A typical leveraged Buyout

XYZ Corporation
Balance sheet-1985 (All values in mio)
Assets
Current assets
cash
marketable
securities
inventory
receivables

Libilities & Equity

Current
liabilities

0.2

1.55

1.75

accruals
account
payables
notes
payables

0.5

1.5

long term
debt

2.5

Equity
common
stock
Retained

Fixed assets
deprreciable

12

less cum dep

-12

0.25

0.75

0.5

0.5

A typical leveraged Buyout

The replacement cost of the asset
are assumed to be $10 mio.
The firm earning are very stable and
it had been very consistent.
Management suggestion Increase
use of debt and decrease use of
equity
Shareholder has conservative view
(Risk averse)

A typical leveraged Buyout

XYZ corporation
Profit and loss - 1985
(All values in mio)
Sales
$15
Cost of good sold
8
Gross profit
7
Selling and
5.5
administrative
Operating profit before
1.5
dep.
Depreciation
0
Operating profit
1.5
Interest expenses
0.35
Earning before tax
1.15
Tax(40%)
0.46
Earning
after
tax
Cash flow
= Earning
after0.69
tax
+ dep
= $0.69 mio + $0

Short term debt cost = 10%

Long term debt cost = 13%
Earning per share (EPS) =
$0.69
Market value per share = $8
P/E = 11.6
Agency theory aditya please
check....!!!, pg 567 below table
and include one line
Firm decided to go private on
account of rumours in market
that rival is planning to take over
company

A typical leveraged Buyout

Management group set up a sell
corporation known as xyz holding to act
as a legal entity making acquisition
Initial tender offer $12 per share (17.4
times earning)
Bid was successful and all stocks are
purchased at $12 per share
Two firm then merged , with xyz holding
representing the surviving entity.

A typical leveraged Buyout

Total acquisition cost = $12 per share * 1 mio
share = $12 mio
Fund sources
Secured bank loan
Junk bond
Investment bank
0wn money

$5 Mio @ 12%
$4 mio @ 18%
$1.2 mio @ 40% for 5
yrs
$1.8 mio

Management retain a buyout option with the investment

bank to acquire investment bank equity after 5 year
Buy out cost = $1.2 mio * (0.4)^5 = $6.45 mio

A typical leveraged Buyout

XYZ Holdings
Balance sheet (revised)-1985 (All values in mio)
Assets
Current assets
cash
marketable
securities
inventory
receivables

Libilities & Equity

Current
liabilities

0.2

1.55

1.75

accruals
account
payables
notes
payables

0.5

long term
debt

Equity
common
stock
Retained

Fixed assets
deprreciable

10

less cum dep

0.25

0.75

0.5

1.5
11.5

A typical leveraged Buyout

Steps taken by company to reduce
cost
Shifted offices to less expensive
quarters
Reduction in overhead cost
Firm able to reduce selling and
distribution cost by $1.5 mio per
year
Accelerated depreciation method to
enhance the cash flow


Sales
Cost of good sold
Gross profit
Selling and administrative
Operating profit before
dep.
Depreciation
Operating profit
Interest expenses
Earning before tax
Tax(40%)
Earning after tax

Divident

Cash flow

XYZ corporation
Profit and loss - 1985
(All values in mio)
1986
1987
1988
$15
$15
$15
8
8
8
7
7
7
4
4
4

1989
$15
8
7
4

1990
$15
8
7
4

1991*
$15
8
7
4

2.5
0.5
1.67
(1.17)
(0.47)
(0.70)

2.5
0.5
1.35
(0.85)
(0.34)
(0.51)

2.25
0.75
0.99
(0.24)
(0.10)
(0.14)

2
1
0.72
0.28
0.11
0.17

0.75
2.25
0.46
1.79
0.72
1.07

1.80

1.99

2.11

2.17

1.82

0
3
0.35
2.65
1.06
1.59

1.59

Debt remaining
Short term (10%)
Long term bank (12%)
Bonds (18%)

0.5
7.5
2.2

0.5
7.5
0.21

0.5
5.61
0

0.5
3.44
0

0.5
2.5
0

0.5
2.5
0

A typical leveraged Buyout

At the end of 5 year management
exercised it right to buyout
investment bank equity interest at
agreed price of $6.45 mio
Company made second initial public
offering (SIPO)
Eps = EAT/ no.of share = $1.59
mio/1mio = $1.59

A typical leveraged Buyout

Fund collected from SIPO
Flotation cost
Fund left after flotation cost
Buyout cost
Fund left with company

Initial investment

$1.59*15*1 MIO = $23.85 mio

$1.6mio
$22.25 mio
$6.45 mio
$15.8 mio

$1.8 mio

Average annual
compound rate of return

54%

Advantage of LBO