FIN 855
Case: Valuing a Cross-Border LBO: Bidding on the Yell Group
Read the Valuing a Cross-Border LBO: Bidding on the Yell Group case in the course pack and answer the questions below. 1. Is Yell a good leveraged buyout candidate? 2. How similar are the U.K. and U.S. businesses? 3.
Do the management projections in Exhibit 6 and Exhibit 7 make sense to you? In other words, if you were part of the Apax/Hicks Muse team, would you trust them?
4. How does the cross-border nature of the Yell deal affect the valuation of the firm? 5. How much is Yell worth? How much would you bid? 6. If you were Apax/Hicks Muse would you do the deal?
Hicks Muse and Apax, two of the leading private equity groups in the world, were preparing a proposal for the largest European Leveraged buyout transaction ever executed by a financial buyer: the acquisition of Yell Holdings from British Telecom (BT). The deal was crucially important to them, since it would leave its mark on the reputations of both private equity firms. Merrill Lynch and CIBC World Markets had been chosen as partners for the deal and they would lead a syndicate contributing ￡ 1.45 billion of total debt to finance the acquisition. The two private equity groups are under the pressure to reach a final consensus on the valuation of Yell and how much to bid for it.
The first thing they needed to consider is that whether Yell is a good LBO target. Yell was the company to be created to act as a holding company for the Yellow Pages business in the United Kingdom and the Yellow Book business in the United States. After investigating the related issue, the Monopolies and Mergers Commission claimed that BT Yellow pages held a monopoly position in the classified directories advertising services market. Yellow Book USA also had the market-leading position as independent publisher of business directories in the United States. Such strong market positions ensure that Yell won't be squashed after the leveraged buyout and its cash flows are less risky. In addition, Yellow Pages was considered as a “must buy” by many small and medium-sized businesses, and its revenues did not fluctuate widely with economic cycles. Therefore, although the Office of Fair Trading would cap the advertising price growth rate and the average advertisement price was expected to decline, we believe Yell can still generate steady and predictable cash flow, which is the most important trait when evaluating a LBO candidate since the firm must have the ability to support the relatively high interest expense.
Moreover, BT had large amount of tangible assets, so we infer that the amount of tangible assets of Yell is also considerable. The assets of the acquired company are used as collateral for the loans in addition to the assets of the acquiring company. Tangible assets will also help to obtain more low-interest financing and thus less cash will be necessary to repay the loans.
Yellow Book made ambitious growth plans in order to capture much of the predicted market share gains. Apax/ Hicks Muse team thought that an aggressive strategy of new product launches would have to complement organic growth to achieve management projections on the revenue side. As a result, they built many new launches each year into their forecasts, which may not be a good thing for LBO. The acquirer wants to use all the possible cash to pay off the debt, so large cash outlays for growing purpose would not be preferable. Working capital Looking at capital expenditure as a percentage of EBITDA, the expenditure of each year represents less than 18% of Yell’s EBITDA. Such moderate capital expenditures guarantee that cash flows were not diverted from the principle goal of debt repayment.
British Telecom was under pressure to reduce its heavy debt load. Such a strong motivation to cash out would also increase the chances of success.
Yell Group Ltd. was the company to be created to act as a holding company for the Yellow Pages business in the United Kingdom and the Yellow Book business in the United States. British Telecom, under pressure to reduce its heavy debt load, had been wavering for months about the future of its two Yellow Pages divisions. Yell consisted of two main assets: BT Yellow Pages, the market-leading classified directory business in the United Kingdom; and Yellow Book USA, the market-leading independent publisher of business directories in the United Staates. BT Yellow Pages: BT Yellow Pages was a series of annual, regional, classified directories that listed the name, address, and telephone number of substantially all business telephone subscribers in the United Kingdom. In the 2000 fiscal year (ending on March 31), BT Yellow Pages directories contained 813,000 advertisements for approximately 390,000 advertisers. That represented nearly 85% of the U.K. classified directories advertising revenues. Yellow pages advertising expenditures tended to be more stable than other forms of media advertising and did not fluctuate widely with economic cycles. They were considered a “must buy” by many small and medium-sized businesses since the yellow pages were their principal means of reaching customers in the United Kingdom. After investigating the issue, the Monopolies and Mergers Commission claimed that BT Yellow pages held a monopoly position in the classified directories advertising services market and that prices were “higher than would be the case if competition were effective.” The Commission recommended the imposition of a limit on the annual increase in rates for advertising in BT Yellow Pages. Yellow Book USA: Yellow Book was the market- leading independent publisher of yellow pages directories in the United States. It had approximately $330 million in revenues and $42 million in EBITDA. New Market Launches: Yellow Book made ambitious growth plans in order to capture much of the predicted market share gains. Apax/ Hicks Muse team thought that an aggressive strategy of new product launches would have to complement organic growth to achieve management projections on the revenue side. In LBO transactions, financial buyers seek to generate high returns on the equity financial leverage (debt) to increase these potential returns. Financial buyers opportunities with by analyzing expected internal rates of return (IRRs), which invested equity. IRRs represent the discount rate at which the net present value
investments and use evaluate investment measure returns on of cash flows equals
zero. Historically, financial sponsors' hurdle rates (minimum required IRRs) have been in excess of 30%, but may be as low as 15-20% for particular deals under adverse economic conditions. Hurdle rates for larger deals tend to be a bit lower than hurdle rates for smaller deals
Risk Equity holders – In addition to the operating risk assumed risk arises due to significant financial leverage. Interest costs resulting from substantial amounts of debt are "fixed costs" that can force a company into default if not paid. Furthermore, small changes in the enterprise value (EV) of a company can have a magnified effect on the equity value when the company is highly levered and the value of the debt remains constant.
