Assessment Choices – Approach and Framework
Choice of Company for Assessment
▪ You may choose any business on the list of companies in this document and you should assess them as Buyout candidates
▪ They are all real public companies and therefore have lots of information on them – annual reports, good websites etc.
▪ The comments in this paper relate only to Part 1 of your assessment although the company you choose should also be used when responding to Part 2 of the assessment in line with the guidance you receive from Simon Welte.
Valuation
▪ You should assume for the purposes of the assessment that these businesses are privately owned – therefore references to share price, market value, dividends and yields are not appropriate.
▪ You should ignore the market valuation. It will offer you a useful sense of what the current valuation might be but your assessment can assume an initial purchase price LOWER or HIGHER than the current market price.
▪ Remember you are valuing the business for investment by a Private Equity Firm based on forecast financials and the capital structure which a PE deal would use. In some cases market values simply do not allow a PE deal to be done using sensible assumptions. It may be that a deal is still done but it will (unusually) have to make assumptions on an exit multiple higher than the entry multiple
▪ You are not approaching this as if it was a Public to Private deal (in P2P deals there is a need to value the business in a way that procures agreement from existing shareholders to sell – which often needs a public market control premium which would complicate the assessment and therefore should be ignored)
Assessment Choices – Approach and Framework (cont.)
Buyout modelling
▪ You should model the deal on the basis of appropriate Entry and Exit multiples – but also have the capacity to use common sense in relation to the numbers actually used
▪ Use EBITDA only as your proxy for Entry Price, Debt Multiple & Cash flow to model returns
▪ In the Buyout Model assume EBITDA and EBIT are the same
▪ Ignore Capex in the assessment calculation. PE firms would only model identified capex in the model and they would assess follow on investment independently e.g. for an acquisition. As a result, the benefits of future acquisitions cannot be modelled on Day 1 but can be commented on as part of the investment case
▪ Ignore the current balance sheet (whether or not it has high, low or no debt). Your only choice is what debt level to use as part of the buyout capital structure (making your own judgement on risk and return)
▪ The split between ordinary shares and loan note will be your choice – but assume that the loan note carries a 10% coupon
Your commercial assessment
▪ Focus on the content headings in the assessment overview only
▪ Assume that the current management team are the team that will progress the buyout
▪ There is no right or wrong – but there is a need for you to have given original thought to the assessment and base your conclusions on either specific or widely accepted fact
▪ You should have an opinion and be bold
▪ Any clever analysis, table, graphic that you elect to use will likely improve your grade but is not essential
