The Leveraged Buyout; Definition and Valuation
Topic 43 defines the characteristics of a highly leveraged transaction and the methodology employed to price a leveraged buyout (LBO).
- A leveraged transaction or LBO is a buyout transaction financed with a significant amount of debt in the capital structure.
- Debt allows the acquirer to increase the price paid for the target based on specific valuation of the leverage benefit (see Topic 42).
- The amount and type of debt and the characteristics of debt employed in financing such transactions is a function of the lender's perceived risk-adjusted cash flows of the target as well as the state of the lending markets at the time the transaction is structured (see Topic 44).
- Generally speaking, senior debt lenders today generally lend up to 2.0 to 2.5 times leading (next year’s) earnings before interest, tax, depreciation, and amortization (EBITDA), sometimes higher (depending on the industry, business, and economic conditions prevailing at the time and other covenants).
- Mezzanine subordinated lenders generally lend up to 1.0 times leading EBITDA (again depending on the industry, business, and economic conditions prevailing at the time and other covenants).
- All in, LBO debt today could approximate 2.0 to 3.5 times leading EBITDA (sometimes higher), depending on the lender relationship, lending climate, target fundamentals, outlook, and value proposition.
LBO VALUATION OVERVIEW
- The leveraged transaction enterprise ...