Leveraged Buyout Model Assumption Analysis

This report analyzes the Leveraged Buyout Model Assumption for a private equity firm acquiring a German business. It includes an acquisition analysis, repayment schedule, interest rates, and returns earned by the private equity firm.

ASSIGNMENT FOR STRATEGIC ANALYST CANDIDATES
Introduction
The report analyse the Leveraged Buyout Model Assumption wherein a private equity firm
seeks to acquire a German Business with a value of Euro 280 Million taking a senior secured
debt and a vendor loan. Further, there shall be ranking of debt for repayment and the structure
of investment shall be in the following manner:
Acquisition Analysis
(In Euro Million)
Sl No Particular Amount
1 Acquisition Value 380
2 Advisory Fees (2% of (1)) 7.6
3 Total Funds Needed (1+2) 387.6
4 Vendor Loan 35
5 Senior Bank Debt (2.5 Times of EBITDA) 87.5
6 Private Equity Firm (3-4-5) 265.1
The rate of interest on Senior Bank Debt 7% per annum (cash pay) with the following
repayment schedule 5% repaid in year one, 15% in year two, 20% in year three, 30% in year
four and 30% in year 5.
The vendor interest shall be paid at 8% and shall accrue annually and shall be in
subordination to the bank debt. Further, private equity firm expects a 15% non-cash pay
coupon that accrues annually.
In addition to above, the company is required to maintain a minimum balance of Euro 1
Million Operating cash at all times. Also, the shareholding pattern of the company shall be
85% acquired by Private Equity Firm and 15% by Management.
Analysis
Question A
The analysis has been based on assumption that the investment made by private Equity Firm
shall be considered as Equity for the purpose of computation cash on cash return and Internal
Rate of Return of the Private Equity firm on the investment made. Further, interest on the
investment made by private equity firm has been used for computation of tax liability. On the
basis of above details, the return earned by private equity firm has been detailed here-in-
below:
2012 2013 2014 2015 2016 2017
Sl No Particular Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
1 Sales 100 105 112.35 120.2145 128.629515 137.6335811
2 EBITDA 35 38.85 43.8165 49.28795 55.31069145 61.93511147
3 Multiple of 7X 387.1748402 433.5457803
4 Value of senior Rank Debt 31.5 0
5 Value of Vendor Loan 47.62 51.43
6 Value of Private Equity Firm Investment 261.8490676 324.801403

2012 2013 2014 2015 2016 2017
Sl No Particular Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
7 Multiple of 8X 442.4855316 495.4808918
8 Value of senior Rank Debt 31.5 0
9 Value of Vendor Loan 47.62 51.43
10 Value of Private Equity Firm Investment 308.8631553 377.4462477
11 Multiple of 9X 497.7962231 557.4160033
12 Value of senior Rank Debt 31.5 0
13 Value of Vendor Loan 47.62 51.43
14 Value of Private Equity Firm Investment 355.877243 430.0910925
15 Outflow of Private Equity Firm -247.6 -247.6
16 IRR at 7X Multiple 1% 6%
17 IRR at 8X Multiple 6% 9%
18 IRR at 9X Multiple 9% 12%
19 Cash on Cash Return- 7X Multiple 1.4% 6.2%
20 Cash on Cash Return- 8X Multiple 6.19% 10.49%
21 Cash on Cash Return- 9X Multiple 10.93% 14.74%
Question B
The returns that shall be earned by Private Equity under EBITDA multiple of 2.5 and 3.5 for
Senior Bank debt has been illustrated here-in-below:
2.5 times of EBITDA
2012 2013 2014 2015 2016 2017
Sl. No Particular Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
1 Sales 100 105 112.35 120.2145 128.629515 137.6335811
2 EBITDA 35 38.85 43.8165 49.28795 55.31069145 61.93511147
3 Multiple of 7X 387.1748402 433.5457803
4 Value of senior Rank Debt 26.25 0
5 Value of Vendor Loan 47.62 51.43
6 Value of Private Equity Firm Investment 266.3115676 324.801403
7 Multiple of 8X 442.4855316 495.4808918
8 Value of senior Rank Debt 26.25 0
9 Value of Vendor Loan 47.62 51.43
10 Value of Private Equity Firm Investment 313.3256553 377.4462477
11 Multiple of 9X 497.7962231 557.4160033
12 Value of senior Rank Debt 26.25 0
13 Value of Vendor Loan 47.62 51.43
8 Value of Private Equity Firm Investment 360.339743 430.0910925
9 Outflow of Private Equity Firm -265.1 -265.1
10 IRR at 7X Multiple 0% 4%
11 IRR at 8X Multiple 4% 7%
12 IRR at 9X Multiple 8% 10%
13 Cash on Cash Return- 7X Multiple 0.1% 4.5%
14 Cash on Cash Return- 8X Multiple 4.55% 8.48%

