Hult International Business School – A3: Individual Assignment
Course:Private Equity
Lecturer: Alek Grzeszczak
Date: Summer 2023
In all questions, please write out a solution/calculated figure or provide a written answer. Add space as required. Work on this word document, save it, upload it, done! Have a great summer and good luck with your job interviews.
Total: 15 questions / 50 points.
Student Name:
Question 1 (3 points)
What are the key difference between VC (Venture Capital) Private Equity and Buyout (LBO) Private Equity ?
Question 2 (8 points, 4 points each)
Interesting Microsoft transactions took or are taking place recently. Let’s find out about the actual prices/multiples paid (as per data available on the announcement date). Using publicly available information (and publicly available financial statements) your task is to calculate LTM (last twelve months) transaction multiples (/Revenue; /EBITDA; /EBIT) for:
- Microsoft’s (proposed) acquisition of Activision Blizzard (announced on January 18th 2022);
- Microsoft’s (completed) acquisition of Nuance Communications (announced on April 12th 2021);
Show your calculations. We are interested in FV/EBITDA; FV/EBIT, FV/Revenue multiples.
Question 3(2 points)
Describe a typical acquisition capital structure in Leveraged Buyout transactions?
Question 4(2 points)
Comment on the validity of the definitions of Minority Interests (MI) &Minority Interests Provisions (MIP) listed below ?
MI – Asset item showing our minority ownership in an entity > 50% owned by someone else.
MIP – Portion of the net income (losses) of entities that are > 50% owned by someone else.
Question 5(2 points)
You are looking at a potential LBO target. It has no debt on its balance sheet, What impact will this fact have on expected returns (increase, decrease, no impact) to the financial investor?, and why ?
Question 6(3 points)
ROE can be expressed in terms of ROIC (Effect of leverage).
- How ?, show the relationship between the two performance metrics.
- Explain the key conclusions (from Equity/Private Equity perspective) that flow out of the relationship.
Question 7 (3 points)
What is the difference between bank debt and high-yield debt?
Question 8(2 points)
In an LBO transaction, is it possible for debt investors to get a higher return than the PE sponsor firm? Why or why not ?
Question 9(2 points)
Explain the difference between contractual and structural subordination ?
Question 10(3 points)
List/describe three initiatives buyer can undertake post buyout closing that are completely under his/her control. Explain how each will either lead to value creation or will prevent value destruction.
Question 11(2 points)
From a Private Equity (Seller) perspective, list (in bullet points) key advantages and key disadvantages in arriving at the final equity price by using the Locked Box (vs. Completion Accounts) mechanisms.
Question 12(2 points)
In a standard SPA (Share Purchase Agreement) …
- What is a “covenant” ? Give example of one.
- What is a “indemnity” ? Give example of one.
Question 13(2 points)
Discuss the relative merits, strengths and weaknesses, (from the selling PE perspective) between exiting an investment via a sale to a financial buyer and a leveraged recapitalization.
Question 14(7 points)
At closing there is a (verifiable) shortage in the Employee Pension Fund of $50.
Target owns 90% of a subsidiary company with a market capitalization (assume at closing) of $100.
Signing of the SPA is anticipated for June 30th 2023;
Closing of the transaction is anticipated for October 31st 2023 and the B/S data (above) are as expected at closing;
Closing W/C balance is equal to 1x the LTM average. LTM average is what both parties agreed to.
Verification of Company financials at closing showed that the average monthly Capex & Marketing spent between signing and closing was 50% of the $6/month agreed to and listed as a covenant to in the SPA).
Parties have agreed that within a week after closing the Buyer will make to a $20 bonus payment to the current/exiting management team.
Between Signing and Closing the business generates $10/month of FCF which is accumulating on the Balance Sheet.
Assuming that the seller and the buyer are both rational individuals and that they will manage to negotiate what economically belongs to each of them … what will be the:
- Price listed in the SPA;
- Will it (point 1 just above) be a Firm Value or Equity Value price listed in the SPA?
- Ultimate price or price/share paid to the seller at/around closing.
Question 15(7 points)
Basic LBO model.
Fill in the empty cellsin the LBO model shown below (all other cells have been properly filled in).
