Referring to background information provided in problem 1, assume now that the transaction was financed by a jumbo loan for 80 percent of the purchase price. The loan is INR-denominated at 12 percent with interest payment tax-deductible at the rate of 30 percent and repaid in full in a lump sum payment at exit time.

a. What is a leveraged buyout? What are the pros and cons of LBOs in crossborder acquisitions?

b. Assuming that Ulysses did purchase Salgacoar’s shipping business at a P/E multiple of 10 for cash, that Salgacoar’s shipping business will grow its earnings at the annual rate of 2. 50 percent, and that all earnings are paid as dividends, at what exit price will Ulysses have to sell Salgacoar in five years to guarantee to its investor a rate of return of 25 percent? The current exchange rate stands at US$1 = INR 50, and the INR is expected to depreciate at an annual rate of 1. 25 percent over the next five years.

Data from problem 1

How should private equity firms value cross-border acquisitions? Ulysses, a Boston-based private equity firm, specializes in transportation with a focus on emerging capital markets. It has identified Salgacoar Ltd., a family-owned business group headquartered in Goa (India). Salgacoar is involved in three businesses—iron ore mining in the State of Goa, ocean-going freighters, and hotels. Each division is cash-flow positive. Its shipping division generated in 2013 earnings after taxes of INR 4 billion. Two publicly listed shipping companies on the Mumbai stock exchange have P/E multiples of 8 and 9. 2, respectively. Maersk, the giant Danish shipping and container company, is listed on the Copenhagen Stock Exchange and has a P/E of 13. 5.