View the step-by-step solution to: CREATION TRANSFER DESTRUCTION OF SHAREHOLDER VALUE RISK RETURN

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Need help on assignment.
LBO OVERVIEW 2012.xls

CREATION TRANSFER DESTRUCTION OF SHAREHOLDER VALUE
RISK RETURN GROWTH SUSTAINABILITY

PRIV VENT INITIAL
DEBT PURCH
EQ CAP PUBLIC
ISSUE
VC
OFFERING
IPO
GO PUBLIC
TELESWITCH

MERGER AND ACQUISITION
POOL MGMT
LEV'RD SPIN
BUYOUT BUYOUT OFF
MBO
LBO

DISCOVERY

EQUITY BANKRPY CORP
CARVE
REORG
OUT
IPO
GO PUBLIC

GO PRIVATE
REVCO

NORRIS
GLOBAL FOODS

MARVEL
REVCO

DEBT
CAPACITY
MARRIOTT
MID 1980'S
LEVER UP
REPURCHASE STOCK

MARRIOTT
1993
SPIN OFF
MARRIOTT INTERNATIONAL
EE'S 23,000
SALES 7,900
21
CFFO 408
LITTLE DEBT
EBIT 250

FOUR WAYS TO DEPLOY MONEY
+CASH

+ DEBT ISSUE
1 + PPE (ORGANIC)
2 + ACQUIRE
3 - REPURCHASE STOCK
4- LIQUIDATING DIVIDEND

MARRIOTT HOST
EE'S 23,000
SALES 1,800
2,870
CFFO 363
LOTS OF DEBT EBIT 169

MULTIPLES
EQUITY
ENTERPRISE
P/E

MKT/BOOK

REVENUE

EBITDA

REVENUE
EBITDA
EBIT
NET INCOME
BOOK VALUE (RE-0 + RE-1)
ACCOUNTING DISTORTIONS INCREASE FROM TOP TO BOTTOM
REVENUE IS A CLEANER NUMBER THAN NET INCOME AND BOOK VALUE
DISTORTIONS COMPOUND FROM TOP TO BOTTOM
IMPACT OF OPERATING EFFICIENCY (BUSINESS RISK) AND FINANCIAL EFFICIENCY (FINANCIAL RISK)
INCREASE FROM TOP TO BOTTOM, NET INCOME AND BOOK VALUE
BETTER ILLUSTRATE MANAGEMENT SKILL THAN REVENUE - MORE INCLUSIVE

V=

ECF/K-G

V=P

(LIKE DDM)
(ASSUME MARKET EFFICIENCY)

ECF = E
E = K-G
P/E = 1/K-G

WHERE K-E = R-F + BETA X RB-P
R-F = R-REAL + R-INFLATION
BETA-E = BETA-ASSET (V/E)
WHERE BETA-A = INDUSTRY
V/E = LEVERAGE

D+E/E = 1 + D/E
BETA-L = BETA-UL (1 +D/E)
BETA-UL = BETA-L/(1+D/E)

BEFORE THE LBO - OLD COMPANY
CASH 60
CL
CA

AFTER THE LBO - NEW COMPANY
CL
CA

DEBT

DEBT
20

295

PPE

PPE
EQUITY
175

STOCK SELLING AT HISTORICAL LOW
COMPANY PERFORMANCE SO-SO OR WORSE
LOW DEBT RATIO
HAS $60 CASH HORDE
LBO SYNDICATE OFFERS A BIG PREMIUM TO S/H
10 MILLION SHARES AT $29 MARKET PRICE
SYNDICATE OFFERS $41
MUST RAISE $410 MILLION
OPERATING PROFIT FORECAST AVERAGES $100
DEBT CAPACITY ROUGHTLY $500 ($100/.20)
AT A 1:1 INTEREST COVERAGE RATIO
S/H GETS $41 FOR STOCK SELLING AT $29

11%

EQUITY
55

536%

SYNDICATE PUTS UP EQUITY OF $55 MILLION
BORROWS THE REST $410-55-60 WHICH IS $295
AN LBO IS A DEBT FOR EQUITY REORGANIZATION
THE PUBLIC COMPANY BECOMES PRIVATE
TRY TO RUN IT AND SERVICE DEBT
TAKE IT PUBLIC WHEN TIME IS RIGHT
EXIT STRATEGY:
SYNDICATE PUT UP $55 AND SELLS FOR $400 IN 2 YRS
0
1
2
-55
0
400
170% INTERNAL RATE OF RETURN, NOT BAD

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Reference.xlsx

Canadian $
in thousands, rounding errior
hist.
Sales

SEE FINANCIAL STATEMENT NOTES IN THE CASE
hist.
hist.
hist.
hist.
forecast
2002
2003
2004
2005
2006
2007
4994
5034
4631
5309
5984
7597

CGS
GM...

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