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May 26, 2009, 10:57 am
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LBO Analysis on a Cocktail Napkin (Solution to Exercise)
May 26, 2009, 10:57 am
Below are solutions to an exercise in the blog entry / newletter email titled "LBO Analysis on a Cocktail Napkin." To read the full blog entry/newsletter email, click here.
1) What is CVS’ assumed purchase price (transaction value) in the exit year?
Answer: $120.0
Comment: Our assumption of $15b in EBITDA and an exit multiple of 8.0x implies a price of $120 at exit
2) What is CVS’ implied equity value at the exit year?
Answer: 116.0
Comment: With a debt burden of $4b at exit, equity value at exit is $120b less the outstanding debt.
3) What is the maximum initial equity contribution by the sponsors?
Answer: 55.9
Comment: Since sponsors expect $116b in equity at exit, they'd be willing to put in no more than $55.9b at the initial deal date given their 20% required annualized return. Formula: $116/(1+20%)^4.
4) What is the maximum initial transaction value?
Answer: 93.4
Comment: Lenders are willing to lend no more than $37.5b; sponsors are willing to invest no more than $55.9b. As a result, no more than $93.4b is available to pay the pre-deal lenders and shareholders.
5) What is the highest purchase price the sponsors would be willing to pay for each of CVS' shares today?
Answer: $55.63
Comment: Of the $93.4b in funds available to LBO CVS, $10b goes to pay off pre-deal CVS debt, while the remaining $83.4 is used to buy the 1.5b CVS shares outstanding. Formula: $83.4/1.5 = $55.63/share.
6) Given CVS’ market trading level, is an LBO possible under these assumptions?
Answer: Yes
Comment: Current CVS shares trade for $30; $55.63 represents a substantial premium.
Comments
found the material very revealing & quite insightfull. would be able to take the LBO Module as soon as possible.
Thats very educative, keep up the good work. Everything was just good, and clear, I dont have questions.