SILVER LAKE PRIVATE EQUITY CASE COMPETITION
Executive Summary
Trinity Industries (NYSE: TRN)
Brief Overview
We've chosen to analyze Trinity Industries, Inc., whose four major business segments include railcar manufacturing
and leasing, inland barges, construction, and energy equipment. Trinity operates domestically and internationally, with
most of its foreign operations located in Mexico. Railcar manufacturing and leasing is Trinity's largest business
segment, contributing 70% of revenue at year-end 2014.
For the past five years, the Railcar Manufacturing and Leasing industries have seen positive growth; this growth has
been supported by the federal "Buy America" provisions which mandates that a majority of government contracts for
railway related projects are given to domestic companies, protecting Trinity Industries from foreign competition. The
Railcar Manufacturing and Leasing industries came to a halt during the recession of 2009 due to two key drivers of
industry demand, industrial production and coal mining, plummeting during this period; however, by 2011 the industry
began to recover as supported by an increase in total trade value, demand from rail transportation, and industrial
production index. The Railcar Manufacturing and Leasing industries are dominated by a small number of big players,
with Trinity Industries holding the single largest market share of 28.8% in the Railcar Manufacturing industry and
holding 14.2% market share in the Railcar Leasing industry.
Investment Thesis
Our success will be driven by three factors. First, Trinity’s current management is engaging in empire building
activities and as the new owner we will spinoff non-core businesses and stop making negative NPV investments.
Second, the railcar industry is in the final stages of a regulatory overhaul which will create an unprecedented demand
boom. Third, the dramatic drop in the price of steel will reduce costs across all of Trinity’s business segments.
Trinity has a hodge-podge of unrelated businesses that it has accumulated over decades, but the railcar manufacturing
and leasing businesses account for over 70% of the conglomerate's total revenue and 80% of the profits. We believe
the current CEO, Timothy Wallace, son of Trinity's founder Ray Wallace, is engaging in empire building through
uncorrelated, non-synergistic acquisitions.
Following numerous accidents in crude-by-rail shipping, both the U.S. Department of Transportation and Transport
Canada are in the final stages of overhauling tank car specifications and phase-out timelines. This will lead to a huge
boom in railcar manufacturing as the entire fleet of tank cars will need to be replaced by approximately 2025.
Additionally, Trinity will benefit from the 20% reduction in steel prices this year due to the strengthening dollar which
is the primary input in all of their businesses. Overall, our model predicts investment returns in excess of 25% IRR.
Proposed Capital Structure and Summary Financials
The initial proposed capital structure is based on comparable transactions and historical LBO capital structure averages.
Blackstone's recent buyout of Gates Corporation was the most similar transaction that we focused on to come up with
the capital structure. The average debt to EBITDA multiple for recent LBO transactions is 5.5x, and given that Gates
had 7.0x, we decided on a 6.0x multiple resulting in 74% debt in the capital structure and 26% equity. 3% of the equity
will come from management share rollover of $80.27MM, and the rest will come from the sponsor. This results in a
74% debt, 24% equity capital structure which will consist of a revolving credit line, bank term loans, and bridge loans.
The revolver would be 10% of the debt with a 2.5% rate on the revolver drawn and 0.5% fee on the total amount. 60%
of the debt will be bank term loans A and B (40% & 20%), which will be at a rate of 4% & 5.25% rate and will mature
in 5 & 8 years respectively based on the fact that Gates had a 4.25% interest rate on their term loan A and had higher
leverage than Trinity. Finally, 30% of the debt will be an 8% unsecured bridge loan with an increase of 50bps
semiannually. The bridge loan will be paid off by divestitures; if the proceeds from divestitures do not cover the loan,
the next option is to refinance it with 6.75% high yield bonds maturing in 10 years.
