Privat Equity

At the time of the acquisition (assumed to be in 1992), Hicks & Muse acquired Du Pont’s electronic supplier business for $330 million, which is equivalent to a EBITDA multiple of 18.3 given the $18 million of EBITDA previously generated by the firm. Although this multiple is quite high, Hicks & Muse believes that the firm could improve its EBITDA up to $65 million, which would translate into a 5.1 EBITDA multiple. I first assumed that the equity contribution represents one third of the acquisition price, the remaining two thirds being debt. I also assumed that the company did not have any previous debt and excess cash on hand. This brings the equity contribution to $110 million and the debt level to $220 million.

Purchase Price | 330 |   | Capital Structure |

EBITDA (Entry) | 18 | | Equity Contribution- 1/3 | 110 |

EBITDA Multiple | 18.3 | | Debt- 2/3 | 220 |

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EBITDA Exit Multiple | 8.6 | | Assumptions |   |

EBITDA | 185 | | Acquired in 1992 |   |

Enterprise Value | 1,591 | | No debt or Cash excess at Entry |

- 50 % Debt | 110 | | Acquisitions made with excess cash |

Equity Value | 1,481 | | Half of the Debt paid down at Exit |

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Equity Return | 13.5x | | |   |

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I then assumed that the add-on acquisitions made by H&M in the subsequent years were financed with the excess cash generated by the business, no extra debt added. This could work only if H&M was able to unlock the EBITDA generation capability of the firm over the years. Since the acquisition EBITDA multiple seems to be quite high (and would value the firm at 3.3 billion if it was used as the exit multiple), I chose to use the average EBITDA multiple in 1997 as represented in Exhibit 5. With a EBITDA of 185, this results in an enterprise value of $1,591 million. Finally, I assume that half of the debt would have been paid out over the years. This gives an equity value of $1,481, or 13.5 times the initial...