Joseph V. Rizzi
Amsterdam Institute of Finance
October, 2014
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Transaction: Buyout, Acquisition or Recapitalization
Leverage: Resulting in highly leveraged (i.e., non investment
grade) obligor – fD/EBITDA > 3X
Subject to market availability and pricing (function of risk
appetite
Deal Types:
Acquisition
Recapitalization
Refinance
PTP (Public to Private)
STS (Sponsor to Sponsor, aka Pass the Parcel)
PE Importance: Provides 1/3 of all I/B Revenues and up to
25% of M&A
Amsterdam Institute of Finance
October, 2014
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Amsterdam Institute of Finance
October, 2014
7 Year High – 1.77T
U.S. - 41%
ROW - 59%
Drivers
Cash Balances
Low Rates
Exhausted Cost Cuts and Buybacks
Pent-up Demand
Positive Response
Confidence
Rising Stock Prices
Increase in Hostile T/O
20% of total v single digits post crisis
PE: Dog that didn’t bark – Strategic Acquirers crowd-out
20% of total v 27% 4 year average
Reflects dearth of larger PTP deals
Volume up 6% 2014 v double digit M&A increase
PPX: 14X+
Drop in cash in favor of stock/stock + cash
All cash at lowest level since 2001
Averages reflect return of the “big deal”
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Activity
Volume ($B)
Size (> 10B)
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1H14
1H13
1,768
9
1,023
19
Return of Strategic Acquiror
Holcim – LaFarge
April, 2014:
$39.5B
Numericable – SFR
Facebook – WhatsApp
Suntory – Beam
Bayer – Merck Cons
March, 2014:
February, 2014:
January, 2014:
May, 2014:
$23.3B
$19.5B
$15.7B
$14.2B
Drivers
Increased Stock Prices – Management confidence; Stock as Currency
Positive Shareholder Reaction: One Day Indexed Buyer Stock Price Reaction
Amsterdam Institute of Finance
October, 2014
1H14
2.9%
2H13
3.6%
1H13
3.1%
2012
1.8%
2011
.3%
2010
.3%
2009
<1.9%>
2008
<1.3%>
Source: S&P Capital IQ
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Factors
Deal Size
Timing
Price
Financing
Consideration
Buyer
Execution
Type
Tests
Best Owner
Iron Law
Amsterdam Institute of Finance
October, 2014
5
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(Euro/B)
7/31/14
38.8
2013
63.7
2012
29.0
2011
43.9
2010
39.4
2009
9.0
2008
69.3
2007
152.3
2006
164.5
Country
UK
28.57%
France
19.10%
Germany
12.59%
Netherlands
10.83%
Spain
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Amsterdam Institute of Finance
October, 2014
6.45%
European PE Dry Powder (Euro/B) – European Focused Fundraising
7/31/14
225
58.4
2013
190
88.8
2012
175
73.8
Key Buyout Stats – 7/31/14
PPX
9X
Eq%
35%
FDX
5X
Source: S&P Capital IQ
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European LL Volume:
Highest Level Post Crisis June/July
YTD Volume €59.5B up 19% same period 2013/LY
Includes M&A and PE
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Leverage Up: 5X+
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Return of Cov-lite: Reduced Terms
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2L Increasing
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CLO:
Returning – 6 Mo 16 v 20 for YE13
Costs dropped from E+200 2013 to E+100 1H14
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MEZ N/A: 2L Wipeout
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HYB (7/31/14): €61.3B v €47.2B LY
Amsterdam Institute of Finance
October, 2014
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Question
Framework
1. How will transaction achieve our goal?
Acquisition Strategy
2. Which companies are good targets?
Strategic Fit
Search Screen
3. Best transaction types?
M&A v Alliance
JV and Minority Interests
4. Available Synergies?
Scale, Scope and Skill
Strategic and Due Diligence
5. What is target worth to us and potential
bidders?
