GROUP X
Financing € 27 million MBO Underwriting - Part desired end: € 13.5 million
limininaire As I said that some calculations and charts can for simplicity be put in this article. Many are made using tables of calculations in Excel. On fundamental analysis LBOs, see my article on the subject with the following link: http://analysefinanciere.blogspot.com/2007/02/lbo-quelques-principes-danalyse.html
1 Overview society and demand
The target company, the Group X is prospect of our Company Bank.
The Group was established in 1987 and is specializing in medical diagnostic activities of building and fire safety. It is a major player on the Ile de France.
X comes in 3 main areas:
· Hygiene Building (art history): missions disinfestation, rodent control and disinfection of columns chutes. This activity represents 16% of turnover and EBIT forecast 2003.
· Security Fire (20% of sales, 31% of EBIT): Activity developed by the Group since 1992, including missions to compliance audits of buildings (or missions control), provision of equipment and hardware maintenance.
· Diagnosis Health Real Estate (64% of sales, 53% of EBIT): Diagnostic Health Real Estate is available in four branches: the diagnosis of asbestos, lead the diagnosis, the diagnosis "termites" and Evaluation of occupational hazards. Group X
focused on community housing, managed by directors of property mainly in Paris and Region Parisienne (Paris and Ile de France up 95% of sales).
Since 2001, Company X is seeking to expand into regions, but this deployment is marginal at this stage and is confined to follow a few key accounts in Lyon or Lille.
We have been asked by YY, investor alongside management to arrange senior debt. The valuation of the case is 52.5 M €, EBITDA 8 * 2003.
At the end of the transaction, the holding company that will be created "NEWCO" will be owned 52% by Mr. XX (Group leader since 2000) to 38% by the investor YY and the remainder by other managers .
EMPLOYMENT
Valuation Group Company X: 52.5 M €
Transaction fees (audit, legal): 1.7 M €
Total: 54.2 M €
RESOURCES
Contribution in cash investor YY: 7.7 M € Contribution actions
leaders (DT 10.5 Mr ZZ): € 12.4 million Convertible Bond Issue by
** YY: 7.1 M €
Senior Debt: 27 M €
Total: 54.2 M €
** These obligations are fully convertible subordinated to senior debt, part of the interest is paid (4% / year) interest beyond this threshold are capitalized.
The Senior Debt is comprised of two tranches:
· Band A: 22 M € depreciable basis over 7 years and 6 months.
· Band B: 5 M € in depreciable thin (bullet) to 7 years and 6 months.
Main Terms and conditions offered to the senior debt:
- Delegation of key man insurance on the person of Mr. ZZ
- Pledge of 99% shares of the Target Company X
- Clause holding of the shareholder
- Clause priority allocation of dividends to repay the credit
- Financial covenants on a consolidated basis (see Annex 1 and 2 Term Sheet): §
net financial debt / EBITDA
§ Free Cash Flow / Debt Service
§ Financial Debts / Equity
Our Bank would arranger with a firm grasp of € 27 million. The syndication will turn initially to the banks A and B, historic stream banks of the Group X who have expressed interest in following the Arranger on the transaction. It should also be noted that if successful will YY January 16, and then we will have one month and a half to launch the syndication and we can probably do our share disburse the final day of closing.
2 Financial Analysis and Business Plan
2.1 Activity at 31/12/2002 Group Corp. (consolidated )
In M € -------------- ---12/01-----------12/02
CA --------------------- 17 ------ --------- 17.3
Variat.CA in --------+ 16 %------------+% 2.9% EBITDA --------------
----- --------------- 5.6 5 1
EBITDA / Sales 32.7% --- ------------- 29.2% --------- ---------- Consolidated
RN 2 ,7 --------------- 2, 4
On the last ten years, the Group X an average growth of sales of 20% per year, and net return (NR / CA) of 18.7% on average.
