LBOs: Deal structuring and definition of the capital structure

Question 1

What is a leveraged buyout?

Answer 1

An acquisition with a high use of debt (high leverage)

Question 2

What are teh 4 steps of an LBO?

Answer 2

1. The creation of a Newco (SPV)
2. The funding of the Newco with equity (low) and debt (high)
3. The acquistion of 100% of the Target Shares (less frequent is the acquisition of less than 100%)
4. Meger of Target into Newco (that changes its name with the original Target name)

Question 3

What are possible good candidates for an LBO?

Answer 3

Firms rich in cas with a stable performance:
1. Mature market
2. Strong market position
3. Good management
4. Low growth
5. Idle cash
6. Non-core assets eventually to be disposed
7. Low initial leverage

Question 4

What are the sources of value in LBOs?

Answer 4

1. Deleverage (bet: all debt will be repaid at the end of investment)
2. Arbitrage (betting on a shift of market appetite for a given sector/industry/firm, EV/EBITDA will grow)
3. Growth (requires strong involvment of the investor in the firm management. Bet: at end of investment EBITDA at exit is hihger than the initial value)