FYI: rollover equity refers to the equity stake the seller is retaining (i.e. not selling, not part of the transaction).
I/S, B/S and C/F statement (below) are provided.
| Sources of Funds | Cash % | PIK % | PIK Terms | Amount | % Cap | EBITDA | Maturity | ||
| Revolver | 7.0% | — | — | 10.0 | 2.8% | 0.3x | — | ||
| Senior Bank Facility | 6.5% | — | — | 70.0 | 19.7% | 2.3x | 7 Years | ||
| Senior Notes | 9.0% | — | — | 50.0 | 14.1% | 3.7x | 10 Years | ||
| Sub Notes | 10.0% | 10.0% | 3 Years | 40.0 | 11.3% | 4.9x | 10 Years | ||
| Senior Preferred | — | 14.0% | 5 Years | 40.0 | 11.3% | 6.0x | 10 Years | ||
| Total Debt & Preferred | — | — | — | 210.0 | 59.1% | — | — | ||
| Sponsor Equity | — | — | — | 120.0 | 33.8% | — | — | ||
| Roll-over Equity | — | — | — | 0.0 | 0.0% | — | — | ||
| Total Equity | — | — | — | 120.0 | 33.8% | 9.5x | — | ||
| Existing Cash / Liquid Assets | 3.0% | — | — | 25.5 | 7.2% | — | — | ||
| Total Sources of Funds | — | — | — | 100.0% | 10.2x | — | |||
| Uses of Funds | Amount | % Cap | ||
| Purchase of Equity | 67.5% | |||
| Debt / Preferred Refinancing | 28.1% | |||
| Provide Liquidity | 3.0 | 0.8% | ||
| Transaction Costs | 2.0% | 2.0% | ||
| Financing Fees | 2.5% | 5.3 | 1.5% | |
| Total Uses of Funds | 100.0% | |||
| Pro Forma Ownership | Common | Common | Warrants | Fully Diluted | ||
| % | % | Ownership | ||||
| Sponsor Equity | 120.0 | 100.0% | — | |||
| Roll-over Equity | 0.0 | 0.0% | — | 0.0% | ||
| Sr Preferred | — | — | 7.5% | 6.3% | ||
| Sub Notes | — | — | 2.5% | 2.1% | ||
| Sr Notes | — | — | — | — | ||
| Management | — | — | 10.0% | 8.3% | ||
| Total Equity | 120.0 | 100% | 20% |
| Balance Sheet Adjustments | ||||||||||
| 2022 | Adjustments | 2022 | ||||||||
| (USD in millions, except otherwise stated) | Actuals | Additions | Eliminations | Pro Forma | ||||||
| Long-term Assets | 220.0 | 220.0 | ||||||||
| Intangibles | 0.0 | |||||||||
| Investments | 25.0 | 0.0 | ||||||||
| Working Capital | 0.0 | 0.0 | ||||||||
| Debtors (Net of Prepayments) A/R | 25.0 | 25.0 | ||||||||
| Inventory | 11.0 | 11.0 | ||||||||
| Trade Creditors (Net of Advances) A/P | (19.0) | (19.0) | ||||||||
| Net Working Capital | 17.0 | 17.0 | ||||||||
| Financial Position | ||||||||||
| Cash | 0.5 | 3.0 | (0.5) | 3.0 | ||||||
| New Short Term Debt (Revolver) | 0.0 | (10.0) | 0.0 | (10.0) | ||||||
| Existing Short Term Debt | (25.0) | 0.0 | 25.0 | |||||||
| New Bank Facility | 0.0 | 0.0 | ||||||||
| New Sr Notes | 0.0 | 0.0 | ||||||||
| New Sub Notes | 0.0 | 0.0 | ||||||||
| Existing Long Term Debt | (75.0) | 0.0 | ||||||||
| New Sr Preferred | 0.0 | (40.0) | 0.0 | (40.0) | ||||||
| Net Debt | (99.5) | 99.5 | ||||||||
| Deferred Tax Assets (Liability) | 0.0 | 0.0 | ||||||||
| Other Assets | 0.7 | 0.7 | ||||||||
| Other Libilities | (0.5) | (0.5) | ||||||||
| Net Assets | 162.7 | |||||||||