Financing
Debt Multiple
Debt
Revolver - Evergreen Syndicate Facility - Senior Secured
Term Loan A - Maturity over 5 Years - Senior Secured
Term Loan B - Maturity over 8 Years - Second Lien
Bridge Loan - Interest increases 50bps per six months (to
be taken out by divestitures or high-yield issuances)
Equity
Transaction Multiples
Transaction value / Sales
Transaction value / EBITDA
Transaction Value / EBIT
1.51x
8.12x
10.32x
Rate
6.0x
6880
900
2752
1376
2064
$2,433
2.50%
4.00%
5.25%
8.00%
Transaction Assumptions
30 Day Average Share Price
Offer price premium
Offer price per share
Target diluted shares outstanding
Offer Value
+ Short-term debt
+ Long-term debt
+ Preferred
+ Minority Interest
- Cash & Cash equivelants
Transaction Value
$33.85
25%
$42.32
$155.67
$6,587
$3,613
$0
$0
-$887.9
$9,312
SILVER LAKE PRIVATE EQUITY CASE COMPETITION
QUALITY SYSTEMS
Target Company / Industry Overview
Quality Systems Inc. (NASDAQ: QSII) is a US-based company operating in the Healthcare Information Technology (HIT) sector. The company provides
Electronic Health Records (EHRs), clinical, billing, revenue cycle management (RCM) and other digital services to healthcare providers. The company has
four segments: NextGen Healthcare and RCM Services, which comprise 93% of revenues and focus on physicians, QSI Dental, which comprises 4% of
revenues and focuses on dentists, and Hospital Solutions, which comprises 3% of revenues and focuses on hospitals. The HIT segments that QSII
operates in have a total market size of greater than $60 billion and are expected to grow annually at greater than 20%.
The market is relatively concentrated, with the top 5 vendors maintaining greater than 50% market share and the bottom 3rd of the market consisting of
over 500 vendors. As margins shrink for healthcare institutions, HIT software has become increasingly pervasive as a way to boost margins for healthcare
providers. Government subsidies supporting HIT used by healthcare providers have also catalyzed growth for the industry. Recurring revenues, a massive
backlog, and customer contracts of weighted-life greater than 6 years allow for predictable and sizable cash flows for leading firms.
QSII is consistently the 4th largest player in the physician-related software industry, with greater than 7% market
Firm Comparables
Ticker
EBITDA Margin EV/Sales EV/EBITDA
share. However, QSII trades at a significant discount to the market due to transitory slack in 2014 and the market
STRM
-­‐25.3%
2.6x
NA
penalizing the lagging Hospital Solutions segment. QSII trades at EV/Sales of 1.76x and EV/TTM EBITDA of
ATHN
12.6%
5.1x
29.0x
MTBC
7.5%
0.8x
NA
12.9x, relative to the industry medians of 2.59x and 20.2x, respectively. Due to its market leadership, with significant
MDRX
11.8%
1.9x
11.3x
upside via several drivers, we feel that QSII is an attractive investment opportunity with a 5-year IRR of 36.5%.
Comp Mean
QSII
10.6%
13.7%
2.6x
1.8x
20.2x
12.9x
Investment Thesis, Value Creation, Key Factors for Success
We believe that QSII is undervalued by the market despite being operationally superior to its peers, with 13.7% EBITDA margins versus the competitor
average of 10.6%. Significant tailwinds of growth and margin improvement will drive additional value for the firm over the next 3-5 years. Furthermore,
divesting non-core and low-opportunity businesses should allow for better capital allocation, improved margins and focus, and re-rating of multiples.
Finally, with significant industry consolidation, we expect ample exit opportunities for BMS Capital’s investment in QSII.
1. Favorable regulatory changes: The American Recovery and Re-investment Act (ARRA), initiated in 2009, allocated over $60 billion for increased HIT
implementation nationally, of which 70% has yet to be paid out. Providers are only given subsidies if they meet Meaningful Use (MU) requirements. QSII
has consistently placed 4th in MU attestations for its clients. Continued government incentives look to drive business to QSII and away from the more
fragmented providers in the market, which do not have as expansive product suites, installed bases, and enough interoperability between platforms to
achieve MU attestation for clients. Management confidently projects it will surpass $1B in revenue within 5 years.
2. Spinoff of Hospital and Dental divisions drives growth and margin improvement: QSII’s Hospital and Dental divisions both represent non-core
segments of the business, together comprising less than 10% of revenues. However, they require disproportionate resources that cannot be directly shared
with other segments, such as a sales force, R&D and capital expenditures. The Dental segment represents a low-growth segment with 80% existing
penetration and only slight overlap with the core physician business. The Hospital market has been 70% penetrated and is also relatively small at $2B.
Management has outwardly admitted that it foresees future losses and heavy investment in the segment. Spinning off both divisions will allow for
increased focus and growth on core businesses without siphoning resources into low-ROI capital expenditures, R&D, and sales force expenses.
Furthermore, by becoming pure-play and reducing exposure to saturated slow-growth industries, we believe that QSII will experience multiple expansion
and trade more in line with – or even at a premium to - its industry given its operational performance, expected growth, and market share.
