Hey WSO,
I honestly for the life of me can't figure out how to do a LBO. I've looked at guides and googled the topic on WSO. Guides teach you how to do it but imagine a DCF, its completely different explaining it during an IB interview compared to doing it.
Could someone give a detailed explanation on how to do an LBO? https://www.wallstreetoasis.com/forums/walk-me-th…
Under the part that says "Interview Question - Leveraged Buyout Walkthrough" the explanation is extremely vague, like if someone asked you to explain a DCF you would say project cash flows, determine TV value, discount the value of money, and add them, but there's so much more to it than that. You need to know the TV calculations, FCF formulas, how to explain levered and unlevered cash flow etc.
Could someone explain it and also add details? I understand DCFs but I just can't figure out info on LBOs. If I explained the LBO like the link I posted does, what are possible follow up questions? Such as the formula for IRR, MoM and what they mean, plus how you get the numbers for the part of the formula in IRR/MoM.
P.S. so the end of a dcf you take the EV and subtract net debt, preferred stock, and minority interests and get equity value right? You then divide by fully diluted shares outstanding.
How do I calculate fully diluted shares outstanding? From what I understand, if they ask you in an interview you would say you have to calculate all the shares outstanding as well as things that could be shares, such as convertible bonds, would this be the correct answer? Is there a formula to calculate the amount of fully diluted shares outstanding?
Thanks WSO
Not per your specific question, but would recommend picking up a comprehensive interview guide and going through all explanations -- make sure you understand the basic concepts before proceeding to advanced / LBO
Will fill up any gaps, and easier than trying to piece things together from threads
Although DCF and LBO analyses aren't very similar, but understanding the mechanics of one helps you relate to the other a little more easily. If you think about an LBO as a simple 100% acquisition of a company using leverage, it is much simpler.
Let's use a simple example here:
Company A is a $10m EBITDA company. PE firm decides to purchase Company A for 10x EBITDA, i.e. $100m. Let's assume Company A has zero debt and cash, so equity value is $100m. PE firm finances the acquisition using 70% debt, 30% equity, so $70m debt and $30m equity.
Every year, Company A generates a net cash flow of $5m, which is swept to pay debt. So after a 5 year holding period, debt is reduced by $25m, leaving $45m of debt outstanding.
At the end of 5 years, Company A has grown EBITDA to $15m. PE firm sells it for 10x EBITDA as well, i.e. $150m. After paying off debt, this will leave $105m in equity value.
So PE firm has grown its investment from $30m to $105m, representing a 3.5x CoC multiple in 5 years, or roughly 28% IRR. If the PE firm did not taken on debt, then it would have made only a little over 1x its investment, which is a lower IRR.
This is a very watered down and simplified representation of what an LBO is. In real life the variables are much more diverse, such as the amount of debt you can take on, the amount of financing and transaction fees that are paid, possible multiple expansion, etc. Hopefully the example has given you an idea of the logic behind LBOs.
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