buyout considerations

8/3/2019 Buyout Considerations

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James O’Gara

Matteo LuoniMatteo Masi

Brandon Parry

Ryan Brewer

LBO 201 - Deal Evaluation Case Study

Wharton Buyout Case Competition 2011



2

Deal Evaluation Approach – Tell the Story

Evaluate the

Market

Evaluate theCompany

DealConsiderations

K e y S t e p s

S o u r

c e s

Your fundamental bet about the industry and the company’s ability to capture value in it.It underpins your entire investment recommendation. Make it clear!

Investment Thesis

Evaluate from an investment

perspective – take a stand High-level overview: size,

growth, trends?

Where/how is value being created or destroyed?

10-year view: need to consider

your exit, value for next buyer What are the key risks?

Where can PE create value?

Which companies are positioned to

benefit from market trends youidentified?

Financial profile – cash flow is king

Is the value proposition defendable?Key risks and mitigants

Assets – think creatively and

strategically (roll-ups, add-ons) Management strength and track

record – can you partner with them?

Key diligence items

Entry

– Valuation and deal approach – Leverage and structuring: what

are current market conditions?

– Management incentives

Portfolio

– Value creation opportunities:

what’s the plan?

Exit: sale vs. IPO, strategicbuyer vs. financial, exit multiple

Analyst reports (Investext)

Industry (Datamonitor, etc) Competitor reports

S&P’s LCD for leverage

market (on facebook) Company info – board, etc.

Public data: 10-K, etc.

Capital IQ for financials Analyst reports



3

Financial Modeling

Basic

Approach

Revenue Build

– Choose an approach: top-down or bottom-up

– Should match your industry view, incorporating key variables to examine how they impact it

– Flexible and easy to understand/walk someone through

– Be as granular as possible on division/product specific revenues Cost Assumptions

– Understand fixed vs. variable costs and how flexible the cost structure is

– Think about what impacts margins: don’t just hold them flat!

– Be careful about assuming significant margin improvements

Cash Flow items

– Make sure your capex assumptions match both your revenue growth and D&A – sanity check – Examine working capital accounts for seasonality – use minimum cash balance to reflect it

– Accurately reflect below the line, cash expenses: management fee, restructuring charges, etc.

Cases

Sensitivity

Analysis

Boiling your investment thesis down to the numbers

At minimum, base and downside cases in the model

– Base is your best guess, downside is not “doomsday” but reflects a realistic, bearish scenario

Upside case may also be useful, but careful about too much optimism – “Management Case” – projections from the company are often used as this

Sensitize returns around the key variables (risks) that impact your investment outcome

– Not just entry/exit multiples, or year of exit (lazy modeling!)

– Exit multiple is typically a huge driver of returns, but so are operational/industry outcomes

– Include at least one non-deal specific driver: company growth, margins, industry outcomes

buyout considerations

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