Leveraged Buyouts (LBOs) PDF

Leveraged Buyouts Building Competence. Crossing Borders. Prof. Dr. Mehdi Mostowfi [email protected] Content and Goals Goals Content Introduction to Leveraged Buyouts 1. Understand the concept of...

Leveraged Buyouts Building Competence. Crossing Borders. Prof. Dr. Mehdi Mostowfi [email protected] Content and Goals Goals Content Introduction to Leveraged Buyouts 1. Understand the concept of Leveraged Buyouts (LBO) Deal Structuring and Drivers of 2. Know the different ways of Value Enhancement structuring an LBO transaction Overview of selected LBO- and the key drivers of value Transactions in Switzerland creation Leveraged Buyouts Analysis as a 3. Learn to use LBO analysis as an Valuation/Structuring Tool important structuring/valuation tool 2 Agenda 1 Introduction, Deal Structures and Value Drivers of LBOs 2 Selected Transactions 3 Leveraged Buyouts Analysis as a Valuation/Structuring Tool 3 Leveraged Buyouts - Concept and Characteristics Definition Leveraged Buyout (LBO) Transaction: Acquisition of a company using a significant amount of debt to finance the acquisition price LBOs are usually initiated and structured by Private Equity Funds with a focus on this kind of transactions (Buyout-funds). The Buyout fund provides the equity piece that is required to finance the purchase price The deal structure of an LBO-transaction entails that the acquired Company (“Target”) or an economically equivalent Special Purpose Vehicle (SPV), services the acquisition debt on its own The main objective is to increase the company’s value and to achieve a high capital gain by selling the company after a few years (“Exit”) In cases, when the Target’s managers buy or acquire a large part of the company and/or initiate the Buyout, the transaction is called Management Buy-out (MBO) or Management Buy-in (MBI) 4 Volume of LBO Market over Time (1/2) Transactions tracked by Preqin 5 Volume of LBO Market over Time (2/2) Transactions tracked by Preqin NUMBER OF NUMBER of DEALs AGGREGATE DEAL AVERAGE DEAL NUMBER of SECONDARY (aggregated) VALUE (USD Bn) SIZE (USD Mn) BUYOUTs BUYOUTs Total 28,726 2,622.1 460.3 21,015 7,711 YTD 2023 1,701 123.6 447.7 1,121 580 2022 2,500 250.7 601.1 1,889 611 2021 3,493 470.3 713.7 2,351 1,142 2020 2,398 240.7 522.1 1,736 662 2019 2,645 237.9 461.1 1,891 754 2018 3,120 250.2 419.8 2,308 812 2017 3,067 241.3 420.4 2,307 760 2016 2,787 205.5 360.6 2,102 685 2015 2,637 213.3 382.3 1,976 661 2014 2,433 236.1 399.4 1,857 576 2013 1,945 152.5 318.3 1,477 468 6 Typical Financing Structure of an LBO …and indicative market terms for the various financing Instruments Financing Assets Costs of Capital* Maximum repayment Structure Period Senior − Euribor/Libor + 225 to 300 bps 7-9 years Debt 50-70% Target’s Assets High Yield − 10y AAA-bonds + 500 bps 10-12 years or Mezzanine − Cash interest: 10y AAA-Bonds + 400 bps 10-12 years − Pay-in-kind rate: 400-600 bps 10-20% − (or Equity Kicker) Equity 25-40% − Expected IRR of (at least) between 20 and 25 % 7 Legal Structuring of LBOs in case of an Asset Deal LBO-Fund Seller (Target‘s current owner) Banks/Bondholders Equity Debt Capital Purchase Price* NewCo Purchase Price Assets Target *Net of potential taxes to be paid by Target 8 Legal Structuring of LBOs in