DCF, Comps (trading, transaction)
ROV
6. Target assessment?
Shareholder value
Economic profit, other
7. Risks?
Cost of Capital Analysis
Sensitivity, Scenario and Simulation
8. Deal Structure?
Asset v Stock
Cash v Stock
Fixed v Contingent
9. Integration
Absorption v Preservation
Symbiosis v Holding
10. Negotiations
Planning and Strategies
Amsterdam Institute of Finance
October, 2014
8
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CEO only believer: headstrong; magazine cover effect
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Only revenue synergies with no investment plan
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Prefunctory Due Diligence
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Reservation price changes during bidding
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Must close deal
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Failure to identify why buyer is best owner
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Emphasis on time, effort, cost and reputation sunk into deal
Amsterdam Institute of Finance
October, 2014
9
Stone Age
Bronze Age
Silver Age
Golden Age
(1974-84)
(1985-90)
(1990-2000)
(2002-07)
Fund proliferation
Goes global
Shakeout/consolidation
Exits
Represents 40%
higher equity levels
Fund Raising
of M&A
smaller deals
Dry Powder
Mega Funds
Operating improvements
Diversification
Cottage Industry
KKR
Bootstrap deals
High Yield
Back-to-the-Future
(2008-2012)
Maturity
(2013 - ?)
focus. Increase in PIPE
and minority interests?
Amsterdam Institute of Finance
October, 2014
10
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PE Fund Performance Persistence – declining due to competition
Access
Networks
Signaling
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Crowded (> 5,000)
2,200 funds seeking funds as of July, 2014
Raise $750B
Dry Powder
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LP Selection Issues
Strategy
Returns
Team
Terms
Relationship
Amsterdam Institute of Finance
October, 2014
11
Tax – Legal – Accounting Knowledge
Network Management
Industry Expertise
Corporate Finance Delivery
Fund
Raising
Amsterdam Institute of Finance
October, 2014
Investing
VALUE
Managing/
Monitoring
Exit
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• Buy Right: PPX
• Financial Engineering: FDX
• Operating Improvements: (pf) EBITDA
• Multiple Expansion: Exit X
Amsterdam Institute of Finance
October, 2014
13
Corporate
PE
Valuation
WACC based DCF
Equity returns and cost of equity based
Debt Capacity
Investment Grade (company
determined)
Maximum debt capacity (lender/market
determined)
Residual Value
Growing Prep
Exit X
Value Added
Synergies
Financial Engineering
Search
Focused
Opportunistic
Affordability
Dilution
IRR on required equity
Deal Size
Large
Depends
Capital Structure
Permanent
Temporary
Debt Structure
Simple
Complex
Flexibility
No financial covenants
Cov-lite
Horizon
Long Term
5+ years
Integration Risk
High
Low
Thesis
Strategic
Transaction
Amsterdam Institute of Finance
October, 2014
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Sponsor
Share
CVC
10.13%
Carlyle Group
5.06%
Astorg Partners
5.06%
Permira
5.06%
Clayton, Dubilier & Rice
3.80%
Goldman Sachs
3.80%
Montagu Private Equity
3.80%
Advent International
2.53%
Bain Capital
2.53%
Koch Industries
2.53%
Cinven Ltd
2.53%
Apollo Management
2.53%
Bridgepoint Capital
2.53%
Teachers’ Private Capital
2.53%
Investcorp
2.53%
Triton Managers
2.53%
Ardian
2.53%
Electra Partners
2.53%
ATP Private Equity Partners
1.27%
3i pic
1.27%
Source: S&P Capital IQ
Amsterdam Institute of Finance
October, 2014
15
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Up Cycle
Spreads Narrow
Multiples Increase
Leverage Increases
Exits Accelerate
Fundraising
Dry Powder
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Characteristics
Government Bond Rates
High Yield Spreads
Amsterdam Institute of Finance
October, 2014
16
Superior returns
Attracts capital
Deals chase money
Macro
Financial Markets
Disappoint returns
Impacts fundraising
Amsterdam Institute of Finance
October, 2014
Deal market
Capital chasings deals
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US Investors
Fund manager
US Exempt
Investors
General
Carried interest
LP
LP
LP
Partner
partner
A
B
C
Non-US
Investors
FUND
Nominee
Investment
CLO
Leverage finance
Hedge funds
syndicate participants
Investment
Investment
Hold Co.
Hold Co.
