Dividend Recapitalization
While not a true exit strategy, a dividend recapitalization dividend recap provides the sponsor with a viable option for monetizing a sizeable portion of its investment prior to exit. In a dividend recap, the target raises proceeds through the issuance of additional debt to pay shareholders a dividend. The incremental indebtedness may be issued in the form of an add-on to the target's existing credit facilities and or bonds, a new security at the HoldCo level,27 or as part of a complete...
Identify Key Characteristics of the Target for Comparison Purposes
A simple framework for studying the target and selecting comparable companies is shown in Exhibit 1.3. This framework, while by no means exhaustive, is designed to determine commonality with other companies by profiling and comparing key business and financial characteristics. EXHIBIT 1.3 Business and Financial Profile Framework Products and Services Customers and End Markets Distribution Channels Geography Profitability Growth Profile Return on Investment Credit Profile Companies that share...
Equity Research
Research Reports Equity research reports provide individual analyst estimates of future company performance, which may be used to calculate forward-looking multiples. They generally include estimates of sales, EBITDA and or EBIT, and EPS for future quarters and the future two- or three-year period on an annual basis . More comprehensive reports provide additional estimated financial information from the research analyst's model, including key items from the income statement, balance sheet, and...
Exit Multiple Method
The EMM calculates the remaining value of a company's FCF produced after the projection period on the basis of a multiple of its terminal year EBITDA or EBIT . This multiple is typically based on the current LTM trading multiples for comparable companies. As current multiples may be affected by sector or economic cycles, it is important to use both a normalized trading multiple and EBITDA. The use of a peak or trough multiple and or an un-normalized EBITDA level can produce a skewed result....
Low Capex Requirements
All else being equal, low capex requirements enhance a company's cash flow generation capabilities. As a result, the best LBO candidates tend to have limited capital investment needs. However, a company with substantial capex requirements may still represent an attractive investment opportunity if it has a strong growth profile, high profit margins, and the business strategy is validated during due diligence. During due diligence, the sponsor and its advisors focus on differentiating those...
Step V Calculate Present Value and Determine Valuation Calculate Present Value
ValueCo's projected annual FCF and terminal value were discounted to the present using the selected WACC midpoint of 11 see Exhibit 3.54 . We used a mid-year convention to discount projected FCF. For the terminal value calculated using the EMM, however, we used year-end discounting. EXHIBIT 3.54 Present Value Calculation Unlevered FCF2009e x Discount Factor 79.0 million x 0.95 Exit Year EBITDA x Exit Multiple 189.5 million x 7.0x Unlevered FCF2009e x Discount Factor 79.0 million x 0.95 Terminal...
Projection of Free Cash Flow
In a DCF analysis, EBIT typically serves as the springboard for calculating FCF see Exhibit 3.4 . To bridge from EBIT to FCF, several additional items need to be determined, including the marginal tax rate, D amp A, capex, and changes in net working capital. Less Taxes at the Marginal Tax Rate Less Increase Decrease in NWC FCF 5If the model is built on the basis of COGS and SG amp A detail, the banker must ensure that the EBITDA and EBIT consensus estimates dovetail with those assumptions. This...
Step I Study the Target and Determine Key Performance Drivers
As a first step, we reviewed the basic company information provided on ValueCo. This foundation, in turn, allowed us to study ValueCo's sector in greater detail, including the identification of key competitors and comparable companies , customers, and suppliers. Various trade journals and industry studies, as well as SEC filings and research reports of public comparables, were particularly important in this respect. From a financial perspective, ValueCo's historical financials provided a basis...
Screen for Comparable Companies
Once the target's basic business and financial characteristics are researched and understood, the banker uses various resources to screen for potential comparable companies. At the initial stage, the focus is on identifying companies with a similar business profile. While basic financial information e.g., sales, enterprise value, or equity value should be assessed early on, more detailed financial benchmarking is performed in Step IV. Investment banks generally have established lists of...
Step IV Determine Terminal Value 1
Exit Multiple Method We used the LTM EV EBITDA trading multiples for ValueCo's closest public comparable companies as the basis for calculating terminal value in accordance with the EMM. These companies tend to trade in a range of 6.5x to 7.5x LTM EBITDA. Multiplying ValueCo's terminal year EBITDA of 189.5 million by the 7.0x midpoint of this range provided a terminal value of 1,326.3 million see Exhibit 3.50 . EXHIBIT 3.50 Exit Multiple Method in millions Calculation of Terminal Value using...
Step IIIc Estimate Cost of Equity re
Cost of equity is the required annual rate of return that a company's equity investors expect to receive including dividends . Unlike the cost of debt, which can be deduced from a company's outstanding maturities, a company's cost of equity is not readily observable in the market. To calculate the expected return on a company's equity, the banker typically employs a formula known as the capital asset pricing model CAPM . Capital Asset Pricing Model CAPM is based on the premise that equity...
Instructor Teaching Aids
To accompany the chapters, we have included a test bank of over 300 questions and answers for classroom and other instructional use. The test bank can be accessed by instructors in Microsoft Word format at www.wiley.com go investmentbanking. The test bank is also available in interactive format to facilitate online testing. The website includes the following files Chapter 1 .Comparable Companies Analysis_Q amp A.doc Chapter 2_Precedent Transactions Analysis_Q amp A.doc Chapter 3_Discounted Cash...