2012 2013 2014 2015 2016 2017
Sl. No Particular Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
15 Cash on Cash Return- 9X Multiple 8.98% 12.45%
3.5 times of EBITDA
2012 2013 2014 2015 2016 2017
Sl. No Particular Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
1 Sales 100 105 112.35 120.2145 128.629515 137.6335811
2 EBITDA 35 38.85 43.8165 49.28795 55.31069145 61.93511147
3 Multiple of 7X 387.1748402 433.5457803
4 Value of senior Rank Debt 36.75 0
5 Value of Vendor Loan 47.62 51.43
6 Value of Private Equity Firm Investment 257.3865676 324.801403
7 Multiple of 8X 442.4855316 495.4808918
8 Value of senior Rank Debt 36.75 0
9 Value of Vendor Loan 47.62 51.43
10 Value of Private Equity Firm Investment 304.4006553 377.4462477
11 Multiple of 9X 497.7962231 557.4160033
12 Value of senior Rank Debt 36.75 0
13 Value of Vendor Loan 47.62 51.43
8 Value of Private Equity Firm Investment 351.414743 430.0910925
9 Outflow of Private Equity Firm -230.1 -230.1
10 IRR at 7X Multiple 3% 7%
11 IRR at 8X Multiple 7% 10%
12 IRR at 9X Multiple 11% 13%
13 Cash on Cash Return- 7X Multiple 3.0% 8.2%
14 Cash on Cash Return- 8X Multiple 8.07% 12.81%
15 Cash on Cash Return- 9X Multiple 13.18% 17.38%
Further, the analysis has been based on assumption that the investment made by private
Equity Firm shall be considered as Equity for the purpose of computation cash on cash return
and Internal Rate of Return of the Private Equity firm on the investment made. Further,
interest on the investment made by private equity firm has been used for computation of tax
liability
In addition to above, the issues to be taken into consideration while considering the level of
debt:
(a) Cash Flow of the company;
(b) Amount of debt obligation;
(c) Future cash flows of the company;
(d) Tax Exposure;
(e) Business Risk;
(f) Style of Management;
(g) Growth prospects etc.

Question C
The recommended level based on return to Private Equity Firm shall be 3.5X of EBITDA
based on above analysis.
Question D
The most realistic exit based on return computed shall be at 8X of EBITDA as the return on
the same shall be approximately 6% to 9% which is in alignment with the return earned by
other investors of the company and shall include the cost of managing affairs of the company.
Question E
In the present scenario, the business is running at EBITDA of 35% of sales and growing at
2% per year till 2017. On the basis of the said scenario a net return of greater than 10% shall
be ideal based on the details provided and computation made.
Further, since approximately 100% of the business is funded by debt, return of greater than
10% shall be ideal.
Question F
The benefit of Vendor Loan has been presented here-in-below:
(a) Payment shall accrue and no cash payment shall be needed to be made;
(b) Reduced rate as the expected return on funds from Private Equity firm is 15%;
(c) Additional Source of Finance;
(d) Company Liquidity needs are met.
Question G
Since the company has idle cash at its disposal, the company should utilise the same to pay off the
vendor loan so as to reduce the liability of interest and disposal of idle cash lying at the disposition of
the company. The computation of idle cash has been presented here-in-below:
Cash Flow Computation
2012 2013 2014 2015 2016 2017
Sl No Particular Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
1 EBITDA 35 38.85 43.8165 49.28795 55.31069145 61.93511147
2 Machinery Purchase Expense 15 15 15 15 15
3 Interest Expense 7.35 6.9825 5.88 4.41 2.205
4 Principal Repaid 5.25 6.9825 21 31.5 31.5
5 Working Capital Requirement 2.8767 0.2014 0.2155 0.2305 0.2467
6 Closing Balance (1-Sum of 2 to 4) 8.4 14.7 7.2 4.2 13.0
7 Minimum Balance to be maintained 1
8 Excess Cash 7.4 14.7 7.2 4.2 13.0
Question H

The computation of the proceeds that shall go to shareholder and the portion that shall go to
the management has been detailed here-in-below:
2012 2013 2014 2015 2016 2017
Sl No Particular Year 0 Year 1 Year 2 Year 3 Year 4 Year 5
1 Sales 100 105 112.35 120.2145 128.629515 137.6335811
2 EBITDA 35 38.85 43.8165 49.28795 55.31069145 61.93511147
3 Multiple of 7X 387.1748402 433.5457803
4 Value of senior Rank Debt 36.75 0
5 Value of Vendor Loan 47.62 51.43
6 Value of Private Equity Firm Investment 257.3865676 324.801403
7 Value of Management 45.42115898 57.31789464
8 Multiple of 8X 442.4855316 495.4808918
9 Value of senior Rank Debt 36.75 0
10 Value of Vendor Loan 47.62 51.43
11 Value of Private Equity Firm Investment 304.4006553 377.4462477
12 Value of Management 53.7177627 66.60816136
13 Multiple of 9X 497.7962231 557.4160033
14 Value of senior Rank Debt 36.75 0
15 Value of Vendor Loan 47.62 51.43
16 Value of Private Equity Firm Investment 351.414743 430.0910925
17 Value of Management 62.01436642 75.89842808