case of a Share Deal LBO-Fund Seller (Target‘s current owner) Banks/Bondholders Equity Purchase Price Debt Capital NewCo Acquisition of Subsequent 100% of the Merger of shares Target with NewCo Target 9 Case Study: LBO of Bartelsmann Springler In 2003 the British private equity funds Canven and Cindover acquired the German science publisher Bartelsmann Springler from the media Group Bartelsmann for a cash purchase price of EUR 1.1bn (cash and debt free) and renamed it in Springler Science later. The purchase price was financed by EUR 300m equity and EUR 800m debt (bank loans). At the time of the acquisition Bartelsmann Springler owned non-cash assets with a book value of EUR 600m (with 100m hidden reserves) and was fully equity financed. Describe the different steps of the LBO if the acquisition was structured a) as an Asset Deal and b) as a Share Deal highlighting the impact of the transaction on the balance sheet of the acquisition vehicle. 10 Drivers of Value Creation in LBOs Impact of High Leverage effect (boosting the Return on Equity) Leverage on Cost Reduction of Cost of Capital (WACC) resulting from Interest Tax Shield of Capital Theoretical model-background: Modigliani Miller Model (including taxes) Management has to take significant equity stakes (“positive incentives“) Strong High leverage puts huge burden on the company with a disciplining effect on Incentivisation of Management (“negative incentives“) Management Theory background: Principal-Agent-Theory (Reduction of Agency Costs) Corporate restructuring measures: - Divestiture of low-profit and/or non-core business divisions Operational - Profit enhancing acquisitions in the core areas of business Enhancement Improvement of operational efficiency within existing business divisions Generally: strong focus on cash generation 11 Agenda 1 Introduction, Deal Structures and Value Drivers of LBOs 2 Selected Transactions 3 Leveraged Buyouts Analysis as a Valuation/Structuring Tool 12 Selected LBOs – Transactions in Switzerland Target Lead Investor Transaction Year Status BC Partners 2002 Exit via Trade Sale Capvis 2004 Exit via Trade Sale Capvis 2004 Exit via Trade Sale Capvis 2004 Portfolio Company Permira 2005 Exit via Trade Sale Zurmont Madison 2006 Exit via IPO Capvis and 2014 Exit via IPO Partners Group CVC 2017 Portfolio Company 13 Agenda 1 Introduction, Deal Structures and Value Drivers of LBOs 2 Selected Transactions 3 Leveraged Buyouts Analysis as a Valuation/Structuring Tool 14 Firm Valuation based on LBO Analysis Future oriented assessment of debt capacity by analysing 1 predicted Free Cash Flows (before and after interest payments) Constraint 1: Free Cash Flows after interest payments needs to be principally positive Constraint 2: Maximum redemption period Maximum (9 years for senior, 12 years for junior debt) Debt Capacity Past-oriented analysis of debt-to-EBITDA multiples 2 considering the planned financing structure and current market debt ceilings Calculation of the Internal Rate of Return (IRR) for the 3 invested equity on the basis of the debt capacity as determined in steps 1 and 2, the assumed acquisition price and the expected exit price 15 LBO Analysis vs DCF Methodology LBO-Analysis DCF-Valuation Financing Structure Free Cash Flows Generated CF for