3. Margin Improvement via Operational Changes: There are ample opportunities for margin improvement. Currently, a significant portion of QSII’s
support force is still employed in the US, and there is potential to outsource to and grow Quality Systems India Healthcare in order to reduce support
costs. Additionally, the firm can reduce its sales force, R&D, and other support functions as a pure-play provider given the aforementioned spinoffs.
4. Industry Consolidation provides exit opportunities: With increased regulatory change and required reinvestment into the industry, larger industry players
have increased market share while smaller players have consolidated. Precedent transactions have provided healthy, consistent premiums (26% average)
and suggest clear exit opportunities. With an operationally superior business and strong market share, we believe QSII will have ample exit opportunities.
There are several risks associated with the venture. For one, there are many competitors in the industry with comparable products. Thus, there is a tail risk
of customer attrition to a competitor. However, in an oligopolistic industry with sticky market share, significant backlog, and recurring revenues on longerterm contracts, we believe that the risk of significant topline reduction is muted over the course of the 5-year investment horizon. Another core risk is that
regulatory change tailwinds could reverse with new administration in 2016, one year into the investment, and reduce incentives for EHR implementation.
However, the business is increasingly growing along the RCM route, and EHR software is generating recurring revenues with long contracted lives. Thus,
despite any potential changes, we believe that RCM growth will continue to drive value for QSII, Summary statistics
Bear Base
Bull
Leverage assumptions
as it improves revenues for clients and is not driven by government incentives.
Debt to value
55%
60%
65%
Purchase assumptions
Proposed Capital Structure and Summary Financials
30%
20%
20%
In our base case, we assume a buyout of QSII at a 20% premium with a conservative 60% D/V, Purchase premium
Implied purchase multiple
17.3x 15.8x 15.8x
with first lien 4.4x Debt/FTM EBITDA at 11% cost of debt and second lien 2.2x Debt/FTM QSI Dental sale
No
Yes
Yes
No
Yes
Yes
EBITDA at 14% cost of debt. In our base case, we also assume that we sell both the Hospital Hospital Solutions sale
19.0x 24.6x
and Dental divisions at the current trading values of comparable companies (without any QSI Dental sale multiple (EV/EBIT)
Hospital Solutions sale multiple (EV/Sales)
2.8x
3.5x
premium paid) and assume the proceeds are fully taxable. We then assume no multiple expansion Exit assumptions
14.8x 15.8x 16.8x
in our base case and assume a sale at 15.8x EV/EBITDA in 2020, despite our strong belief that Exit EV/EBITDA
year
2020
2020
2020
the company should trade at a premium to market as a pure-play competitor. We have also Exit
Margin assumptions
modeled in a management option pool in addition to the rollover, in which management receives NextGen gross margin
64.7% 65.7% 66.7%
28%
29%
30%
an additional 10% of equity if the total equity IRR surpasses 25%. In regards to margins and to RCM gross margin
growth rate assumptions
remain conservative, we assume margins stay flat despite room for improvement. Finally, our Revenue
NextGen "other" segment growth rate
29.0% 30.5% 35.5%
revenue growth assumptions undershoot management expectations by at least 8%, with 2020 RCM growth rate
10.7% 11.7% 15.0%
revenues at $920M in our model. With these conservative assumptions, we arrive at a sponsor IRR
24.5% 36.5% 48.4%
IRR of 36.5%. In our bull case, which we believe is actually more representative of the business, we assume leverage of 65% D/V, and also assume that
the divestitures occur at premiums in line with the medians of past transactions. We also assume multiple expansion of 1x at exit. Finally, we assume
margin improvement of 100bps along the remaining two lines of the business relative to the base case and assume revenue growth rates keep in line with
what management has specifically outlined in guidance, yielding a sponsor IRR of 48.4%.
Silver Lake Private Equity Case Competition
Ticker: OI/NYSE
Market Capitalization: $3.87 bn
Shares Outstanding: 164 mm
Last Close: $23.54
Enterprise Value: $6.79 bn
Adj. P/E: 10.1x
FY14 Revenue: $6.78 bn
FY14 Adj. EBITDA: $1.16 bn
P/B: 3.3x
nd
*As of market close on April 2 2015, all financials in $USD
Overview of Target & Industry
Proposed Capital Structure & Financials
 Owens-Illinois (OI), established in Ohio in 1903, is the largest






Proposed Capital Structure
manufacturer of glass containers in the world with 75 glass
manufacturing plants in 21 countries
OI produces glass containers for alcoholic beverages, including
beer, flavored malt beverages, spirits and wine, as well as glass
packaging for food items, soft drinks and pharmaceuticals
OI is the #1 glass container manufacturer in Europe, North
America and South America by revenue
OI has four reportable segments, based geographically: Europe,
North America, South America and Asia Pacific
OI has 21,100 employees, holds 1,900-plus worldwide patents and
is diversified across 49,000 customers in 86 countries
OI’s customers include AB InBev, Bacardi, Coca-Cola, Heineken,
Heinz, Molson Coors, Nestlé, PepsiCo, SAB Miller and Yuengling,
with no single customer accounting for more than 10% of revenues
The market for glass packaging is highly fragmented, with the top
six companies accounting for less than 35% global share in 2013.
