A LEVERAGED BUYOUT

STORY
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LEVERAGED BUYOUTS:
INTRODUCTION
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Tabletops Global is a distributor of bespoke dining furniture and was
established over 20 years ago. The current CEO, Jeremy Firth joined
Tabletops three years ago and implemented a number of strategic
turnaround initiatives, lowering transportation costs, increasing cash
flow conversion and expanding the product range. Despite these
successes, the company still traded at a substantial discount to its
peers in the specialty retail sector. Investors did not value the stable
lower growth cash flow profile of the business.
Firth believed the company, valued at 200 million was materially
undervalued by investors. With the company out of favour with
investors, the management team still believed strongly in the
companys prospects and pursued a buyout of the owner's equity
stake and control of the company.
Management examined the potential for funding the acquisition
mostly with debt. Tabletops was an ideal candidate for this type of
transaction as it had stable operating margins, minimal working
capital needs and had disciplined management to ensure interest
payments on the debt would be met. Management invested 40%
equity and took a bank loan to fund the remaining 120m.
Management had a five-year time horizon before they looked to sell
the company on the stock market or to a competitor.
As such, Firth developed a leveraged buyout (LBO) analysis for
Tabletops to determine what management could afford to pay for the
company in order to earn a sufficient return on its equity investment.
Why Tabletops Global was an
ideal LBO Candidate
Undervalued
Strong
Management
Stable
Cash Flows
Low Capex &
Working Capital
Viable
Exit Strategy
LEVERAGED BUYOUTS:
OPERATING ASSUMPTIONS
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To start, Firth developed a number of operating assumptions
(listed to the left) for Tabletops over the 5 year investment
period to project the cash flows available to repay the bank
loan.
Tabletops expected to hit 100 million in revenues in its first
year after the buyout. Revenues were forecast to grow by 10%
each year. Thanks to the CEOs initiatives over the last few
years, Tabletops EBITDA margin had steadily increased to 40%
and this was expected to remain flat over the next five years.
The interest rate negotiated on the loan was 5.0% and all the
debt would be paid down at the point of sale in Year 5.
Spending on property and equipment (capital expenditures)
was forecast at 10% of sales. Operating working capital was
forecast to increase by 3 million annually. Depreciation on
property and equipment was expected to account for 20
million annually. Tabletops would pay corporate tax rate at 30%.
Management planned to exit the business after 5 years at the
same EBITDA valuation multiple used at entry (200m
Valuation / 40m EBITDA) = 5.0x EBITDA.
Tabletops - Operating Assumptions
Sales - Year 1 100.0
Projected Annual Revenue Growth (%) 5%
EBITDA Margin (%) 40%
Annual Operating Working Capital (m) 3.0
Depreciation (m) 20.0
Tax Rate (%) 30%
EBITDA Entry Multiple (x) 5.0x
Capital Expenditure / Sales (%) 10%
Interest Rate on Debt (%) 5%
LEVERAGED BUYOUTS:
CASH FLOWS
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To forecast the cash flows available to repay the lenders on
exit, Firth projected the income statement for the next 5
years. Using the above assumptions for EBITDA margin
(40%), depreciation & amortisation of 20m annually,
interest payments on debt (140m x 5% = 7m) and
corporate tax rate of 30%, he calculated the companys
forecast net profits over the period.
Firth then deducted the cash outflows from capital
expenditures and increases in working capital (needed to
operate the business). He added back depreciation and
amortisation to reflect the fact that these were non-cash
deductions that were made from net profit. From this he
arrived at the free cash flows available for debt repayment.
The projections showed the company generated a sum
total of 90m (11.2+12.1+13.0+14.0+15.1) in free cash flows
over the period to pay down the 140m loan for the
acquisition.

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
Sales 100.0 105.0 110.3 115.8 121.6 127.6
EBITDA 40.0 42.0 44.1 46.3 48.6 51.1
Depreciation & Amortisation 20.0 20.0 20.0 20.0 20.0 20.0
Operating Profit 20.0 22.0 24.1 26.3 28.6 31.1
Net Interest 14.0 14.0 14.0 14.0 14.0 14.0
Profit Before Tax 6.0 8.0 10.1 12.3 14.6 17.1
Tax (1.8) (2.4) (3.0) (3.7) (4.4) (5.1)
Net Profit 4.2 5.6 7.1 8.6 10.2 11.9
Year 1 Year 2 Year 3 Year 4 Year 5
Net Profit 4.2 5.6 7.1 8.6 10.2
Capex (10.0) (10.5) (11.0) (11.6) (12.2)
Depreciation & Amortisation 20.0 20.0 20.0 20.0 20.0
Operating Working Capital (3.0) (3.0) (3.0) (3.0) (3.0)
Free Cash Flow 11.2 12.1 13.0 14.0 15.1
Tabletops Earnings Projections
Tabletops Levered Free Cash Flows
LEVERAGED BUYOUTS:
THE EXIT STRATEGY
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Tabletops Exit Valuation & Returns
Assuming the companys valuation in five years time was based
on the same 5.0x entry EBITDA multiple as exit, as this is a
forward looking multiple (based on next years financials), Firth
used Year 6 EBITDA of 51.05m x 5.0x to yield an enterprise
value of 255m.
With the remaining debt left in the business after paying down
the 140m loan with 90m free cash flows, the company had
50m net debt. Deducting the remaining debt from enterprise
value implied a 205m (255 -50m) equity valuation.
From managements initial 80m equity investment, the annual
rate of return (IRR) the investors achieved over the 5 years was:
IRR: (205m / 80m)^
(1/5)
-1 = 27.9%
Money Multiple: (205m / 80m) = 3.4x
Year 6 EBITDA (m) 51.05
Exit Multiple 5.0x
Enterprise Value (m) 255
Less Net Debt (m) 50
Equity Value (m) 205
IRR (%) 27.9%
Money Multiple (x) 3.4x