debt repayment Key Factors Terminal Value- Assumption Exit-Assumption (Time and Price) Target Internal Rate of Return Discount Rate - WACC Asset/Equity Valuation as a result of an Asset/Equity Valuation as a result of iterative valuation process discounting expected Free Cash Flows Crucial relevance of the financing Limited importance of the structure financing/capital structure 16 LBO Analysis as an Iterative Procedure Implied Entry Multiple Exit Valuation 𝐸𝐸𝐸𝐸0 𝑀𝑀 ≔ 𝐸𝐸𝐸𝐸𝑇𝑇 = 𝑀𝑀 ∗ 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸 𝑇𝑇 𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸𝐸0 Condition: IRR Calculation 𝐼𝐼𝐼𝐼𝐼𝐼 ≥ 𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇𝑇 Equity Equity Mezzanine Maximum Mezzanine Debt Capacity Senior Debt Reduced by Senior Debt Repayments Entry Valuation Exit Valuation in in year 0 (𝐸𝐸𝐸𝐸0 ) year T (𝐸𝐸𝐸𝐸𝑇𝑇 ) 17 Important Parameters Purchase price for the acquisition of the target (unknown variable to be determined by an LBO analysis) Acquisition Price For listed companies usually the market capitalization plus a takeover premium Main multiple to calculate the maximum debt capacity. Typical ceilings: Debt/EBITDA Total Debt: 4-6 x LTM EBITDA Senior Debt: 3-4 x LTM EBITDA Overall Asset Value in „x EBITDA“ referring to the EBITDA of the Exit Multiple assumed Exit-Year Default assumption:* “Exit Multiple = Entry Multiple” Exit Year Assumed Exit Date: Usually 3-5 years post the acquisition date *in the absence of better information 18 LBO Beispiel AG LBO Beispiel AG Key Financials - Conglomerate-Case Financial Forecasts Summary Financials (excluding Goodwill Amortisation) EUR MM Actual 31. Dez 08 31. Dez 09 31. Dez 10 31. Dez 11 31. Dez 12 31. Dez 13 31. Dez 14 31. Dez 15 31. Dez 16 31. Dez 17 31. Dez 18 31. Dez 19 31. Dez 20 31. Dez 21 31. Dez 22 Incom e Statem ent Sales 12.991 11.761 12.026 12.611 14.023 15.616 17.418 19.455 21.763 24.378 27.344 30.711 34.536 38.884 43.831 % Growth (9,5%) 2,3% 4,9% 11,2% 11,4% 11,5% 11,7% 11,9% 12,0% 12,2% 12,3% 12,5% 12,6% 12,7% EBITDA 451 492 491 630 658 731 813 906 1.011 1.129 1.263 1.414 1.585 1.779 2.000 % Margin 3,5% 4,2% 4,1% 5,0% 4,7% 4,7% 4,7% 4,7% 4,6% 4,6% 4,6% 4,6% 4,6% 4,6% 4,6% Depreciation (245) (241) (229) (243) (272) (305) (342) (384) (431) (485) (547) (617) (696) (787) (890) % Margin 1,9% 2,0% 1,9% 1,9% 1,9% 2,0% 2,0% 2,0% 2,0% 2,0% 2,0% 2,0% 2,0% 2,0% 2,0% EBIT 206 252 262 387 386 426 472 522 579 643 716 797 889 993 1.110 % Margin 1,6% 2,1% 2,2% 3,1% 2,8% 2,7% 2,7% 2,7% 2,7% 2,6% 2,6% 2,6% 2,6% 2,6% 2,5% Total Interest (112) (111) (108) (104) (98) (92) (85) (76) (66) (53) (39) (20) Goodw ill Amortization 55 55 55 55 55 55 55 55 55 55 55 55 PBT including GW 330 330 374 423 479 542 614 695 787 891 1.009 1.145 Reverse tax shield on interest expenses (10) (10) (9) (9) (9) (8) (7) (7) (6) (5) (3) (2) Tax (99) (99) (112) (127) (144) (163) (184) (208) (236) (267) (303) (343) % Tax Rate 30,0% 30,0% 30,0% 30,0% 30,0% 30,0% 30,0% 30,0% 30,0% 30,0% 30,0% 30,0% Net Income before GW Amortization 221 222 252 287 327 371 422 480 545 619 703 799 % Margin 1,8% 1,6% 1,6% 1,6% 1,7% 1,7% 1,7% 1,8% 1,8% 1,8% 1,8% 1,8% Cash Flow Statem ent EBITDA 630 658 731 813 906 1.011 1.129 1.263 1.414 1.585 1.779 2.000 Cash Interest (112) (111) (108) (104) (98) (92) (85) (76) (66) (53) (39) (20) Pension Provisions 12 6 6 6 6 6 6 6 6 6 6 6 Tax / rew verse tax shield (109) (109) (122) (136) (152) (171) (192) (215) (242) (272) (306) (345) Investment in Working Capital (165) (137) (152) (170) (189) (212) (237) (266) (298) (336) (378) (426) % of Change in Sales (9,7%) (9,5%) (9,4%) (9,3%) (9,2%) (9,1%) (9,0%) (8,9%) (8,8%) (8,7%) (8,6%) Capital Expenditures (223) (242) (271) (304) (341) (383) (431) (485) (547) (617) (698) (789) % of Sales 1,8% 1,7% 1,7% 1,7% 1,8% 1,8% 1,8% 1,8% 1,8% 1,8% 1,8% 1,8% % of Depreciation 92,0% 89,2% 89,1% 89,0% 88,9% 88,9% 88,8% 88,8% 88,7% 88,7% 88,7% 88,7% Tax-free Proceeds from Divestments: 0 (Equity) Free Cash Flow 33 65 84 106 131 159 190 226 267 312 365 425 Cumulative Free Cash Flow 65 150 256 387 545 735 961 1.228 1.541 1.905 2.331 LBO Beispiel AG LBO Analysis LBO Beispiel AG Conglomerate-Case Key Inputs Uses / Sources Value Multiples EUR MM Acquisition EUR MM Acquisition Multiples Current Share Price (EUR) 29,20 Uses Premium 30% AV / 2010 EBITDA (x) 8,1 x Acquisition Share Price (EUR) 37,96 AV / 2011 EBITDA (x) 6,3 x Purchase Equity 2.885 Shares Outstanding (MM) 76,00 Equity Value 2.885 AV / 2010 EBIT (x) 15,2 x Retire Debt / (Use Cash) 1.100 AV / 2011 EBIT (x) 10,3 x Existing Debt (incl. minorities, preferred) 1.100 Transaction Costs 80 Asset Value 3.985 2014 IRR at exit m ultiple 20,3% Acquisition Dec 2010 Total Uses 4.065 exit m ultiple 6,50 x Details of Financing Sources % of EBITDA Interest Average Total Multiple Spread Rate Paydow n Life Senior Debt 2.300 Senior Debt 56,6% 3,7 x 2,3% 4,3% >10 NA Total Senior 2.300 Total Senior 56,6% 3,7 x High-Yield Debt 200 High-Yield Debt 4,9% 0,3 x 5,0% 8,3% >10 NA Mezzanine Mezzanine 0,0% 0,0 x 13,0% 0 FALSCH Total Debt 2.500 Total Debt 61,5% 4,0 x Equity 1.565 Equity 38,5% Total Sources 4.065 Total Sources 100,0% 6,5 x LBO Beispiel AG LBO Analysis LBO Beispiel AG Conglomerate-Case Key Inputs Uses / Sources Value Multiples EUR MM Acquisition EUR MM Acquisition Multiples Current Share Price (EUR) 29,20 Uses Premium 20% AV / 2010 EBITDA (x) 7,7 x Acquisition Share Price (EUR) 35,04 AV / 2011 EBITDA (x) 6,0 x Purchase Equity 2.663 Shares Outstanding (MM) 76,00 Equity Value 2.663 AV / 2010 EBIT (x) 14,3 x Retire Debt / (Use Cash) 1.100 AV / 2011 EBIT (x) 9,7 x Existing Debt (incl. minorities, preferred) 1.100 Transaction Costs 75 Asset Value 3.763 2014 IRR at exit m ultiple 20,4% Acquisition Dec 2010 Total Uses 3.838 exit m ultiple 6,50 x Details of Financing Sources % of EBITDA Interest Average Total Multiple Spread Rate Paydow n Life Senior Debt 1.900 Senior Debt 49,5% 3,0 x 2,3% 4,3% 9 6 Total Senior 1.900 Total Senior 49,5% 3,0 x High-Yield Debt 125 High-Yield Debt 3,3% 0,2 x 5,0% 8,3% 10 10 Mezzanine Mezzanine 0,0% 0,0 x 13,0% 0 FALSCH Total Debt 2.025 Total Debt 52,8% 3,2 x Equity 1.813 Equity 47,2% Total Sources 3.838 Total Sources 100,0% 6,1 x LBO Beispiel AG LBO Beispiel AG Key Financials - Focus on Core-Assets Case Financial Forecasts Summary Financials (excluding Goodwill Amortisation) EUR MM Actual 31. Dez 08 31. Dez 09 31. Dez 10 31. Dez 11 31. Dez 12 31. Dez 13 31. Dez 14 31. Dez 15 31. Dez 16 31. Dez 17 31. Dez 18 31. Dez 19 31. Dez 20 31. Dez 21 31. Dez 22 Incom e Statem ent Sales 12.991 11.761 