FLL
Syndicate participants
SLL
Amsterdam Institute of Finance
October, 2014
High Yield
Investors
Bank
Bridge finance
Investment
Mezzanine
Investors
Operating
Entity
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Now
EBITDA of Acquired Firm
Sale value @ 8 x EBITDA
125
1,000
Financing Plan: Equity @ .20
Debt @ .80
Total Capital Raised
200
800
1,000
Fees
- $ millions -
188 (c)
1,500
30
50
Net Sale Proceeds on Exit
1,450
Original Debt
Less: Debt pay down over 5 years
Debt at end of 5 years
Return of Original Equity
Net gain to be allocated
10% to mgmt options
20% to general partner
70% to limited partners
Total
(a)
Share to CEO
Share to next 4 senior officers
Share to next 8 key players
Total Management share
In 5 yrs
-540
-200
710
71(a)
142
497 (b)
710
2% points
1% points
1/2% points
or
or
or
800
260
540
$14.2 x 1 = $14.2
$ 7.1 x 4 = $28.4
$ 3.6 x 8 = $28.4
$71.0
(b) Equals a 28.4% compound annual rate of return on investment.
(c) Assumes $12 taken out of cost structure immediately and 6.5% growth/year in EBITDA thereafter.
Amsterdam Institute of Finance
October, 2014
Source: Casewriter – The Role of Private Equity Firms in Mergers & Acquisitions Transaction
Harvard Business School case 9-206-1 Rev 10/16/06
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Price ≠ Value
eventually converge, but…
using price to justify M&A – increases overpaying
Most valuations are really disguised Pricings
Academic Surveys – DCF
Reality – Name Only
TV in DCF >60% Value
TV calculated using market multiple
Venture Capital Valuation
Football Field: Flaw of Averages
V
x
x
x
Average Fit Line
x
x
Asset
Value
DCF
Comp
Trade
Comp
Trans
Other
(ROV?)
Goose that Lays the Golden Egg Story: Price v Value
Amsterdam Institute of Finance
October, 2014
20
Stupidity & Bias
Fantasy
Competitive Necessity
Outlook/Information Advantage
Synergies
Lower Buyer WACC
Undervaluation
ROT: Greater than 40% premium over pre-bid market price is
difficult to justify for any sizeable acquisition.
Amsterdam Institute of Finance
October, 2014
21
Focus on return: what is the maximum price I can pay based on
given set of projections and earn X% return not risk adjusted?
Tradition Valuation =
Projected cash flows
Discounted rate
Terminal value
LBO Perspective = IRR (Equity discount rate)
Projected cash flows
Purchase Price
Sale Price (Terminal Value)
Debt Policy
Ratings/Corp
Value Transfer from LP’s
Amsterdam Institute of Finance
October, 2014
22
How much can I borrow (XEBITDA)
Usually 4 - 6X depending on market
Equity Percentage Required (% of PP)
Usually 30% - 45% dependent on market
Compare
Market PPX
IRR
Adjustments
FD
Exit Multiple
Equity
PP
EBITDA adjustment (pro forma EBITDA)
Example – assume €100 EBITDA
FDX – 5X
Equity % - 35%
Affordable bid 7500 or 7.5x EBITDA
Amsterdam Institute of Finance
October, 2014
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DCF
CFADS
Net Income
+ Dep/Amt
+/_ Change in deferred taxes
+/- Other noncash items
+/- Change in working capital
Cash flow from operations
+After tax interest (hypo Ƭ)
- CAPEX
- Unleveraged FCF
Net Income
Dep/Amt
Change in deferred taxes
Other non cash changes
Change in working capital
Cash flow from operations
Non interest expense adjustment
Capex
CFADS
Amsterdam Institute of Finance
October, 2014
24
IRR
10%
20%
30%
40%
50%
Amsterdam Institute of Finance
October, 2014
Equivalent MOIC Over 6 Years
1.8X
3.0X
4.8X
7.5X
11.4X
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Future Value
Market Size (Year 6) 1,000
Market Share
10%
Revenue
100
Revenue Multiple
5
Value
500
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Ownership Need
Investment (today)
10
Required Return (40%) 7.5X
Expected Exit Value
75
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Today’s Ownership Requirement
Expected Exit Value
Projected Value
% Ownership
Amsterdam Institute of Finance
October, 2014
75
500
15%
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Fixing the Broken Deal – Price and
Structural Flex
Increase spread
Recycled
Original issue discount
Eliminate PIK
Reduce debt
Add a subordinate tranche
More equity
Add covenants
Reduce Price
Seller Paper
Amsterdam Institute of Finance
October, 2014
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