| Equity & Reserves | 162.7 | |||||||||
| IRR Analysis | |||||||||
| Projected Fiscal Year Ending December 31, | |||||||||
| (USD in millions, except otherwise stated) | 2022PF | 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | ||
| Dividend Stream / Additional Capital | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | |||
| Exit Multiple @ 6.0x | |||||||||
| Exit in 2026 | (120.0) | 0.0 | 0.0 | 0.0 | — | — | |||
| Exit in 2027 | (120.0) | 0.0 | 0.0 | 0.0 | 0.0 | — | |||
| Exit in 2028 | (120.0) | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | |||
| Income Statement Summary | ||||||||||
| Projected Fiscal Year Ending December 31, | ||||||||||
| (USD in millions, except otherwise stated) | 2022A | 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | ||
| Revenues | 150.0 | 162.0 | 173.3 | 183.7 | 192.9 | 200.6 | 208.7 | 217.0 | ||
| — growth rate, % | — | 8.0% | 7.0% | 6.0% | 5.0% | 4.0% | 4.0% | 4.0% | ||
| COGS | 90.0 | 95.6 | 100.5 | 104.7 | 108.0 | 110.4 | 112.7 | 117.2 | ||
| — gross margin, % | 40.0% | 41.0% | 42.0% | 43.0% | 44.0% | 45.0% | 46.0% | 46.0% | ||
| Salaries | 17.0 | 19.4 | 20.8 | 20.2 | 19.3 | 18.1 | 18.8 | 19.5 | ||
| Marketing | 4.0 | 7.3 | 7.4 | 7.3 | 6.2 | 6.0 | 6.3 | 6.5 | ||
| Other Operating Costs | 2.0 | 4.9 | 3.5 | 2.8 | 2.9 | 2.8 | 2.7 | 2.6 | ||
| EBITDA | 37.0 | 34.8 | 41.2 | 48.7 | 56.5 | 63.4 | 68.2 | 71.2 | ||
| — EBITDA margin, % | 24.7% | 21.5% | 23.8% | 26.5% | 29.3% | 31.6% | 32.7% | 32.8% | ||
| Depreciation & Amortization | 25.0 | 38.9 | 36.7 | 34.7 | 33.2 | 34.0 | 36.0 | 38.0 | ||
| EBIT | 12.0 | (4.1) | 4.5 | 14.0 | 23.4 | 29.4 | 32.2 | 33.1 | ||
| — EBIT margin, % | 8.0% | (2.5%) | 2.6% | 7.6% | 12.1% | 14.6% | 15.4% | 15.3% | ||
| Interest Income | — | 0.1 | 0.0 | 0.2 | 0.2 | 0.0 | 0.2 | 0.8 | ||
| Interest Expense | — | (19.6) | (20.7) | (21.5) | (21.6) | (20.9) | (17.9) | (17.5) | ||
| EBT | — | (23.6) | (16.2) | (7.4) | 1.9 | 8.5 | 14.4 | 16.4 | ||
| Tax | — | (3.5) | (0.5) | 3.0 | 4.9 | 7.6 | 6.4 | 7.1 | ||
| Net Exceptional Items & Adjustments | — | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | ||
| Net Income | — | (20.0) | (15.7) | (10.4) | (3.0) | 0.8 | 8.0 | 9.3 | ||
| Balance Sheet Statement Summary | ||||||||||
| Projected Fiscal Year Ending December 31, | ||||||||||
| (USD in millions, except otherwise stated) | 2022PF | 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | ||
| Long-term Assets | 220.0 | 215.5 | 208.2 | 197.9 | 189.1 | 179.5 | 167.8 | 154.2 | ||
| Intangibles | 82.7 | 78.3 | 73.9 | 69.5 | 65.1 | 60.7 | 56.3 | 51.9 | ||
| Investments | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | ||
| Working Capital | ||||||||||
| Debtors (Net of Prepayments) | 25.0 | 24.8 | 25.7 | 26.9 | 28.4 | 29.7 | 30.8 | 32.1 | ||
| Inventory | 11.0 | 10.5 | 10.6 | 10.7 | 10.8 | 10.7 | 11.0 | 11.3 | ||
