Chapter 13
Leveraged buyout modeling: An Excel applicationa
13.1 OVERVIEW
To illustrate the LBO modeling process with real data, we have recreated the LBO of Toys R Us in 2005, which was bought by a consortium led by Bain Capital and KKR. The consortium invested USD1.3bn of new equity to complete the USD6.6bn LBO.
In our analysis, we have used historic financial data for 2001–2004, from Toys R Us publicly available annual reports. Our base case analysis, which forecasts forward using historic ratios and uses a leverage ratio of 70% debt, gives an IRR of 24% and a money multiple of 3× assuming a 5-year holding period.
When a PE firm structures an LBO deal, it must satisfy at least two conditions: it must be acceptable to the seller and it must achieve acceptable returns to all relevant investors with a manageable level of risk. To judge whether these conditions are fulfilled, the following output measures are taken into consideration:
- Purchase price, often compared with previous transactions based on EBITDA multiples. In public-to-private transactions, the premium over the market price is compared with previous transactions, and in competitive bids the purchase price relative to other bidders is key
- The IRR and money multiple for each investor
- The interest and debt service coverage ratios (ISCR and DSCR), EBITDA to the debt level, and the fixed coverage ratio.
A deal has multiple dimensions: the amount of leverage, the choice of debt instruments, the choice of equity instruments, ...
