FIR: Corporate Finance The LBO of ISS

Case 1

The LBO of:

The case consists of a total of 12 pages including this front page. The questions are on pages 11-12. In
addition, there is a supplementary Excel file with selected Exhibits.

Background information on ISS

The ISS Group was founded in Copenhagen in 1901 and has grown to become one of the world’s leading
Facility Services companies. ISS was originally short for International Service System, but is only used as the
acronym today. 2
In 2012, revenue was DKK 79.5 bln and Operating Profit before other items DKK 4.4 bln. ISS now has more
than 530,000 employees in over 50 countries across Europe, Asia, North America, South America and Pacific.
ISS provides a complete range of facility services as briefly described in the following:
Cleaning services: such as daily office and facility cleaning, dust control, washroom and specialised cleaning
services.
Property services: such as landscaping, damage control, building maintenance and technical services and pest
control services.
Catering services: such as in-house restaurants, hospital canteens, catering services to remote sites, executive
dining, corporate catering and office catering.
Support services: such as call centres, manpower supply, outplacement services, reception and switchboard
services and office logistics.
Security services: such as guarding, access control and patrolling of customer facilities and installation of
alarms and access control systems.
Facility management services: such as on-site management of facility services, change management, space
management and consulting.

1
Although this case study is based on an actual deal, some facts and figures have been changed for teaching purposes.
The case is written by Ken L. Bechmann. Parts of the material on the actual LBO financing have been provided by Robert
Spliid.
2
More information on the quite long history of ISS can be found in Exhibit 1.

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FIR: Corporate Finance The LBO of ISS

The distribution of revenues from these services in 2006 and 2012 is as follows:

Ownership of ISS in early 2005:

ISS had two shareholders holding more than 5% of the company’s total share capital as listed below. At 31
December 2004, approximately 18,000 shareholders representing about 73% of the share capital were
registered in the company’s register of shareholders. Data from the register indicated that Danish investors
held 35% of the shares at the end of 2004 compared with 29% at the end of 2003. Investors in the USA and the
UK held 21% and 10%, respectively, while other European investors outside Denmark held 6%. ISS had no
detailed information on the unregistered holders of the remaining 27% of the share capital but believed that the
majority of these shareholders were based outside Denmark. Through ISS’ employee share programmes in the
period 2001-2004, employees had acquired approximately 3% of the share capital.

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FIR: Corporate Finance The LBO of ISS

Financial information on ISS:

Exhibit 2 provides selected financial information for ISS from the 2004 annual report. This information is
considered to be the most important information in relation to the case questions.

Valuation of ISS, December 31, 2004:

On December 31, 2004 one analyst was working on the valuation of ISS. For this purpose, the analyst came up
with forecasts as stated in Exhibit 3.

Competitors of ISS:
Multiples (from late 2004) for selected competitors of ISS are provided in Exhibit 4.

The LBO deal

Exhibit 5 shows the actual bid for ISS. The bid was in the end (early May 2005) accepted by close to 92% of
the shareholders implying that the remaining shareholders could be forced to accept the offer. ISS was shortly
after delisted from Copenhagen Stock Exchange.

As shown in Exhibit 6, 55% of the equity was invested by EQT (funds EQT III & IV) and 44% by Goldman
Sachs Capital Partners (fund GSCP 2000). The remaining 1% was invested by the management as part of their
incentive program.

Exhibit 7-8 provides further details on the LBO financing including the fact that a total of 7.7 bn. DKK in
equity was invested.

Exhibit 9 provides information on the price reaction on the existing outstanding corporate bonds.

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FIR: Corporate Finance The LBO of ISS

Exhibit 1: Brief history of ISS (from issworld.com)

1901 ISS was founded in Copenhagen, Denmark as a small security company with 20 night watchmen named
Kjøbenhavn-Frederiksberg Nattevagt (Copenhagen-Frederiksberg Night Watch)
1934 ISS entered the cleaning business with the establishment of Det Danske Rengørings Selskab A/S (The Danish
Cleaning Company) as an independent subsidiary of the security company
1946 The first geographical expansion outside Denmark Swedish subsidiary established
1968 The company adopted the ISS name
1973 Overseas expansion started
1975 Group revenue reached DKK 1 billion
1977 ISS shares listed on the Copenhagen Stock Exchange
1989 The total number of employees in the Group reached 100,000
1997 Strategy “aim2002“ was launched. This strategy focused on Multi Services – selling a number of services to
the same customer
1999 ISS acquired Abilis, the second largest European provider of cleaning and specialised services, in a DKK 3.6
billion acquisition, the Group’s largest ever. Abilis had about 50,000 employees and annual revenues of DKK
5.2 billion in 1998. The total number of employees in the Group reached 200,000
2000 A new five-year strategy “create2005“ was launched, introducing the Facility Services concept
2003 ISS’s first major pan-European Integrated Facility Services contract signed
2005 A new strategy was introduced aiming at a continuous transformation of ISS towards an Integrated Facility
Services company. ISS A/S was acquired by funds advised by EQT Partners and Goldman Sachs Capital
Partners, and de-listed from the Copenhagen Stock Exchange. The total number of employees in the Group
reached 300,000
2006 Group revenue passed DKK 50 billion. ISS made the second-largest acquisition in company history, when
acquiring the outstanding 51% of the shares in Tempo Services Ltd. in Australia
2007 Group revenue passed DKK 60 billion. ISS entered the US market through the acquisition of Sanitors Inc. The
total number of employees in the Group reached 400,000
2008 Introduction of ISS’s strategy plan “The ISS Way”, which is built on four strategic cornerstones customer
focus, people management, the IFS strategy and a multi-local approach. ISS’s largest ever international
Integrated Facility Services contract was signed
2010 Group revenue passed DKK 70 billion. The total number of employees in the Group reached 500,000
2012 Ontario Teachers' Pension Plan (Teachers') and KIRKBI Invest A/S make EUR 500 million investment in ISS
2014 ISS made an IPO at the Copenhagen Stock Exchange.