| Trade Creditors (Net of Advances) | (19.0) | (15.8) | (16.8) | (17.4) | (18.0) | (18.4) | (18.8) | (19.3) | ||
| Net Working Capital | 17.0 | 19.5 | 19.6 | 20.2 | 21.2 | 22.0 | 23.0 | 24.0 | ||
| Financial Position | ||||||||||
| Cash | 3.0 | 1.5 | 0.0 | 10.5 | 0.0 | 0.0 | 11.8 | 39.5 | ||
| New Short Term Debt (Revolver) | (10.0) | (16.1) | (8.3) | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | ||
| Existing Short Term Debt | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | ||
| New Bank Facility | (70.0) | (70.0) | (70.0) | (70.0) | (37.1) | (12.4) | 0.0 | 0.0 | ||
| New Sr Notes | (50.0) | (50.0) | (50.0) | (50.0) | (50.0) | (50.0) | (50.0) | (50.0) | ||
| New Sub Notes | (40.0) | (44.0) | (48.4) | (53.2) | (53.2) | (53.2) | (53.2) | (53.2) | ||
| Existing Long Term Debt | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | ||
| New Sr Preferred | (40.0) | (45.6) | (52.0) | (59.3) | (67.6) | (77.0) | (77.0) | (77.0) | ||
| Net Debt | (207.0) | (224.2) | (228.7) | (222.0) | (207.9) | (192.7) | (168.4) | (140.8) | ||
| Deferred Tax Assets (Liability) | 0.0 | 3.5 | 4.1 | 1.0 | (3.9) | (5.0) | (6.2) | (7.5) | ||
| Other Assets | 0.7 | 0.7 | 0.7 | 0.7 | 0.7 | 0.7 | 0.7 | 0.7 | ||
| Other Libilities | (0.5) | (0.5) | (0.5) | (0.5) | (0.5) | (0.5) | (0.5) | (0.5) | ||
| Net Assets | 112.9 | 92.9 | 77.2 | 66.8 | 63.8 | 64.7 | 72.7 | 82.0 | ||
| Equity & Reserves | 112.9 | 92.9 | 77.2 | 66.8 | 63.8 | 64.7 | 72.7 | 82.0 | ||
| Cash Flow Statement Summary | ||||||||||
| Projected Fiscal Year Ending December 31, | ||||||||||
| (USD in millions, except otherwise stated) | 2022PF | 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | ||
| EBITDA | 37.0 | 34.8 | 41.2 | 48.7 | 56.5 | 63.4 | 68.2 | 71.2 | ||
| Cash Interest Income | — | 0.1 | 0.0 | 0.2 | 0.2 | 0.0 | 0.2 | 0.8 | ||
| Cash Interest Expense | — | (10.0) | (9.9) | (9.3) | (13.3) | (11.4) | (17.9) | (17.5) | ||
| Cash Tax | — | 0.0 | 0.0 | 0.0 | (0.0) | (6.5) | (5.2) | (5.8) | ||
| Net Change in WC / Other CA | — | (2.5) | (0.0) | (0.7) | (1.0) | (0.8) | (1.0) | (1.0) | ||
| CAPEX | — | (30.0) | (25.0) | (20.0) | (20.0) | (20.0) | (20.0) | (20.0) | ||
| Extraordinary Cash Items | — | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | ||
| Change in Cash before Financing | — | (7.6) | 6.2 | 18.8 | 22.4 | 24.7 | 24.3 | 27.6 | ||
| Financed by | ||||||||||
| Equity Issue / (Buy Back or Dividend) | — | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | 0.0 | ||
| Debt Issue / (Retirement) | — | 6.1 | (7.7) | (8.3) | (32.9) | (24.7) | (12.4) | 0.0 | ||
| Total Financing | — | 6.1 | (7.7) | (8.3) | (32.9) | (24.7) | (12.4) | 0.0 | ||
| Change in Cash for the Period | — | (1.5) | (1.5) | 10.5 | (10.5) | 0.0 | 11.8 | 27.6 | ||
| Cash BoP | — | 3.0 | 1.5 | 0.0 | 10.5 | 0.0 | 0.0 | 11.8 | ||
| Cash EoP | — | 1.5 | 0.0 | 10.5 | 0.0 | 0.0 | 11.8 | 39.5 | ||
