LBO Principles

Question 1

Key LBO levers

Answer 1

EBITDA growth
- Growing revenue
- Cutting costs
- Making accretive acquisitions

Raising debt and paydown
- Ensuring CF consistency
- Reducing capex

Multiple expansion
- Building HQ business
- Investing in markets that will improve

Question 2

What is a Leveraged Buyout (LBO)?

Answer 2

Analysis that projects returns of a potential investment (refers to full takeover, but same mechanics for other structures)

1. Makes assumptions regarding valuation, forecasted financials, and deal investment structure
2. Puts leverage on company and pays down debt with CFs
3. IRR/MOIC return calculations (determine proceeds received)

Question 3

Transaction assumptions

Answer 3

Determine equity and enterprise value to determine how much to invest

EV = Equity + Debt - Cash

Question 4

Public company EV build

Answer 4

Common equity value: FDSO * PP per share

FDSO = Basic SO + RSUs + Net Warrants + Net Options

+ Debt (debt, convertible debt, preferred stock, capitalized leases)

• Cash (and cash equivalents)

Question 5

Private company EV build

Answer 5

EBITDA * Multiple (from CIM/financial info)

Question 6

How do you determine premium?

Answer 6

1. Historical trading levels / volume weighted price
2. Trading comps and PTs

General rule: 15-30% premium (depends on market/competitiveness)

Question 7

TSM

Answer 7

Calculate net amount of options to be included in FDSO

1. Company issues options to employees
2. Employees exercise options to receive shares
3. Company uses proceeds from employees to buy back shares

Outstanding * Price = Proceeds
Shares Repurchased = Proceeds / Acquisition Share Price
Net Shares = Shares - Shares Repurchased