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FIR: Corporate Finance The LBO of ISS

Exhibit 2 (also included in the related spreadsheet).

Financial Review for ISS (page 146-147 from the ISS 2004 annual report)

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FIR: Corporate Finance The LBO of ISS

Ken L. Bechmann, 2023 6/12

FIR: Corporate Finance The LBO of ISS

Exhibit 3 (also included in the related spreadsheet).

One analyst’s forecasts of ISS’ performance (using the analyst’s own valuation template).

Expected Income statement for ISS, year 2005

DKKm 2005e
Revenue 44,391
EBITDA 2,885
EBIT 1,953
Financial income -299
Pre tax income 1,654
Tax -529
Net income 1,125

Forecasts for ISS

DKKm 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Revenue 44,391 45,278 46,184 47,108 48,050 49,011 49,991 50,991 52,011 53,051
EBITDA 2,885 2,943 3,002 3,062 3,123 3,186 3,249 3,314 3,381 3,448
Depreciation & Amortisation 932 951 970 989 1,009 1,029 1,050 1,071 1,092 1,114
EBIT 1,953 1,992 2,032 2,073 2,114 2,156 2,200 2,244 2,288 2,334
Capex 777 792 808 824 841 858 875 892 910 928
Net Working Capital 43 44 45 46 47 48 49 50 51 52 53

Exhibit 4.

Multiples for selected competitors.

Multiples based on 2005e

EV/EBITDA P/E
Lassila & Tikanoja 11.3 17.9
Securitas 9.6 14.9
Group 4 Securicor 7.5 13.2
Prosegur 8.3 14.2
Rentokil Initial 8.3 12.3
Serco Group 10.6 16.4
Sodexho Alliance 7.4 11.8

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FIR: Corporate Finance The LBO of ISS

Exhibit 5.

The following is the front page of the announcement of the bid for ISS.

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FIR: Corporate Finance The LBO of ISS

Exhibit 6.

The corporate structure of ISS after the successful LBO.

Exhibit 7.

The actual debt structure (including interest rates and main providers). SPV: Special Purpose
Vehicle. SG: Speculative Grade (all bond ratings at and below BB+). IG: Investment Grade (all bond
ratings at and above BBB-).

The equity capital injected by the two new owners (PE funds) was 7.7 bn. DKK.

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FIR: Corporate Finance The LBO of ISS

Exhibit 8.

The financing of the LBO.

Exhibit 9: Reaction by the corporate bond market

Se også Opgave 5 i Øvelsessæt 0.

The following is pictures from newspaper articles on the takeover of ISS. The chart is showing the changes in
the price of one of ISS corporate bonds in the period around the announcement of the takeover.

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FIR: Corporate Finance The LBO of ISS

Questions
Assume first that today is December 31, 2004. In addition to the forecasts provided in Exhibit 3, the same
analyst has estimated or assumed the following information for ISS:

Cost of debt: 4.70%

Beta of the ISS stock: 1.15
Market risk premium: 5.00%
Risk free interest rate: 3.90%
Tax rate: 32%

1. Calculate the estimated enterprise value of ISS and the stock price based on a DCF valuation. Assume here
that cash flows will grow by 1.50% per year after 2014 and that the information in Exhibit 2 can be used
regarding Net debt and Net debt/EV.
2. Provide information on the growth of ISS in the period 1995-2004 and explain how this growth has been
financed.
3. Provide a brief discussion of the information provided by EQT and Goldman Sachs in the tender offer
announcement (attached as Exhibit 5), i.e. explain why they are providing this information.
4. What are the possible explanations for the difference between your stock price from question 1, the tender
offer price, and the stock price of DKK 358 for ISS the day before the announcement? Can these stock
prices represent the value of ISS in the eyes of EQT and Goldman Sachs?

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FIR: Corporate Finance The LBO of ISS

It was expected that EQT and Goldman Sachs would follow the normal LBO strategy and increase the
leverage of ISS in case of a successful tender offer. Exhibits 6-8 illustrate what actually happened and how the
deal was structured and financed.

5. Would you say ISS (in early 2005) was a natural candidate for a takeover by a private equity fund and for
such an increase in leverage? Elaborate on your answer.
6. What are the different arguments EQT and Goldman Sachs could have for increasing the leverage of ISS?

Assume the following information is characterizing the capital structure of ISS after the LBO:
Net debt/Enterprise value: 73.4%
Cost of debt: 5.77%*
Beta of debt: 0.3**
Illiquidity premium: 2.00% (added to Cost of equity)
*Cost of debt is estimated based on a weighted average of the interest rates in Exhibit 7 (with a Euribor of
2.10%). If the Cost of debt was estimated based on CAPM and the stated Beta of debt it would have been
slightly lower. Here it is found that the information in Exhibit 7 is probably more accurate.

**This is an estimate based on the information from Forelæsning 4 (Table 12.3 from the book). Note that this,
given the comment in *, is used here to calculate the relevant beta of equity after the change in the capital
structure. Assume that the Beta of debt was 0 before the change in the capital structure.

7. Estimate the WACC after the LBO.

8. What arguments can explain that the optimal capital structure includes more debt when ISS is owned by
EQT and Goldman Sachs compared to when ISS is listed on a stock exchange.

Ken L. Bechmann, 2023 12/12