Consider a proposed LBO for NewCo. Financed by $500 million in senior bank debt, $350 million in high yield bonds, $400 million in equity, and $75 million in cash on hand. Fees and expenses of $40 million will be spent on the deal.

Questions:

1. What is the leverage (Long term debt/Total assets) of the NewCo. before and after the LBO? (2)
2. What is the enterprise value of the LBO deal? Assuming $130.6 million in EBITDA in Year 0, what is the EV/EBITDA multiple for Newco.? (3)
3. Estimate the cash flows available for debt pay down for the next five years. (8)

Assuming all the cash flows available for debt repayment will be used for paying down the debt for the next five years (cash sweep period), the terminal equity exit value is expected to be $1,285.1 million. If sponsors target IRR is 30%, do you think that the sponsors expected IRR will be higher or lower than 30%? (5)

LBO Valuation The balance sheets before and after LBO are as follows: Before LBOsaction Adjustm After LBO Assets Cash 75 -75 0 Accounts Receivable 14.4 14.4 Inventory 63 63 Other 94.3 943 Total Current Assets 246.7 171.7 Net PP&E Goodwill Total Assets 700 220 1166.7 200 700 420 1291.7 Liabilities & Shareholders' Equity Accounts payable Other Total Current Liabilities 41.7 40 81.7 41.7 40 81.7 300 -300 500 350 Existing term loan Senior bank debt Subordinated notes Total Liabilities Shareholders' Equity Total Liabilities & Equity 0 500 350 931.7 360 1291.7 381.7 785 1166.7 -785 360 4 Notes: 1. Goodwill is equity purchase price (5985 million) less the book value of equity (5785 million). 2. Existing term loan is paid off and replaced by new LBO debt. 3. NewCo's existing equity of S785 million is extinguished and replaced with sponsors' equity. Shareholders' equity is the sponsors' equity contribution of S400 million less S40 million in fees and Pro Forma Income Statement 0 1 2 3 5 EBIT 97.3 112.5 117 121.7 126.5 Net Interest Expenses 43.8 48.3 43.2 37.5 31.2 Earnings before Taxes 53.5 642 73.8 842 95.3 Taxes (21%) 11.2 13.5 15.5 17.7 20 Net Income 42.3 50.7 58.3 66.5 75.3 Other relevant items Depreciation and Amortization 48.7 50.6 52.6 54.7 56.7 Capital Expenditures 13.5 14.1 14.6 15.2 15.8 Increase in Working Capital 1.1 1.5 1.6 1.6 1.7 A. What is the leverage (Long term debt/Total assets) of the NewCo. before and after the LBO? B. What is the enterprise value of the LBO deal? Assuming $130.6 million in EBITDA in Year 0, what is the EV/EBITDA multiple for Newco.? C. Estimate the cash flows available for debt pay down for the next five years. D. Assuming all the cash flows available for debt repayment will be used for paying down the debt for the next five years (cash sweep period), the terminal equity exit value is expected to be $1,285.1 million. If sponsors' target IRR is 30%, do you think that the sponsor's expected IRR will be higher