Assignment 1

The Art of the LBO

November 2004

Agenda

I.

An Overview of Leveraged Buyouts

II.

The Building Blocks

III.

Putting It All Together

IV.

How It Happens in Reality

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1

I. An Overview of Leveraged

Buyouts

What Are LBOs?

What Is an LBO?

A L everaged BuyOut is the acquisition of an entire Company or

division

n Buyer (the “Sponsor”) raises debt and equity to acquire Target



Borrows majority of purchase price



Contributes proportionately small equity investment

n Buyer grows Company, improves performance



Relies on Company’s free cash flow and asset sales to

repay debt



Potentially makes add-on acquisitions



Later sells or IPOs all or a portion of the Company to exit

investment

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2

What Is An LBO?

Typical Leveraged Buyout Structure

Current

Owners

Purchase

Price

High Yield

Bondholders Bonds

Equity

Investment

NewCo

(Merged Into

Target)

Bank

Loan

Acquiror

(LBO Firm)

Banks

Target

5

More Common Than You Think…

Some prominent LBOs:

Company

Sponsor

Size

Silver Lake

$2.0bn

TPG, Bain & GS

$1.6bn

Madison Dearborn Partners $1.5bn

KKR

$1.5bn

THLee

$1.1bn

Bain

$1.0bn

Blackstone

$700mm

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3

Value of LBO Activity: 1997-2003

Global Announced Volume

($ Billions)

100

$81

$86

$85

$86

2002

2003

80

$60

60

40

$39

$43

20

0

1997

1998

1999

2000

2001

Source: GS F&P, Securities Data Co., Buyouts, Thompson Financial Securities Data

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LBO Analysis – An Important Banker Tool

n M&A valuation

 Complements other valuation techniques

n Acquisition financing

 LBO

 Corporate acquisition

 “Staple-on” financing

n Dividend recapitalization

n Straight debt financings

n Complex merger plan analysis

 Cash flow impact vs. EPS

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4

II. The Building Blocks

How Are LBOs Financed?

The Building Blocks

Types of Acquisition Financing

Bank Debt...