The slower growth in 2002 (+2.9% CA) is linked on the one hand, to a wait of directors of property pending the finalization of draft laws and decrees relating to asbestos and secondly to launch 4 new products that required a lag time before being put into commercial force.
Operating profitability is good (EBITDA / sales from 29.2% in 2002).
financial structure is correct, the FP represent nearly 37% of the total balance.
2.2 Projected (Consolidated Holding Group NEWCO + X - where gradient)
The 2003 results are confirmed by the financial audits required by YY. The year 2003 is considered done (only the first and last year's business plan are represented in this simplified example).
€ m ------------------------------- 2003 2011 *-----------
CA -----------------------------------+ 21.4 ---------- - 26.7
Tx Growth ---------------------+ %-----------+ 20.2 3.5
% EBITDA / sales in% 31.3 ------------------------ %------------- 28,
5% Free Cash Flow (a) ------------------- ---------------- 0.5 +5, 2
Debt Service (b) -------------- ---------- -------- -1 -8.7 **
Cash beginning ------------------ - +0.6 3.5
---------------- Net cash (ab ) ---- - 0.5 -3.5 ------ --------- Cash end
------------------ 0.1 --------- -------- 0 -----+
only * the target company - not NEWCO creates
** repayment of Tranche B - bullet
- Hypothesis of a loss of sales of -3.7% from fiscal 2005, followed by a gradual recovery on years. If Investor (management option) forecasts growth of more sustained activity (+ 19% on average between 2004 and 2006 and then 5% thereafter), which seems consistent with the historical development of the Group and the favorable sector.
- The degradation of the margin to 28.5% (a historically low level) is maintained over the duration of the plan even though the factors pressure on margins are limited: the price is not the main factor of competition with a professional clientele that values equally the reliability and reputation of the provider (the charges billed by the group X is less than 1% of budget of trustees) and that these benefits are most binding.
- Debt service: the distribution of dividends used to repay the loan holding company must not exceed 60% of net income target. In the scenario presented by investors, the debt service is secured with a rise in dividends below the prudential standards (50% from 2004). Assuming degraded (see table above), the pressure on distributable is higher (95% from 2004), including the early years, but still acceptable (s'agisant a gradient case).
Criteria for the LBO transaction:
- RIP (recovery of the target / RN 2003): 12.5. The PER is high. The transaction price based on an evaluation conducted by the firm ZZZ based on market comparables, comparisons with recent transactions, as well as methods of discounting future cash flows. For lenders, the level the price is moderate because the level of equity invested in the operation.
- Company not dependent on one or two clients: sales achieved on many contracts.
- leverage (debt of the holding / equity) = 1. The level of contributions in equity and quasi-equity is reasonable in relation to senior debt.
3 Synthesis
Strengths
Ø Group activity is recurrent through contracts that are multi-annual. Ø Good
Operating profitability and recurrent high.
Ø Involvement of leaders Key in the transaction of acquisition of Group X.
Ø The financial structure of the target is quality. Ø Customer
atomized
Weaknesses
Ø Acquisition cost high.
Opportunities
Ø Market segmentation of X Corporation Dynamic (active fire safety and health diagnostic real estate) and gain (given the increased regulation).
Threats
Ø Performance last year had withdrawn
4 Conclusion The record shows good fundamentals (financial structure, profitability, industry development). Therefore, favorable to arrange the facility of € 27 million total (underwriting 100%), with a final share of 50% with maximum guarantees:
- Delegation of key man insurance on the person of Mr. XX amounting to € 3 million.
- Pledge of 99% shares of the Target Group X.
- Clause holding of the shareholder.
- Clause priority allocation of dividends to repay the credit.
- Financial covenants on a consolidated basis (see Annex 1 and 2 of the Term Sheet):
§ Net financial debt / EBITDA
§ Free Cash Flow / Debt Service
§ Financial Debt / Equity
We propose a coverage rate based on 60% of both bands A and B.
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