LBOs Flashcards
What makes a company a good candidate for an LBO?
Steady cash flows, limited business risk, limited need for ongoing investment, strong management, opportunity for cost reductions, and a high asset base.
The most important trait is steady cash flows, as the company must have the ability to generate the cash flow required to support the relatively high interest expense.
In energy, LBOs are very rare because of commodity risk, which is fluctuations of,oil and natural gas prices.
What is an LBO?
Leveraged buy out
A private equity firm buys another company by raising a large amount of debt. They use the debt to buyout the other shareholders, taking the company private. The company being purchased levers up or assumes the debt that was taken out. The cash flows of the company are used to pay the interest on the debt while the pe firm reorganizes and/or improves the company. Depending on the exit strategy, the pe firm sells the company and pays off the debt, receiving oversized returns on their committed equity.
