Question
KKR is contemplating a leveraged buyout of Tempur-Pedic International (TPX). TPXs 15 million shares currently trade at $25/share, and the company has $60 million in
KKR is contemplating a leveraged buyout of Tempur-Pedic International (TPX). TPXs 15 million shares currently trade at $25/share, and the company has $60 million in long-term debt. KKR is offering $35/share to existing shareholders and plans to finance the buyout using $500 million of debt with an interest cost of debt, rd, equal to 12% and $25 million of equity. The interest expenses (in millions) for both the old and new debt are given below. [KKR will be responsible for both the old and new debt after the deal.] After increasing the incentives of the managers with increased equity stakes, KKR projects that TPX will generate free cash flows of $84 million next year (t=1) and will remain the same in nominal terms thereafter. KKR plans to sell TPX after 5 years (t=5), and anticipates the new owners will maintain a target D/V ratio of 0.30 following the sale. With this D/V of 0.30, TPXs cost of debt will drop back to 9%. In your below analysis of this LBO, you should assume that TPXs unlevered cost of equity, ra, equals 14% and use the Miles-Ezzell WACC. You should also assume the corporate tax rate faced by TPX is 35%. Please express all values in millions of dollars.
Year 1 2 3 4 5 Interest expense (Old debt) 5 5 5 5 5 Interest expense (New debt) 60 60 60 60 60
What is the base-case NPV of TPX? (i.e. what is the unlevered NPV of TPX)
With the LBO, what is the PV(interest tax shields) for years 1-5?
With LBO, what is the PV(interest tax shields) for years > 5?
What is the APV of TPX under the LBO?
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