12.026 12.611 14.023 13.387 15.097 17.040 19.249 21.762 24.621 27.877 31.587 35.815 40.636 % Growth (9,5%) 2,3% 4,9% 11,2% (4,5%) 12,8% 12,9% 13,0% 13,1% 13,1% 13,2% 13,3% 13,4% 13,5% EBITDA 451 492 491 630 658 652 730 820 921 1.035 1.165 1.313 1.480 1.669 1.885 % Margin 3,5% 4,2% 4,1% 5,0% 4,7% 4,9% 4,8% 4,8% 4,8% 4,8% 4,7% 4,7% 4,7% 4,7% 4,6% Depreciation (245) (241) (229) (243) (272) (285) (322) (363) (410) (463) (523) (592) (671) (760) (862) % Margin 1,9% 2,0% 1,9% 1,9% 1,9% 2,1% 2,1% 2,1% 2,1% 2,1% 2,1% 2,1% 2,1% 2,1% 2,1% EBIT 206 252 262 387 386 366 409 457 511 573 642 720 809 909 1.023 % Margin 1,6% 2,1% 2,2% 3,1% 2,8% 2,7% 2,7% 2,7% 2,7% 2,6% 2,6% 2,6% 2,6% 2,5% 2,5% Total Interest (112) (98) (83) (79) (74) (67) (60) (51) (41) (29) (11) 0 Goodw ill Amortization 55 55 55 55 55 55 55 55 55 55 55 55 PBT including GW 330 343 339 385 439 499 568 646 734 835 953 1.078 Reverse tax shield on interest expenses (10) (9) (7) (7) (6) (6) (5) (5) (4) (3) (1) 0 Tax (99) (103) (102) (116) (132) (150) (170) (194) (220) (251) (286) (324) % Tax Rate 30,0% 30,0% 30,0% 30,0% 30,0% 30,0% 30,0% 30,0% 30,0% 30,0% 30,0% 30,0% Net Income before GW Amortization 221 231 230 263 301 343 392 447 510 582 666 755 % Margin 1,8% 1,7% 1,7% 1,7% 1,8% 1,8% 1,8% 1,8% 1,8% 1,8% 1,9% 1,9% Cash Flow Statem ent EBITDA 630 658 652 730 820 921 1.035 1.165 1.313 1.480 1.669 1.885 Cash Interest (112) (98) (83) (79) (74) (67) (60) (51) (41) (29) (11) 0 Pension Provisions 12 6 6 6 6 6 6 6 6 6 6 6 Tax / rew verse tax shield (109) (111) (109) (122) (138) (156) (176) (198) (224) (253) (287) (324) Investment in Working Capital (165) (137) (138) (154) (174) (195) (220) (248) (280) (317) (358) (405) % of Change in Sales (9,7%) n.m. (9,0%) (8,9%) (8,8%) (8,8%) (8,7%) (8,6%) (8,5%) (8,5%) (8,4%) Capital Expenditures (223) (242) (244) (275) (311) (352) (398) (451) (511) (580) (658) (748) % of Sales 1,8% 1,7% 1,8% 1,8% 1,8% 1,8% 1,8% 1,8% 1,8% 1,8% 1,8% 1,8% % of Depreciation 92,0% 89,2% 85,4% 85,6% 85,7% 85,9% 86,0% 86,2% 86,3% 86,5% 86,6% 86,8% Tax-free Proceeds from Divestments: 576 (Equity) Free Cash Flow 33 652 85 106 130 157 187 222 262 306 361 415 Cumulative Free Cash Flow 652 736 842 972 1.128 1.316 1.538 1.801 2.107 2.468 2.883 LBO Beispiel AG LBO Analysis LBO Beispiel AG Focus on Core-Assets Case Key Inputs Uses / Sources Value Multiples EUR MM Acquisition EUR MM Acquisition Multiples Current Share Price (EUR) 29,20 Uses Premium 30% AV / 2010 EBITDA (x) 8,1 x Acquisition Share Price (EUR) 37,96 AV / 2011 EBITDA (x) 6,3 x Purchase Equity 2.885 Shares Outstanding (MM) 76,00 Equity Value 2.885 AV / 2010 EBIT (x) 15,2 x Retire Debt / (Use Cash) 1.100 AV / 2011 EBIT (x) 10,3 x Existing Debt (incl. minorities, preferred) 1.100 Transaction Costs 80 Asset Value 3.985 2014 IRR at exit m ultiple 20,1% Acquisition Dec 2010 Total Uses 4.065 exit m ultiple 6,50 x Details of Financing Sources % of EBITDA Interest Average Total Multiple Spread Rate Paydow n Life Senior Debt 2.250 Senior Debt 55,4% 3,6 x 2,3% 4,3% 9 5 Total Senior 2.250 Total Senior 55,4% 3,6 x High-Yield Debt 200 High-Yield Debt 4,9% 0,3 x 5,0% 8,3% 10 10 Mezzanine Mezzanine 0,0% 0,0 x 13,0% 0 FALSCH Total Debt 2.450 Total Debt 60,3% 3,9 x Equity 1.615 Equity 39,7% Total Sources 4.065 Total Sources 100,0% 6,5 x