FINA4514 EXAM 2 | CH.5
Answer LBO ANALYSIS
1. LBO Analysis Overview
Answer - Core analytical tool used to assess financing structure, investment returns, and valuation in LBO
scenarios
- Same techniques to assess refinancing opportunities and restructuring alternatives for corporate issuers
- Requires specialized knowledge of financing modeling, leveraged DCM, M&A, and accounting,
LBO model constructed with the flexibility to analyze a given target's performance under multiple financing structures
and operating scenarios
2. Financing Structure Overview (4 bullets)Answer - Debt financing side | Banker uses LBO
analysis to help craft a viable financing structure for the target, which encompasses the amount and type of debt,
as well as an equity contribution from a financial sponsor
- The analysis of an LBO financing structure is typically spearheaded by an investment bank's leveraged finance and
capital market teams
- Once PE buyer chooses preferred financing structure the deal team presents it to the bank's internal credit commit-
,tee(s) for approval
- Following committee approval, the IBs typically provide a financing commitment which is then submitted to the seller
and its advisor(s) as part of its final bid package
3. Valuation Overview (5 bullets)
Answer - LBO analysis is used by sponsors, bankers, and other finance professionals to determine an
implied valuation range for a given target in a potential LBO sale based on achieving acceptable returns
- Valuation output is premised on key variables such as financial projections, purchase price, financing structure, exit
multiple, and year
- In an M&A sell-side advisory context, the banker conducts LBO analysis to assess valuation from the perspective of a
financial sponsor
- Similarly, on buy-side engagements, the banker typically performs LBO analysis to help determine a purchase price
range
- For a strategic buyer, this analysis is used to frame valuation and bidding strategy by analyzing the price that a
competing sponsor bidder might be willing to pay for the target
4. 5 Steps to LBO Analysis
, Answer I. Locate and analyze the necessary info
II. Build the Pre-LBO model
III. Input transaction structure
IV. Complete the Post-LBO model
V. Perform LBO analysis
, 5. Locate the Necessary Info (5 bullets)
Answer - When performing LBO analysis, the first step is to collect, organize, and analyze all available info
on the target, its sector, and the specifics of the transaction
- In an organized sale process, the sell-side advisor provides such detail to prospective buyers, including financial
projections that usually form the basis for the initial LBO model
- This info is typically contained in a confidential info memorandum (CIM) with additional info provided via a
management presentation and data room
- In the absence of a CIM or supplemental company info i.e. the target is not being actively sold, the banker must rely
on public sources to perform preliminary due diligence and develop an initial set of financial projections
- Regardless of whether there is a formal sale process, it is important for the banker to independently verify as much
info as possible about the target and its sector
6. 3 Steps to Build the Pre-LBO Model (II)
Answer A. Build historical and projected income statement through EBIT
B. Input opening balance sheet and project balance sheet items
C. Build cash flow statement through investing activities
Answer LBO ANALYSIS
1. LBO Analysis Overview
Answer - Core analytical tool used to assess financing structure, investment returns, and valuation in LBO
scenarios
- Same techniques to assess refinancing opportunities and restructuring alternatives for corporate issuers
- Requires specialized knowledge of financing modeling, leveraged DCM, M&A, and accounting,
LBO model constructed with the flexibility to analyze a given target's performance under multiple financing structures
and operating scenarios
2. Financing Structure Overview (4 bullets)Answer - Debt financing side | Banker uses LBO
analysis to help craft a viable financing structure for the target, which encompasses the amount and type of debt,
as well as an equity contribution from a financial sponsor
- The analysis of an LBO financing structure is typically spearheaded by an investment bank's leveraged finance and
capital market teams
- Once PE buyer chooses preferred financing structure the deal team presents it to the bank's internal credit commit-
,tee(s) for approval
- Following committee approval, the IBs typically provide a financing commitment which is then submitted to the seller
and its advisor(s) as part of its final bid package
3. Valuation Overview (5 bullets)
Answer - LBO analysis is used by sponsors, bankers, and other finance professionals to determine an
implied valuation range for a given target in a potential LBO sale based on achieving acceptable returns
- Valuation output is premised on key variables such as financial projections, purchase price, financing structure, exit
multiple, and year
- In an M&A sell-side advisory context, the banker conducts LBO analysis to assess valuation from the perspective of a
financial sponsor
- Similarly, on buy-side engagements, the banker typically performs LBO analysis to help determine a purchase price
range
- For a strategic buyer, this analysis is used to frame valuation and bidding strategy by analyzing the price that a
competing sponsor bidder might be willing to pay for the target
4. 5 Steps to LBO Analysis
, Answer I. Locate and analyze the necessary info
II. Build the Pre-LBO model
III. Input transaction structure
IV. Complete the Post-LBO model
V. Perform LBO analysis
, 5. Locate the Necessary Info (5 bullets)
Answer - When performing LBO analysis, the first step is to collect, organize, and analyze all available info
on the target, its sector, and the specifics of the transaction
- In an organized sale process, the sell-side advisor provides such detail to prospective buyers, including financial
projections that usually form the basis for the initial LBO model
- This info is typically contained in a confidential info memorandum (CIM) with additional info provided via a
management presentation and data room
- In the absence of a CIM or supplemental company info i.e. the target is not being actively sold, the banker must rely
on public sources to perform preliminary due diligence and develop an initial set of financial projections
- Regardless of whether there is a formal sale process, it is important for the banker to independently verify as much
info as possible about the target and its sector
6. 3 Steps to Build the Pre-LBO Model (II)
Answer A. Build historical and projected income statement through EBIT
B. Input opening balance sheet and project balance sheet items
C. Build cash flow statement through investing activities
