LBO Case Study Help!
Hi Guys,
I have several interviews coming up and I have started practicing case studies. I have done a search online and saw the below case study posted on WSO several years ago. Can someone help me with this? I am not sure how to treat the shareholder loan... How does one approach this? Appreciate any help!
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Got this recent case study for LBO/Returns Analysis modeling, and really need some help trying to figure out how to attack this - can anyone provide some help or answers (DM is also preferred)!
Specifically with:
- How do I structure this out (steps - i.e., make sources/uses, then P&L (do I go to interest and taxes), then CFS, then DCF; then debt returns/capital structure waterfall, etc.)?
- Proper method of attacking these questions.
- How to practice to do this within 2 hours?
Thanks!
- Sponsor acquires a US business for $300m and puts in place the following structure:
- Sponsor invests $100m
- $125m of external bank debt
- The seller leaves in $75m
2. Sponsor own 95% of the ordinary shares of the company with management owning the remaining at 5%
3. Sponsor's money is in the form of a loan note and attracts an initial 15% non-cash pay coupon which is rolled-up annually. This note is subordinate to the bank debt and the vendor paper.
4. The bank debt attracts a coupon of 8% per annum cash pay and is repaid 5% in year 1, 10% in year 2 and 12.5% in year three.
5. The seller paper is also in the form of a loan note and attracts a 12.5% non-cash pay coupon which accrues annually. This note is subordinated to the bank debt.
6. It is intended to raise some more bank debt at the end of year one in order to refinance the seller paper. The amount that can be raised is either:
- PS25m
- PS50m
- PS75m
- PS100m
7. For the purposes of this exercise, assume that this new debt is put in as a new facility with the same terms as the existing facility and that the existing facility stays in place.
8. Assume there is no cash sweep.
9. The forecasts at the time of the deal were EBITDA is $40m in year 1, $42.5m in year 2 and $45m in year 3 (historic EBITDA at acquisition was $37.5m)
10. It is thought that capex over this period will be $10m per annum (equal to depreciation).
11. Change in working capital is 0 (not source or use)
12. Tax will be charged at 30%.
13. Assume an exit after 3 years at 3 different enterprise values $300m, $350m and $400m.
Questions:
- What is Sponsor's IRR, and multiple of investment at each of the three enterprise values at each of the 4 levels of refinancing?
- What are the issues that we need to consider in deciding what the level of refinancing should be?
- What is your recommended level of refinancing?
- Which EV exit is realistic given the data provided and what return would you expect.
- What return should you be looking for with this kind of business
- Is the shareholder loan note interest tax deductible
