LBO Methodologies
For LBO Kind of candidate:
1. Companies that are low levered, that is, heavy assets, but cash flow is a constraint.
2. It usually goes for mature industry.
3. Exits usually happens either by merging or relisting
Key Points
- Eliminate Expenses that reduces EBITDA of the company
- Use High leverage to inject the capital
- Pay out the debt & exit
QUALITITATIVE
· Low Leverage
· Mature Industry
· Mature Company
· Asset Heavy
· Stable Cash Flow
· Strong Management team
· Low Capex Requirements
· Good Exit Options
QUANTITATIVE
· Using Leverage , inject the Capital
· 5x EBITD Entry Multiple
· Exit Multiple also around the same (while calculating theoretical returns)
· Typical exit could be around 6.5X
· Use of Junk Bonds & Liquid Credit Measures
· Merging & Acquirer Target
· Taking the company to pvt by de listing & exiting through relisting
LBO VALUATION METHODOLOGY
Valuing LBOs - In LBO Analysis: -
- Junk bonds have critical role to play in debt financing of the acquisition
- Mezzanine financing is very prevalent
- Creditors seek more than credit return in financing LBO
- Empirical evidence on Value creation
o Financial leverage: -41%,
o Operating Improvements: -34%,
o Multiple Expansion: -14%,
o Multiple arbitrage: -11%
- Adjustments
o Adjusted EBIDTA: -EBIDTA less Maintenance CAPEX
o Debt coverage: -Adjusted EBIDTA to Cash interest expense and other fixed charges
- The LBO analysis is done for period of 5-7 years and the conservative multiple to be paid is 5 times EV/EBIDTA
| Qualitative | Quantitative |
| Low levered | Using Leverage |
| Asset Heavy | 5 times EBITDA |
| Stable Industry and cash flow | Exit within entry multiple |
| Good management | Use of Junk bond |
| No capex | Merging |
| | Taking it exiting through relisting |
No comments:
Post a Comment