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    Welcome To Wall Street Prep's Financial Modeling Quick Lessons!

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    alexandre1411
    This document provides an introduction to leveraged buyout (LBO) modeling through an analogy of buying a house. It explains key LBO terms like enterprise value, net debt, and equity value. It also outlines typical exit assumptions like selling price, debt repayment through cash flows, and equity value increase at exit. Finally, it provides a concept checker example of a hypothetical LBO of CVS to illustrate purchase price, equity value, transaction value, and maximum price sponsors would pay per share. The document directs the reader to a video series that shows how to build a simple LBO model.

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    Welcome To Wall Street Prep's Financial Modeling Quick Lessons!

    Uploaded by

    alexandre1411
    417 views3 pages
    This document provides an introduction to leveraged buyout (LBO) modeling through an analogy of buying a house. It explains key LBO terms like enterprise value, net debt, and equity value. It also outlines typical exit assumptions like selling price, debt repayment through cash flows, and equity value increase at exit. Finally, it provides a concept checker example of a hypothetical LBO of CVS to illustrate purchase price, equity value, transaction value, and maximum price sponsors would pay per share. The document directs the reader to a video series that shows how to build a simple LBO model.

    Original Description:

    Primer LBO

    Original Title

    Primer LBO

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    This document provides an introduction to leveraged buyout (LBO) modeling through an analogy of buying a house. It explains key LBO terms like enterprise value, net debt, and equity value. It also outlines typical exit assumptions like selling price, debt repayment through cash flows, and equity value increase at exit. Finally, it provides a concept checker example of a hypothetical LBO of CVS to illustrate purchase price, equity value, transaction value, and maximum price sponsors would pay per share. The document directs the reader to a video series that shows how to build a simple LBO model.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    417 views3 pages

    Welcome To Wall Street Prep's Financial Modeling Quick Lessons!

    Uploaded by

    alexandre1411
    This document provides an introduction to leveraged buyout (LBO) modeling through an analogy of buying a house. It explains key LBO terms like enterprise value, net debt, and equity value. It also outlines typical exit assumptions like selling price, debt repayment through cash flows, and equity value increase at exit. Finally, it provides a concept checker example of a hypothetical LBO of CVS to illustrate purchase price, equity value, transaction value, and maximum price sponsors would pay per share. The document directs the reader to a video series that shows how to build a simple LBO model.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 3
    At a glance
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    The key takeaways are that an LBO involves acquiring a company using a significant amount of borrowed money, deleveraging the debt through cash flows, and exiting for a profit. An LBO is similar to buying a house with a large mortgage that is paid down over time.

    An LBO (leveraged buyout) involves acquiring a company using a significant amount of borrowed money. It is similar to buying a house, where the purchase price is the enterprise value, the mortgage is the net debt, and the down payment is the equity value. Private equity firms look to aggressively pay down debt over 3-7 years through cost cutting and cash flows from the target company.

    Typical private equity exit options are selling the target company to another buyer, taking the company public through an IPO, or recapitalizing the business by borrowing more money and distributing proceeds through a dividend.

    Welcome to Wall Street Prep's

    Financial Modeling Quick Lessons!


    This Quick Lesson Primer focuses on Leveraged Buyout (LBO) Modeling. Once you have this LBO
    primer under your belt, proceed to the Building a simple LBO Model Video Lesson. If youre
    already comfortable with the intuition of an LBO, you can jump straight to the videos.

    LBO Intuition: How an LBO is Like Buying a House


    Many of us do an LBO in our own lives without even realizing it when we buy a house. Lets say
    you are thinking about buying a house for $500,000 ($80,000 down payment, $420,000
    mortgage) that will serve you as an investment property.
    Purchase price assumptions
    Converting that into investment-banking-speak, we can define the terms in the simple house
    purchase described above as follows:

    Enterprise value (transaction value) = Value of the entire property ($500,000)

    Net debt = $420,000 mortgage.


    Equity value = $80,000 down payment

    Another way to think about the equity value is to think of it as the residual value after all nonequity claims (in this case, just the $420,000 loan) are paid off.
    Exit Assumptions
    In order to determine whether this investment property is worth purchasing, you have to make
    some assumptions about what rental income down the raod will look like, as well as how much
    you think you might be able to sell the house for at some point in the future. Accordingly, you
    assume the following:

    5 years from now you could sell the house for, say, $550,000

    5 years from now, the mortgage youre carrying on the property will decline from
    $420,000 to $200,000 as cash flows generated through the assets operations (rental
    income) will be sufficient to not only pay interest but to pay down debt principal. Note:
    With a typical mortgage, it takes 30 years to pay down the mortgage, but with an LBO, debt
    repayments are typically more aggressive (3-7 years) and accomplished through cost
    cutting and selling off portions of the business.

    This implies that you believe the equity value of the property will increase from the original
    $80,000 down payment to $350,000 ($550,000 $200,000) at exit. Remember, the equity value
    of your home is the residual value after all non-equity claims are paid off.
    Typical Private Equity Firm Exits
    As a property owner your options to monetize your investment are limited to selling the property.
    Of course, this is just a simple example - private equity investors (the guys doing actual LBOs), on
    the other hand, can typically monetize their profits by selling the target to another buyer, selling
    to the public in an IPO, or recapitalizing the business (involves borrowing money again from the
    banks, which levers up the balance sheet again, and pocketing the proceeds through a dividend.

    Concept Checker: A Simple LBO Drill


    With some of the basic intuition laid out in the discussion above, lets begin our simple LBO
    example.:
    It is 2009, and a group of financial sponsors are contemplating taking CVS private. The financial
    sponsors believe that under investor pressure, CVS management is under pressure to open too
    many stores, is spreading itself thin, and is hesitant to slash prices to compete effectively with
    cheaper drugstores because theyll miss EPS estimates in the short term.Taking CVS private would
    entail that the company undergo a recapitalization to an initially highly-levered capital structure.
    We have identified some pre-deal information and made some transaction and exit year
    assumptions as follows:
    1) What is CVS assumed purchase price (transaction value) in the exit year?
    Answer: $120.0
    Comment: Our assumption of $15b in EBITDA and an exit multiple of 8.0x implies a price of
    $120b at exit.
    2) What is CVS implied equity value at the exit year?
    Answer: 116.0
    Comment: With a debt burden of $4b at exit, equity value at exit is $120b less the outstanding
    debt.
    3) What is the maximum initial equity contribution by the sponsors?
    Answer: 55.9

    Comment: Since sponsors expect $116b in equity at exit, theyd be willing to put in no more than
    $55.9b at the initial deal date given their 20% required annualized return. Formula:
    $116/(1+20%)^4.
    4) What is the maximum initial transaction value?
    Answer: 93.4
    Comment: Lenders are willing to lend no more than $37.5b; sponsors are willing to invest no more
    than $55.9b. As a result, no more than $93.4b is available to pay the pre-deal lenders and
    shareholders.
    5) What is the highest purchase price the sponsors would be willing to pay for each of CVS
    shares today?
    Answer: $55.63
    Comment: Of the $93.4b in funds available to LBO CVS, $10b goes to pay off pre-deal CVS debt,
    while the remaining $83.4 is used to buy the 1.5b CVS shares outstanding. Formula: $83.4/1.5 =
    $55.63/share.
    6) Given CVS market trading level, is an LBO possible under these assumptions?
    Answer: Yes
    Comment: Current CVS shares trade for $30; $55.63 represents a substantial premium.

    Building a Simple LBO Model


    With this primer under your belt, watch the LBO video series at:
    http://www.wallstreetprep.com/blog/financial-modeling-quick-lesson-simple-lbo-model

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