Leveraged Buyout Analysis

There are three major steps to conducting a leveraged buyout (LBO) analysis:

Step 1: Obtaining a purchase price.
Step 2: Estimating sources and uses of funds.
Step 3: Calculating investor rate of return (IRR).


In order to conduct a leveraged buyout analysis, we first need to obtain a potential purchase price of the entity. Conducting a valuation analysis on the entity will help us arrive at an approximate current value of the entity. The book Financial Modeling and Valuation steps through how to model and value a company. Although a valuation analysis is helpful in providing an indication of what the appropriate value of the entity is today, one will most likely have to consider a control premium. A control premium is the percentage above current market value one would consider paying to convince the business owner or shareholders to hand over the business or shares. Let’s take another look at the Heinz press release presented in the Preface.

Heinz Leveraged Buyout Press Release

PITTSBURGH & OMAHA, Neb. & NEW YORK–(BUSINESS WIRE)—H.J. Heinz Company (NYSE: HNZ) (“Heinz”) today announced that it has entered into a definitive merger agreement to be acquired by an investment consortium comprised of Berkshire Hathaway and 3G Capital.

   Under the terms of the agreement, which has been unanimously approved by Heinz’s Board of Directors, Heinz shareholders will receive $72.50 in cash for each share of common stock they own, in a transaction ...

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