyer would want some type of data supporting his assumptions that the transaction would be accretive to his company through synergies.

I was provided the synergies and rather accurate (according to mgmt) forecasts for the next 6 years. I was also provided all of the details on the debt pieces (assumptions) and such.

I have a merger model I can use from the same BB template, but what would be the end output? Normally I would look at accretion/dilution to EPS.

Also, should the debt inclusion in the merger model resemble that of the LBO or Recap model, but instead of simply a target paying down the debt, the combined entity will pay down the debt?

Just trying to get my head around this from a planning/high level perspective.

@633268

The LBO is an acqusition model, but this isn't a platform target or financial buyer.

duffmt6:

I don't work on many buyside mandates so I would take everything I say with a grain of salt.

Were you asked specifically for a returns analysis? That seems a bit strange to me for a strategic acquisition, the rationale for which should be realizing synergies, growth, earnings accretion, etc. Assuming the asset is integrated into current company operations, there wouldn't really be a planned exit scenario. You could go ahead and do the LBO returns analysis, but it would more be a reference point than anything else.

This should really look like your standard merger model. You just need to do some credit analysis on the post-merger entity. I imagine the rationale for this exercise is to evaluate the company's ability to leverage the acquisition, so you should probably build in some different operating scenarios (management, upside, downside, etc).

Do you have a merger model template to work with?

I agree with you. However, that is what we use to evaluate a deal. The logic behind it is to see the return as a reference point. My boss thinks it is a good analysis and we do have different scenarios. According to your pearls of wisdom I think it is wise to do a merger model and figure out the credit analysis instead of EPS then.

for a strategic acquirer, dcf or npv analysis makes sense. LBO will be a good reference point.

you can also model accretion of other matrics besides earnings

should be enough guidance for you here but one point: just because there is a debt schedule doesn't make it an LBO model. the differentiating factor that made LBO modeling revolutionary at one point was that people were doing levered DCFs over a set time horizon and solving for the discount rate required for a 0 NPV (IRR) and comparing it to a set hurdle to compare investments.