M&A and LBO Modeling and Analysis (1 Day)

Day 5. AM - Introduction to Levered Valuation

Participants are introduced to the basic concepts underlying leveraged buy-outs. The session starts by establishing why private equity firms can create value through leveraged buyouts and how the levered valuation fits into the valuation roadmap. Using a simple free cash flow forecast, participants establish how much a financial buyer could pay for the target company. Participants then build a simple LBO model.

Key Topics:

• What an LBO is and how it can create value
• LBO valuation as an alternative valuation methodology
• Characteristics of suitable LBO candidates
• Estimating cash flows available to capital holders
• Estimating debt capacity
• Simplified debt/equity split for entry capital structure
• Sources and uses of funds
• Estimating the debt capacity
• Estimating the exit value
• Calculating the IRR
• Sensitizing the model

Day 5. PM - M&A Analysis

The session illustrates the key issues around the financial analysis of an M&A transaction. After setting the big picture, a simple M&A model is built, focusing on earnings accretion/dilution and relative P/E analysis. The example is then expanded to incorporate a pro-forma balance sheet, to calculate credit ratios, ownership dilution, a contribution analysis and an analysis at various prices. Finally, the outputs of the model are used to identify a suitable financing mix and a maximum offer price.

Key topics:

• The relevance of M&A analysis
• Quick-and-dirty analysis versus full-blown analysis
• Preparing key acquisition data
• Building a flexible funding structure
• Earnings accretion/dilution analysis
• Using relative P/Es
  • Acquirer P/E versus offer P/E
  • Debt P/E
• Synergies-to-break-even analysis
• Sensitivity analysis
• Calculating and understanding contribution analysis
• Using an analysis-at-various-prices table
• The strategic implication of different financing alternatives
• Identifying the maximum offer price

Homework: Complete additional accretion/dilution model