Advanced LBO Modelling - A Practical Workshop

Course Overview:

This course covers the key elements of modelling in an LBO analysis. Participants will value the target business using historic data and available equity research. The valuation process will incorporate absolute and relative valuation techniques. Once the target business has been valued, participants will be introduced to LBO analysis and construct an LBO model.

The LBO modelling analysis will be developed by assessing the debt capacity of the business to determine the range of capital structures available for the transaction and how credit analysis is used in the LBO modelling process.

The participants will then cover more complex LBO instruments such as warrants and PIKs and how to calculate returns to each of the equity and debt providers.

Participants will model a more complex capital structure and calculate exit values and the IRRs generated by each investor. Using the integrated model participants will then analyse various scenarios (management case, base case, payout case) to derive the optimum financing structure taking into account the financial constraints of each investor.

The participants will undertake an adjusted present value (“APV”) analysis to determine where value has been created in the LBO transaction, using an APV model and finally look at recovery analysis for a failed LBO transaction.

Case Study: The participants will use a variety of case studies and exercises during the two days, based on publicly quoted and generic businesses.

Participants will be required to bring a laptop and a calculator to the course.

Course Content:

Leverage Overview

• Background to the LBO market
  • Why do LBOs happen?
  • The agency effect
  • Main parties to a deal and their roles
• Basic theory – The effect of leverage on firm value
  • Levered vs unlevered businesses
  • The value of the tax shield
  • Bringing in bankruptcy costs

The LBO process

• Stand-alone value of the target – what price to pay?
• Modeling an LBO deal – does the deal meet our returns?
• Further analysis – assessing the debt capacity
• Determining the capital structure
• Assessing the value creation

Valuing the target

• Sourcing information – Historic and forecast date
• Analysing equity research
  • Key attributes of broker analysis
  • Pluses and minuses of equity research
• Building a DCF valuation using equity research
  • Which elements of research to use
  • Cross checking the research
  • Identifying errors in assumptions
• Modelling the stand alone valuation
  • Which WACC to use
  • Underlying assumptions in a DCF
  • Different approaches to terminal value
  • The value driver approach – producing a more realistic terminal value
• Comparing and contrasting DCF and LBO model structure

Case Study I: Participants model the stand alone valuation of the target using historic data and equity research

LBO Modelling Overview

• Key elements of an LBO model
  • Comparing and contrasting DCF and LBO models
  • Sources and uses of funds
  • Key drivers in an LBO model
• From stand alone valuation to LBO analysis
• The debt waterfall and initial capital structure
• Assessing the IRR and initial optimisation of the capital structure

Case Study II: Participants use the stand alone valuation of the target to complete and LBO model

Assessing debt capacity for LBO financing

• Financial interdependencies
• Financing growth
• Sustainable debt
• Target debt capacity assumed in a WACC calculation, debt capacity and interest cover
• Debt capacity in LBOs
• Debt capacity multiples in practice and credit analysis
  • The rating agency ratios
  • Additional constraints in practice
  • “Max out” calculation – optimising the structure with further constraints

Case Study III: Modelling the debt capacity of the target using multiple and credit analysis

Capital providers and their typical characteristics

• Background to the capital markets and key providers of finance
• Current market conditions and ability to finance
  • The high yield market
  • Mezzanine finance
  • Deal multiples and exit conditions
• Institutional and management equity
• Traditional/new lenders
• Senior tranche profiles
  • A, B, C, RCF
• Subordinated tranche profiles
  • Second lien
  • Mezzanine (with/without warrants)
  • PIK
  • High yield bonds
• More complex issues – warrants and options

Case Study IV: Modelling a more complex capital structure with various scenarios calculating exit value and IRR for each of the capital providers

Assessing value creation in LBO transactions – APV analysis

• Key components of an APV valuation
  • Unlevered value
  • Value of the tax shield
  • Direct and indirect cost of leverage
• APV valuation and DCF valuation
• APV valuation in a steady state
• Calculating AP in a steady growth environment
• Incorporating APV analysis in an LBO transaction analysis

Case Study V: Where has value been created, modelling APV analysis for an LBO transaction

What our clients are saying about the course

“A practical course with lots of practice of real modelling”

“A good combination between theory & practice by an experienced trainer”

“I learnt a number of new methods & approaches to modelling”