We can consider LBO transaction, any funding in place on a holding company (created ex nihilo) to acquire securities of a company and whose reimbursement comes almost entirely from dividends received from subsidiary acquired (the target).
the side of a bank which is involved in the financing of the holding, the analysis LBO assembly must meet before any thing to the question:
The target can t it throughout the life of the loan (an average of 7 years, which is long enough for a risky operation in principle) be able to generate sufficient financial resources to repay the debt service?
A number of indicator ratios, "analyst reflexes" should enable us to answer this difficult question. Obviously, the analysis must be based on the LBO all of these elements and is not interpretable by taking each individual indicator.
Some criteria for a successful LBO
1 / At the target
1.1 Its positioning
- What is its market position? Is it leadership or at least it is a major player?
- Sensitivity of the target sector to the economy: it is the target in an area where there are risks of technological change, change of raw materials (metals prices rising in recent years) or even currency risk (share of export turnover).
- Where is the competition of the target? Target Has a competitive advantage sustainable?
- Target is it dependent on a client or a supplier (we reach here the issue of raw material).
-> Remember: the target does she occupies a position on the perennial market without excessive dependence?
1.2 Its production tool
What is the condition of equipment, fixed assets of the company?
Ideally, the needs of planned investments should be limited. On some operations LBO, it may be provided a funding package to the target destination. Obviously, expenditure incurred will impact the net profitability of our target and therefore its ability to repay the debt of our holding.
-> Remember: the target there a tool in working with special needs controlled.
1.3 The Management
A management company involved in the show interested in assembling LBO (we're talking about at the time of an MBO = management buy-out) is a key success factor.
-> Remember: Where does the management, they have been a liability (directors of companies that went bankrupt)? What risk does it compare to the changes that may involve the LBO ?
1.4 The intrinsic quality of the target
- Some financial indicators to watch:
- correct capitalization (Equity / Total Assets) Net debt
- moderate (Gearing calculation of net financial debt / FP ideally <1) BFR
- limited: to see the weight of stocks and receivables. A BFR involves heavy use of short-term financing and therefore a significant financial burden that greatly hinder the profitability of operations. The company said it some leeway in terms Mobilization of the debt (discounting, securitization, factor ...)?
- Profitability (EBITDA / sales) and net return (NR / CA) sufficient and regular. In some cases studied, "weird" the last known returns were well above the historical cost (beware!).
-> Remember: The acquired company is it a healthy and prosperous? The target has non-core assets it feasible?
2 / At the assembly
- The purchase price of the target is it consistent with its ability to generate results. The calculation of a PER (price earniong ratio) allows for a first opinion on this issue. Calculation: Valuing the target / RN means. Ideally, it is preferable that the average RN is calculated on the basis of at least three years (see paragraph above on operating profitability). PER is the norm of between 5 and 8.
- Effects leverage (debt of the holding / equity). The level of contributions in equity and quasi-equity must be reasonable in relation to senior debt.
- The need to lift dividend Holdings shall not exceed 70% of net income. It must indeed remain a net margin sufficient to target to meet its own needs (investments, unanticipated ,...).
- coverage rate senior debt. Most LBOs are fixtures on the basis of senior debt with a variable interest rate. To avoid holding all the additional financial burden to a rate hike could jeopardize repayment of the debt, it is imperative to cover it (via an interest rate swap) to at least 50%.
- A maximum of 8 years of senior debt.
- The level of safeguards put in place :
* A pledge of 100% shares of the target leading
* The delegation guarantee active / passive
* If necessary (particularly in the case of MBO), delegation insurance man Key
* Ownership Clause (= maintain ownership)
* Limiting the distribution of dividends to shareholders of the holding company (clause excess cash flow)
* Limit any additional indebtedness of the holding and Target (clause concerning investment limits and debt).
* Negative Pledge: clause that prohibits the borrower to sell or pledge assets without prior approval of the banks participating in the LBO
* Negative Pledge: equal treatment of creditors
* Ratios to meet (= covenants): there are no clear rules on the ratios used in this type operations. The most commonly used are:
§ Net financial debt / EBITDA
§ Free Cash Flow / Debt Service
§ Financial Debt / Equity
-> Remember: the valuation of target is consistent? The assembly is it really secure?
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