Companies such as Ardagh, Gerresheimer, Owens-Illinois, SaintGobain, Vetropack and Vidrala lead the industry, which is
projected to grow at 4.6% annually through 2020
Amount
Term Loa n A
$3,474
LIBOR + 400bp
Term Loa n B
869
LIBOR + 500bp
Seni or notes
869
8.5% coupon rate
Tota l Debt Contri buti on 5,211
Net Debt Ratio
Debt/EBITDA
3.0x
% of Capital
42.9%
0.8x
10.7%
0.8x
10.7%
4.5x
4.1x
64.4%
Equi ty Contri buti on
2,882
35.6%
Purchase Price
$8,093
100.0%
Projected Annual Financials
2014A 2015E 2016E 2017E 2018E 2019E
Revenue
$6,784 $6,920 $7,058 $7,199 $7,343 $7,490
% growth
2.0%
2.0%
2.0%
2.0%
2.0%
Adj. EBITDA 1,158
% margin
1,358
19.6%
1,443
20.4%
1,532
21.3%
1,550
21.1%
1,570
21.0%
EBIT
740
818
905
995
1,015
1,035
FCF
$311
$348
$438
$530
$569
$608
* All financials in $USD mm unless otherwise indicated
Investment Thesis, Value Creation & Key Factors for Success
Investment Thesis
Value Creation
 A history of strong free cash flows is generated by a diversified
 Achieve industry mean operational margins by installing new






customer base, time-tested economic moat buttressed by highquality capital intensive technologies and non-cyclical end-uses
such as soft drink and alcohol consumption
OI benefits from monopoly or duopoly positions in its key markets
as customers are highly dependent upon direct sourcing and longterm partnerships with OI’s factories that are often located next
to customers’ factories and fortified by high transportation costs
OI has underperformed its peers and the S&P 500 in both the past 3
and 5 years under the entrenched leadership of Chairman, CEO
and President Albert Stroucken since 2006 – his announced
departure, which is within 8 months, presents a unique
opportunity to capitalize on the forthcoming leadership vacuum
Even as OI’s stock has lagged behind its competitors, CEO pay has
risen by double digits over the last 3 years
The incoming CEO is an internal candidate who does not have
confidence from key members of OI’s investor base
Shares are down 28.5% in the last 12 months, which presents an
attractive window for an acquisition, even including a generous
31% premium to the current share price
Conservative entry and exit assumptions and estimates of future
financial performance yield an estimated 25.2% IRR after a 5-year
investment; 4.1x Net Debt/EBITDA and a constant 7.0x EV/EBITDA
management; revisit CEO selection and incentive structure
 Return to historical ROIC levels through rationalization of current
asset / input base and continued reduction of asbestos liabilities
 Rapidly repay senior debt with strong cash flows that serve to
efficiently unlock value for a financial sponsor
 Potentially receive $455 mm from recent favorable ruling against
Venezuela’s asset expropriation (currently not included in IRR)
Key Factors for Success
 Strong cash flow, huge long-lived moat and diversified global sales
 Book asset value is well below the estimated $10 bn replacement
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cost (average furnace cost of $65 mm) that creates significant
capital hurdles for possible entrants and reduces margin pressure
Conservative 31% premium represents an attractive exit
opportunity for the unsuccessful 3-year activist campaign with a
cost-basis of $26 per share, turning their 15% loss into a 19% gain
Departure of the CFO for Aramark last month; CEO, President, and
Chairman in FY15; and 2 additional directors paves way for control
No multiple expansion (7.0x EV/EBITDA) assumed at exit
EBITDA margin forecasted to industry mean (not best-in-class peer)
With proper asset utilization, reaching best-in-class margins will
provide significant additional upside to the projected 25.2% IRR
Sources: Atlantic Investment Management, Bloomberg, Company Filings, FactSet, Packaging Gateway and Transparency Market Research