Leveraged Buyouts
(Table of Contents) 1. 2. 3.LBO 4.TXU 5. LBO 6. (Overview of Leveraged Buyouts) (Mechanics of an LBO Analysis) (LBO Best Practices) (TXU Case Study) (LBO Modeling) (Homework Assignment) (Appendix)
1.
Overview of Leveraged Buyouts
(LBO)
Overview of Leveraged Buyouts
An LBO is the acquisition of a company or division of a company using debt for a majority of the purchase price and equity for the remainder.
The buyer (the LBO Sponsor or Equity Sponsor) borrows the debt portion of the purchase price, typically through public or private bonds and bank loans issued by the company, and contributes the equity portion typically through a private fund Debt is serviced and repaid with the company’s operating cash flows a b The buyer later sells all or a portion of the company and realizes a return on its initial equity investment – Sale of Sponsor equity typically through a) an initial public offering or b) a sale to a strategic buyer or another LBO firm The LBO transaction focus is on cash flows generated by operations and the use of the cash to pay down debt, thereby increasing equity value Additionally, improvements in operating performance can increase value Assuming the enterprise value remains unchanged, as debt is repaid, value reverts to the equity holders, thereby generating equity returns
Return on Equity: A Practical Example
1,000,000 1,000,000 750,000 Assume a home is purchased today for $1,000,000. The purchase is financed with $250,000 of equity and $750,000 of debt. Over the next five years, enough rent is generated to repay $500,000 of debt, in addition to paying interest expense. Assuming the value of the home remains at $1,000,000 five years later, the equity stake in the home has grown to $750,000 5 1,000,000 250,000 750,000 Assuming this home is sold at the end of the fifth year for $1,000,000, $250,000 of the proceeds must be used to repay the remaining debt, which leaves the owner with $750,000. The return on the equity
1.
Overview of Leveraged Buyouts
(LBO)
Overview of Leveraged Buyouts
An LBO is the acquisition of a company or division of a company using debt for a majority of the purchase price and equity for the remainder.
The buyer (the LBO Sponsor or Equity Sponsor) borrows the debt portion of the purchase price, typically through public or private bonds and bank loans issued by the company, and contributes the equity portion typically through a private fund Debt is serviced and repaid with the company’s operating cash flows a b The buyer later sells all or a portion of the company and realizes a return on its initial equity investment – Sale of Sponsor equity typically through a) an initial public offering or b) a sale to a strategic buyer or another LBO firm The LBO transaction focus is on cash flows generated by operations and the use of the cash to pay down debt, thereby increasing equity value Additionally, improvements in operating performance can increase value Assuming the enterprise value remains unchanged, as debt is repaid, value reverts to the equity holders, thereby generating equity returns
Return on Equity: A Practical Example
1,000,000 1,000,000 750,000 Assume a home is purchased today for $1,000,000. The purchase is financed with $250,000 of equity and $750,000 of debt. Over the next five years, enough rent is generated to repay $500,000 of debt, in addition to paying interest expense. Assuming the value of the home remains at $1,000,000 five years later, the equity stake in the home has grown to $750,000 5 1,000,000 250,000 750,000 Assuming this home is sold at the end of the fifth year for $1,000,000, $250,000 of the proceeds must be used to repay the remaining debt, which leaves the owner with $750,000. The return on the equity