The Impact of LBO on Firms

7/30/2019 The Impact of LBO on Firms

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The Impact of LBOon Firms

Performance

By

Sneha.LS

Soujanya.N

Sowmya.N.R


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What is Leverage buyout.???!!!

The acquisition of another company using a significant amount of

borrowed money (bonds or loans) to meet the cost of acquisition.

Often, the assets of the company being acquired are used as collateral

for the loans in addition to the assets of the acquiring company. The

purpose of leveraged buyouts is to allow companies to make large

acquisitions without having to commit a lot of capital.


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Transaction structure

Issues to be considered in LBO transaction

Industry characteristics

Company-specific characteristics

Market conditions


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Characteristics of a Good LBO Candi

Certain features of potential target firms, that attracts LBO

High growth, high market share firms

High profit potential firms

Viable exit strategy

Low operating risk firms

Low existing debt loads.

A multi year history of stable and recurring cashflows.

Strong management team

Divestible assets.


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Capital structure of Leverage buyou

36%27%

13%

9% 15% Subordinate debt

Long term senior debt

Short or Intermediate debt

Common stock

Preferred stock

Tranche

St

1. Revolving

2. Bank Debt

3. High-Yield

4. Mezzanine

5. Seller Note

6. Securitizat

7. Common E

Source: Mergers and Acquisitions corporate restructuring 4th edition By: Gaughan, Patrick A.,


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From Firms Point Of View

ADVANTAGES

1. Corporate Restructuring

2. Small Amount Of Capital

Requirement

3. Management Buy-out

4. Economy

DISADVANTAGE

1. The Restructuring leads a Comp

downsize.

2. Restructuring results in Hostile T

3. Corporations Bankruptcy.

4. Management buyouts can produ

interest and possible mismanage

out Owners.


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1. Stock Price

2. Corporate Efficiency

3. Original Bond Holders

4. New Management

The Effect of LBO.


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List of well known LBOs so far...

Harley Davidson

Bharati Airtel And Zain

The Blackstone Group

Tata and Tetley

Tata and JLR

Tata and Corus

Hindalco and Novelis

Suzlon and Re-power systems

Ub group and Whyte&mackey


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CASE: Tata tea and Tetley

Tata Tea acquired the UK heavyweight brand Tetleyfor a staggering 271 million p

The biggest ever cross-border acquisition.

Pushing for aggressive growth and worldwide expansion.

Tetley's price tag of 271mn pounds (US $450 m) was more than four times the net

which stood at US $ 114 m.

Sources of financing the purchase:

1. Equity-subscribed by Tata tea,

2. Junior loan stock subscribed by institutional investors (including the v

Mezzanine Finance, arranged by Intermediate Capital Group Plc.)

3. Senior debt facilities arranged and underwritten by Rabobank International.


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CASE: Tata and JLR

Year Open High Low Close

2006 121.51 186.30 114.08 168.32007 168.42 182.23 115.19 138.73

2008 138.81 152.55 24.40 31.81

2009 31.60 159.96 25.20 158.52

2010 158.20 276.28 129.02 261.26

2011 264.20 266.86 137.65 178.10

2012 182.00 221.45 178.65 218.55

Share price of Tata Motors from Jan 2006 to Jan 2012

On June 02, 2008, India-based Tata Motors completed the acquisition of the Jaguar and Land Rover (JLR) uni

manufacturer Ford Motor Company (Ford) for US$ 2.3 billion.

Tata motors raised a bridge loan of Us $3bn through syndicate of banks .The amount was repaid in following m

Rs 1.92 billion Underwriting agreement with JM financial consultants

Rs.1.75 billion was raised through a deposit scheme from the public

Additional subscriptions by promoter companiesTata Sons , Tat capital and Tata Investment Ltd


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Effects of Acquisition

Over the next 10 months, TATA incurred a loss of

$468mn seemed the loss spree would continue like it

had been with ford.

After Acquisition, TAMO posted a loss of $67mn for

the quarter, which was $147mn profit, for the same

quarter last year

Tata has sunk almost $2billion for operations, R and

D of Jaguar and Land Rover

Tata has already an existing debt of $6bn in tthi

books of accounts.

TATA Auto

Component

TCS

JL

Cost Sy


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The graph above shows the net profit of Tata motors

-4000

-2000

0

2000

40006000

8000

10000

2011 2010 2009 2008

RsinCrores

Year

Net profit

standalone

consolidated

-100

-50

0

50

100

150

2011 2010 2009

Rs

Year

EPS

EPS of TATA Moto

Mar11 Mar 10 Mar 09 Mar 08

Reported EPS[Rs]

Standalone28.55 39.26 19.48 52.63

Reported EPS [Rs]

Consolidate145.30 44.11 54.80 57.97

Statistics


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16%

5%

22%

11%

22%

24%

Row

Russia

Europe Excl.RussiaChina

North America

UK

18%5%

23%

16%

19%

19%

Row

Russia

Europe Excl.RussiaChina

North America

UK

Market Mix FY 12

Market Mix FY 11

Source: www.jaguarlandrover.com


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Current Scenario

The M-Cap of Tata Motors at the time of acquisition was

Rs.24000crore

but as the deal was sealed within few months it plunged toRs.6500crore.

The current M-Cap of Tata Motors is around Rs.70000 crore,

more than ten fold rise in M-cap post acquisition.

The Company surpassed the Reliance Industries Indias

Largest Pvt sector company as Indias Most valuable brand in

2010 with a valuation of $8.45billion.

According to the Most Valuable Brands report pegs, the value

of the Tata Motors-JLR brand soared 172%in one year to

$8.45 billion from only $3.1 billion in 2008-09

A large chunk of Tata Motors's incremental brand value of

$5.35 billion has been generated because the JLR brands are

now demonstrating an ability to drive cash flows.

Critic

Critics of leverage

that these transacti

long-term competi

involved.

LBO transactions

impact on the stak

firm.

The major risk of t

buyout is bankrupt

acquired company


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Conclusion

LBOs make the most sense for firms having stable cash flows, significant amounts of unen

tangible assets, and strong management teams

Successful LBOs rely heavily on management incentives to improve operating performanc

a streamlined decision-making process resulting from taking the firm private.

Tax savings from interest expense and depreciation from writing up assets enable LBO inv

targets substantial premiums over current market value.

Excessive leverage and the resultant higher level of fixed expenses makes LBOs vulnerab

business cycle fluctuations and aggressive competitor actions.

For an LBO to make sense, the PV of cash flows to equity holders must equal or exceed th

initial equity investment in the transaction, Including transaction-related costs.


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Documents

The Impact of LBO on Firms