LBO Candidate - Short Answer Problem

Stellar Investment Partners (Stellar), a local investment banking firm, has begun its due diligence on a potential LBO candidate, Skippy, Inc. (Skippy). Skippy is a public company that manufactures nutritional food products and vitamin supplements.

Due to the expansion of various production facilities and continued product differentiation, Skippy has obtained solid market share growth in the past several years but is still viewed as a niche player by its larger competitors. Research and development costs are a large part of the companys cost structure, which has been stable, as a percentage of sales, in recent years.

The senior management of Skippy has been together for over ten years and is well respected in the industry based on the companys return metrics. Stellar gathered the following latest financial data on Skippy and noted that twenty-five percent of the companys assets are currently pledged to debt investors as collateral.

($millions) 2020 2019 2018

Net Income $144.9 $125.7 $114.6

EBITDA 199.6 174.8 157.2

Debt/Total Capital 58.2% 52.9% 47.8

Total Assets 620.1 605.2 585.3

Free Cash Flow 133.6 152.7 166.8

Annual Maintenance Capex 16.3 14.0 12.2

Using the information above, identify 3 reasons for Stellar to pursue Skippy as a viable LBO candidate. Also, identify 3 reasons why Stellar might pass on Skippy as a desirable LBO candidate.