Giddy | Leveraged Buyouts

The Amsterdam Institute of Finance

www.aif.nl

Leveraged Buyouts

Prof. Ian Giddy, New York University

What are Leveraged Buyouts?
LBOs are takeovers of companies using borrowed funds and private equity. Typically, the target company's assets and cash flow serve as support for the funding taken out by the acquirer, which repays the debt out of cash flow and asset disposals of the acquired company.

About the Course
This 3-day intensive course aims to improve participants' understanding of leveraged and management buyouts. The course covers the specific challenges in going-private and private-to-private transactions, including the use of leveraged finance for LBOs and other purposes, and the various techniques of leveraged buyout financing. These include senior bridge and term loans, subordinated and mezzanine debt instruments, and private equity.

Pre-Course Reading

Course Outline

Topics	Resources
Day 1 Leveraged Buyouts: The Basic Economics The LBO Market What Makes a Business Suitable for a Buyout? Valuation for Acquisitions Techniques of corporate valuation Valuing the assets Using comparable company valuation methods Valuing the cash flows Valuation for LBOs The keys to LBO value: valuation of the company, valuation of the LBO gains, assessment of debt capacity and the special situation of LBO valuation (financing-driven valuation) Valuing the LBO incentives and gains Adding value -- post-LBO restructuring Modelling the Deal Debt capacity analysis and computations for leveraged finance The 12-step method Focus: synthetic ratings and debt pricing Modelling the LBO cash flows Focus: exit strategies When things go wrong Group Assignment: Developing an LBO Cash Flow Analysis	Presentations lbo-valuation.pdf lbo-analysis.pdf Case studies The LBO of AGI Madras Appliances Nukem Security Reykjavik Fleet Leasing LBO of ISS iss_financials Articles Corporate Valuation Techniques Debt-to-EBITDA How to do an LBO in 1 page What is Private Equity? How LBO Funds Work Spreadsheets corpvaluation.xls active_generation_lbo.xls lbocapacity2.xls lbo_exit.xls
Day 2 Leveraged Buyout Financing Instruments Parties to a typical deal: seller, management, private equity house, bankers, mezzanine investors The multi-tier financing structure Senior Loans in Leveraged Finance Senior-sub structure in leveraged finance Secured debt: what collateral? what pricing? what amortization? A/B/C loans Sale-and-leaseback financing Mezzanine Financing Instruments What is the role of mezzanine? Second lien notes Pay-in-Kind notes Mezzanine notes: warrants, and other variations Vendor finance and earnouts Participation mezzanine: payouts linked to EBITDA or performance LBO Cash Flow Analysis Group Assignment: debt capacity and mezzanine analysis for ISS Cash flow analysis: LBO entry and exit valuation Cash flow analysis: key corporate numbers Cash flow analysis: key predictions Cash flow analysis: financing assumptions High Yield Bond Funding for LBOs Role of high yield bonds Pricing and volatility Terms and conditions Hybrid capital funding for acquisitions	Presentations lbo-instruments.pdf lbo-cashflow.pdf lbo-highyield.pdf Case studies Le Meridien Hotels Cusa Busways Second lien facility Sealy PIK Holdco PIKs Woodstream Woodstream term sheet Cognis Refinancing Suriname Hydro Jordan Cement Hertz High Yield Bonds Articles Second Lien Loans Second lien term sheet Mezzanine Finance 1 Mezzanine Finance 2 Subordinated notes term sheet Spreadsheets woodstream.xls suriname.xls LBO_Model.xls
Day 3 Refinancing, Recapitalization and Exit Pricing the leveraged cost of capital Debt repayment Debt paydown through registered placements and disposals Post-acquisition refinancing Leveraged recapitalizations and partial exit Illustration of use of recaps and "stapled finance" in buyouts Exit strategies and "Plan B" Preparation, Screening, Due Diligence and Documentation The acquisition strategy Role of seller's and buyer's advisors Pre-offer preparation Due diligence checklist Key documentation sequence When diligence goes wrong Legal structure of the deal Applied Buyout Structuring The sequence and the players Private Equity The players and their requirements The equity instruments Suitability of the target Costing out a deal Structuring the senior financing Selling down the loans: syndication and CDOs Role of mezzanine investors Structuring the relationship between the partners Setting up the legal structure Closing and refinancing Post-LBO deal management When things fall apart Group work on valuation and structuring of a leveraged buyout Summary and conclusions	Presentations lbo-refinancing.pdf lbo-diligence.pdf lbo-structuring.pdf Case studies Ahlsell's Recap New York Magazine Marsh Diagnostics Term Sheet Kaydon Bostonian Capital Profile of KKR Marsh Diagnostics Term Sheet KKR Financial CLO IHG Mezzanine Partners RFL Malaysia Regal Cinemas Articles LBO Performance LBO Legal Checklist Spreadsheets ratings.xls beta_and_leverage.xls lanxess.xls optimal_wacc.xls lbo_deleverage.xls

Additional Resources
Articles and Books
Notes on cost of capital and capital structure
Second Lien Loans
Mezzanine Finance 1
Mezzanine Finance 2
Subordinated notes term sheet

Useful Links
fitchratings.com (bond ratings)
bondsonline.com (corporate bond spreads)
damodaran.com (industry ratios)
advfn.com (corporate financial ratios)
Corporate Finance and Debt Capacity Tables
agi_lbo_solution.xls
iss_solution.xls
financing_suriname_solution.xls
jordan_lbo_model_soln.xls
foodtree_solution.xls

About the Instructor
Dr. Ian Giddy, born in South Africa, has taught finance at NYU, Columbia, Wharton, Chicago and in over 40 countries worldwide for the past three decades. He was Director of International Fixed Income Research at Drexel Burnham Lambert from 1986 to 1989. The author of more than fifty articles on international finance, he has served at the International Monetary Fund and the U.S. Treasury and has been a consultant with numerous corporations and financial institutions in North and South America, Europe, Asia, the Middle East and Africa. As a banker and consultant he has been involved in the growth of the structured finance market in the USA, Europe and Asia. He is the author or co-author of The International Money Market, The Handbook of International Finance, Cases in International Finance, Global Financial Markets, Asset Securitization in Asia and The Hudson River Watertrail Guide. He and his wife are the founders of Cloudbridge, a nature reserve in Costa Rica.