Final Presentation Vivek

7/30/2019 Final Presentation Vivek

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To explore the benefit of LBO to the managersin taking up their vital decision regardingmerger as a distinct source of value creation

and to conceptually investigate the goingprivate transactions via LBO as a response todeficient governance structures as well as thepost buyout board restructuring.

Maximization of EPS

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Discussion with Project Guide

Selection of topic and collection of data

Data was collected from Internet, Newspapers,

Journals and books.

Analysis of Data.

Observations based on study

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Buyout The Purchase of a company orcontrolling the interest of a companys shares.

Leverage Buyout - The acquisition of a company

using debt and equity finance. As the wordleverage implies, more debt than equity is used tofinance the purchase, e.g. 90% to 10% equity.Normally, the assets of the company being

acquired are put up as collateral to secure thedebt.

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Mortgaging a Home

Buying a car/taxi, financed by bank

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In an LBO, the private equity firm acquiring thetarget company will finance the acquisition with acombination of debt and equity, much like anindividual buying a rental house with a mortgage .

Just as a mortgage is secured by the value of thehouse being purchased, some portion of the debtincurred in an LBO is secured by the assets of theacquired business. The bought-out business

generates cash flows that are used to service the debtincurred in its buyout, just as the rental income fromthe house is used to pay down the mortgage. Inessence, an asset acquired using leverage helps payfor itself.

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In a successful LBO, equity holders often receivevery high returns because the debt holders are

predominantly locked into a fixed return, whilethe equity holders receive all the benefits from anycapital gains. Thus, financial buyers invest inhighly leveraged companies seeking to generate

large equity returns. An LBO fund will typicallytry to realize a return on an LBO within three tofive years. Typical exit strategies include anoutright sale of the company, a public offering or a

recapitalization.

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Leveraged buyout is a strategic way throughwhich control of a corporation is acquired bybuying up a majority of their stock usingborrowed money. A leveraged buyout may alsobe referred to as a hostile takeover, a highly-leveraged transaction.

Acquire control

(through buying majoritystocks)Pay off

Borrowed Money

(Loans/Debentures) 8


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In an LBO, there is usually a ratio of 90% debtto 10% equity. Because of this high debt/equityratio, the bonds usually are not investmentgrade and are referred to as junk bonds.

Corporate

Finance

CompanyAcquistion

LBO

Method

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Efficient and experienced management team

Assurance of sufficient and stable cash flow

Lower degree of operating risk

Limited amount of Debt

Other factors

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Large positive abnormal returns Tax benefits

Companys credit rating

High levels of debt In case of loss assets

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Senior Debt

Subordinated Debt

Cash-pay Bonds

Step-coup on Bonds

Preference Shares

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Special Purpose Vehicle

Mezzanine Financing

Trading on Equity

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Low capital & cash Requirement

Synergy gains

Efficiency gains

Leveraging

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Tata Steel Corus 2007

Tata Tea Tetley 2000

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Acquisition of Corus by Tata steel Limited is also a caseof Leveraged buyout. In case of Tetley, Tata used onlyone SPV, i.e. Tata Tea (GB) Limited. In case of Corusthey used a chain of SPVs-Tata Steel Asia Pt was set up

as a wholly owned Singapore based subsidiary of TataSteel limited and Tata Steel UK Limited was set up aswholly owned subsidiary of TATA steel Asia Pt.

Debt mobilization was also done by both the SPVs.

$5.6bn through a LBO ($3.05bn through senior termloan, $2.6bn through high yield loan).

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The first major LBO by an Indian company wasacquisition of Tetley by Tata in early 2000.In this case,Tata Tea set up a SPV in the UK in the form of Tata Tea(GB) Limited. This SPV had equity capital of GBP 71million contributed by Tata Tea Limited. The SPV in turn

mobilized GBP 235 million by way of long-term debt onthe security of the assets and cash flows of Tetley andacquired 100 percent of Tetley at the cost of GBP 271million, taking it private.

The Tata-Tetley deal was rather unusual, in that it hadno precedence in India. Traditionally, Indian market hadpreferred cash deals, be it the Rs.10.08 billion takeover ofIndal by Hindalco or the Rs. 4.99 billion acquisition of

India world by Satyam. 17


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LBOs lead to downsizing of operations

Research and development expenditures have

also been controlled.

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Further it has been suggested that managementtakes advantage of superior information abouta firms intrinsic value. The evidence, however,indicates that the premiums paid in leveraged

buyouts compare favourably with those ininter-firm mergers that are characterized byarms-length negotiations between the buyerand seller.

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Merger involves a combination of two firmssuch that only one firm survives.

The leveraged buyout preserves the integrity ofthe firm as legal entity but consolidates

ownership in the hands of a small groups

LBO is different from Sell off/

Spin-off Contraction including equity carve outs,

abandonment of assets, and liquidation;

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If private company will takeover the publiccompany it will come under the LBO

The guidelines for LBO is given by RBI

The objective of business financial investor is to

exit the investment after 3-7 years. Internal Rate of Return (IRR) of in excess of 20%

on its investment

The target company goes private after a LBO.

The ratio of the debt owed by the company is notmore than twice the capital and free reserves aftersuch buy-back

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Tetley United Kingdom Tata Tea 271 million LBO

Whyte & Mackay United Kingdom UB Group 550 million LBO

Corus United Kingdom Tata Steel $11.3 billion LBO

Hansen Netherlands Suzlon Energy 465 million LBOTransmissions

American Axle United States Tata Motors $2 billion LBO

Lombardini Italy Zoom Auto $225 million LBOAncillaries

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COMPANY ACQUIRER VALUE TYPECOUNTRY


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We understand why the L in the LBO is soimportant. It should be clear that by adding aleverage component to our investment ROIsignificantly improves.

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Final Presentation Vivek

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