Buyout fund

Buyout Intro:
1. Mature and traditional industries 2. Single up front investment leading to 100% ownership 3. Management allowed to buy 5-20% at favorable terms 4. High financial risks 5. 2-7 years before returns are realized

Economic rule (BMC- OUC)

Business strategy Mgt motivation Culture Op Efficiencies Utilisation of assets Capital structure

Buyout role to Economy (REOF)

Facilities pvt market for Restructuring Improves Efficiency of listed market Optimises global capital allocation through creative destruction Possibly the only Financial source to save Failing companies

Typical Target Co (CF, SDAT)

1. Adequate and reliable cash flow 2. Opportunities to improve through:
a. b. c. d. e. f. Strategic repositioning Improved product offering Better operational efficiency Loosening of corporate constraints Redeployable, non-core assets availability Poorly incentivised management

3. Distressed/undervalued co 4. Significant asset to collateralise loan 5. Non-cyclical industries without rapidly changing tech

Why misplace in buyout (FE, CCfE)

Heavy use of financial engineering Covenant lite term Overly comfortable on cash flow financing and reduce the importance on asset collateralisation Buyers taking position in co without necessary expertise

Buyout Skill Set (SOAP DNS)

Strategic and Operational Expertise Savvy buyer at Auction Project Management Skills Love for Deal Making and Negotiation Stamina to manage stress

Due di on target (UOR PAP)

Identifying real Underlying perf Assessing growth and profit improvement Opp Isolating key Risks Understanding business Plan Assumptions Develop 100 day and full plan to capture opportunities

Add Value by: (CV UMBO)

Cash focused Shareholder value oriented plan Sense of urgency Better management team Reconstitute board with experience Ownership culture

Valuing PE
Industry comparables Target of return approach

APV
Discount Rate: Risk Free + Asset Beta (E Risk P) Asset Beta: equity beta * % cap in equity

APV Structure
2001E Income Statement Net Sales EBITDA EBIT Interest Expense @ Pre-Tax Income Taxes @ After-Tax Income 537.3 2002P 618.8 88.7 67.6 30.5 37.1 14.8 22.3 2003P 711.6 109.1 87.3 29.6 57.7 23.1 34.6 2004P 817.3 134.2 109.8 27.8 82.0 32.8 49.2 2005P 938.8 161.6 133.5 24.6 108.9 43.6 65.3 2006P 985.7 169.7 140.2 19.9 120.3 48.1 72.2 9.6% 40%

BALANCE SHEET ITEMS Net Working Capital @ 18% of Sales Cash Flow After-Tax Income Plus: Depreciation & Amortisation Less: Working Capital Requirements Less: Capital Expenditure After Tax Cash Flow DEBT BALANCES Beginning Debt (Staple Financing) Debt Repayment Ending Debt

96.7

111.4

128.1

147.1

169.0

177.4

22.3 21.1 -14.7 -19.5 9.2

34.6 21.8 -16.7 -21.0 18.7

49.2 24.4 -19.0 -21.5 33.1

65.3 28.1 -21.9 -22.5 49.1

72.2 29.5 -8.4 -22.5 70.7

317.5 9.2 308.3

308.3 18.7 289.6

289.6 33.1 256.5

256.5 49.1 207.5

207.5 70.7 136.7

Int Exp: 9.6% * debt Capex: given

Asset Beta
Risk Free Rate (10 Year Treasury Bond) Average Asset Beta of comparable companies Equity Market Premium Equity Discount Rate = 5.2%+(1.0 x 7.7%) = 5.2% 1.0 7.7% 12.9%

Selected Data From Exhibit 8 5-Year Avergae Equity Beta Leverage 1.0 1.1 1.3 1.2 8.4% 17.1% 18.1% 4.4%

Company Nike Jones Apparel Group Tommy Hilfiger Liz Claiborne

Calculations 5-Year Avergae Equity Per Cent Asset Beta 91.6% 82.9% 81.9% 95.6% 0.9 0.9 1.1 1.1 1.0

Average Asset Beta

APV
CALCULATE EQUITY CASH FLOWS EBITDA Less Depreciation & Amortisation EBIT Less Taxes @ 40% After-Tax Income With Equity Financing Plus Depreciation & Amortisation Less: Working Capital Requirements Less: Capital Expenditure Cash Flow With Equity Financing 2002P 88.7 21.1 67.6 27.0 40.6 21.1 -14.7 -19.5 27.5 2003P 109.1 21.8 87.3 34.9 52.4 21.8 -16.7 -21.0 36.5 2004P 134.2 24.4 109.8 43.9 65.9 24.4 -19.0 -21.5 49.8 2005P 161.6 28.1 133.5 53.4 80.1 28.1 -21.9 -22.5 63.8 2006P 169.7 29.5 140.2 56.1 84.1 29.5 -8.4 -22.5 82.7

Equity Discount Rate = 5.2%+(1.0 x 7.7%) =

12.9%

Calculate Present Value of Annual Equity Cash flows Equity Discount Factor PV of Year 1-5 Equity Cash Flow 171.9

0.886 24.3

0.785 28.6

0.695 34.6

0.615 39.3

0.545 45.1

2002P
Cash Flow With Equity Financing 27.5

2003P
36.5

2004P
49.8

2005P
63.8

2006P
82.7

Growth Rate In Perpetuity 4.0% Terminal Value = 82.7m x 1.04%/(12.9%-4%) = PV of Terminal Value 526.6

965.9

SUM PRESENT VALUES TO OBTAIN ENTERPRISE VALUE PV of Year 1-5 Equity Cash Flow 171.9 PV of Terminal Value 526.6 PV of Interest Tax Shield 41.3 Enterprise Value 739.8 Less Initial Staple-On Financing -317.5 Equity Value 422.3