SEC Filings 10K 10Q 8K and Proxy Statement
As a general rule, the banker uses SEC filings to source historical financial information for comparable companies. This financial information is used to determine historical sales, gross profit, EBITDA, EBIT, and net income and EPS on both an annual and LTM basis. SEC filings are also the primary source for other key financial items 15First Call and Institutional Brokers' Estimate System IBES provide consensus analyst estimates for thousands of publicly traded companies. Both First Call and...
PART TWO Leveraged Buyouts
Key Participants Financial Sponsors Investment Banks Bank and Institutional Lenders Bond Investors Target Management Characteristics of a Strong LBO Candidate Strong Cash Flow Generation Leading and Defensible Market Positions Growth Opportunities Efficiency Enhancement Opportunities Low Capex Requirements Strong Asset Base Proven Management Team Economics of LBOs Returns Analysis - Internal Rate of Return Returns Analysis - Cash Return How LBOs Generate Returns How Leverage is Used to Enhance...
Step IV Benchmark the Comparable Companies 1
After completing Steps I to III, we were prepared to perform the benchmarking analysis for ValueCo. The first two benchmarking output pages focused on the comparables' financial characteristics, enabling us to determine ValueCo's relative position among its peers for key value drivers see Exhibits 1.53 and 1.54 . This benchmarking analysis, in combination with a review of key business characteristics outlined in Exhibit 1.3 , also enabled us to identify ValueCo's closest comparables in this...
Supplemental Financial Concepts and Calculations
Calculation of LTM Financial Data U.S. public filers are required to report their financial performance on a quarterly basis, including a full year report filed at the end 47Ratings agencies provide opinions, but do not conduct audits. 48 Ratings are assessed on the issuer corporate credit ratings as well as on the individual debt instruments facility ratings . of the fiscal year. Therefore, in order to measure financial performance for the most recent annual or LTM period, the company's...
Valuation Implied by PE
Exhibits 1.36 and 1.37 demonstrate how the P E ratio translates into implied share price and enterprise value ranges. As with the example in Exhibit 1.35, we assume net debt of 500 million and a static fully diluted shares outstanding count of 100 million. Implied Share Price For a public company, the banker typically begins with net income and builds up to implied equity value. The implied equity value is then divided by fully diluted shares outstanding to calculate implied share price. A P E...
Step III Spread Key Statistics Ratios and Trading Multiples 1
After locating the necessary financial information for the selected comparable companies, we created input sheets for each company, as shown in Exhibit 1.39 for Momper. These input sheets link to the output pages used for benchmarking the comparables universe see Exhibits 1.53, 1.54, and 1.55 . Below, we walk through each section of the input sheet in Exhibit 1.39. General Information In the General Information section of the input page, we entered various basic company data see Exhibit 1.40 ....
ValueCo Corporation 1
6.50x - 7.50x 6.25x - 7.25x 5.75x - 6.75x 953.3 - 1,100.0 937.5 - 1,087.5 931.5 - 1,093.5 The chosen multiple ranges in Exhibit 1.56 translated into an implied enterprise value range of approximately 932 million to 1,100 million. This implied valuation range is typically displayed in a format such as that shown in Exhibit 1.57 known as a football field for eventual comparison against other valuation methodologies, which we discuss in the following chapters. EXHIBIT 1.57 ValueCo Football Field...
Step I Select the Universe of Comparable Companies 1
Study the Target Our first task was to learn ValueCo's story in as much detail as possible so as to provide a frame of reference for locating comparable companies. As ValueCo is a private company, for the purposes of this exercise we assumed that it is being sold through an organized M amp A sale process see Chapter 6 . Therefore, we were provided with substantive information on the company, its sector, products, customers, competitors, distribution channels, and end markets, as well as...
PART THREE Mergers Acquisitions
Organization and Preparation 257 Identify Seller Objectives and Determine Appropriate Sale Process 257 Perform Sell-Side Advisor Due Diligence and Preliminary Prepare Marketing Materials 259 Prepare Confidentiality Agreement 261 Contact Prospective Buyers 262 Negotiate and Execute Confidentiality Agreement with Interested Parties 263 Distribute Confidential Information Memorandum and Initial Bid Procedures Letter 263 Prepare Management Presentation 264 Prepare Stapled Financing Package 265...
Valuation Models
The model templates and completed versions for the valuation methodologies discussed in this book are available in Microsoft Excel format at www.wiley They will be updated for new accounting standards, as appropriate. The completed models match the input and output pages for the respective valuation methodologies. The company names and financial data in the models are completely illustrative. The website contains the following files Comparable Companies_Template.xls Precedent...
Ryan Drook Deutsche Bank
We are deeply indebted to the numerous colleagues and peers who provided invaluable guidance, input, and hard work to help make this book possible. Our book could not have been completed without the sage advice and enthusiasm of Steve Momper, Director of Darden Business Publishing at the University of Virginia. Steve believed in our book from the beginning and supported throughout the entire process. Most importantly, he introduced us to our publisher, John Wiley amp Sons, Inc. Special thanks...