Debt holders – The debt holders bear the risk of default equated with higher leverage as well, but since they have the most senior claims on the assets of the company, they are likely to realize a partial, if not full, return on their investments, even in bankruptcy.
This report provides a detailed analysis of the question of whether or not an LBO of Steve Madden (ticker: SHOO) is viable. Thus this report will focus not on Steve Madden’s earning potential but its ability to generate cash flows that will be able to service acquisition-related debt, while still leaving room for further investment to drive the company’s growth - thus leading to of appreciation of the underlying assets The purpose of a leveraged buyout is to use the target firm's cash to pay back the debt used to buy the firm as quickly as possible. Based on this overall purpose, several characteristics of a good leveraged buyout (LBO) can be identified.
The most important trait is steady cash flows, as the company must have the ability to generate the cash flow required to support relatively high interest expense
has steady and predictable cash flow. •
Steady and predictable cash flow - A steady and predictable cash flow will ensure that the LBO target firm will be able to meet its interest
payments for the debt it will take on. Steady and predictable makes it easier to get a loan since there is less risk that the firm will not be able to meet interest payments. •
Low Enterprise Value/EBITDA multiple - The Enterprise Value (EV)/EBITDA (Earnings before interest, tax, depreciation, and amortization) multiple is an indicator of how easily the cash flows will be able to cover the purchase price. Enterprise Value refers to the total value of the firm--market capitalization (equity) plus long term debt (don't forget the current portion of LTD).
•
Large amount of tangible assets for loan collateral - Tangible assets will help to obtain more low-interest financing. The more low-interest financing the acquiring firm can get, the less cash will be necessary to repay the loans. Loan collateral includes current assets such as cash and inventory, as well as long term assets like factories, property, and equipment. the assets of the company being acquired are used as collateral for the loans in addition to the assets of the acquiring company.
•
Potential for expense reduction - If the acquiring firm has good managers on hand (which is often the case in a leveraged buyout), then they hope to be able to reduce expenses when they acquire the target. Reducing expenses will free up cash and allow for faster repayment of the debt. Private firms that are targets for LBO's often have room for expense reduction since management is often entrenched and has little experience outside the firm.
•
Minimal future capital requirements - The acquirer doesn't want to have to make large cash outlays to keep the company running and growing. The acquirers want to use all the cash possible to pay of the debt.
•
Limited working capital requirements - This is pretty much the same as the point above. Any year-over-year increases in working capital result in less free cash flow (less money to pay down the debt). LBO's need money!
•
Clean balance sheet with little debt - Little debt will mean few obligations to pay off other loans. This makes the deal less risky (lower leverage = less risk) and allows excess cash to go to the debt necessary for the leveraged buyout.
•
Strong market position - A strong market position can ensure that the target company won't be squashed after the leveraged buyout goes through. Such a position makes cash flows less risky.
•
Divestible assets - Divestible assets provide the acquirers with extra means to raise cash, particularly if the cash flows are jeopardized, but also simply to pay off the debt more quickly. Such assets can include equipment, land, brands, etc.
•
Viable exit strategy - The point of a leveraged buyout is to get a return on the equity investment, this involves selling the company a few years after the LBO goes through. Without a good exit in site, the LBO probably won't (and shouldn't) happen.
• Strong, predictable operating cash flows with which the leveraged company can service and pay down acquisition debt •
Mature, steady (non-cyclical), and perhaps even boring
•
Well-established business and products and leading industry position
• Moderate CapEx and product development (R&D) requirements so that cash flows are not diverted from the principle goal of debt repayment •
Limited working capital requirements
•
Strong tangible asset coverage
•
Undervalued or out-of-favor
• Seller is motivated to cash out of his/her investment or divest non-core subsidiaries, perhaps under pressure to maximize shareholder value •
Strong management team
•
Viable exit strategy
Based on the information obtained from various sources and Yell’s website, it shown that Yell has grown from the only one classified directory company in Brighton, UK in 1966 to be a leading international company with size of 5,300 employees which provide an useful guidance and information for their customer in the classified advertising market in the United Kingdom, the United States, Spain, Chile, Peru and Argentina at this time. Yell create and receive their earnings by giving an opportunity for buyers to be linked with a simple procedure with their sellers through an integrated portfolio and low-cost advertising products which is available online, over the phone and printed. From a simple way like this, the company become known and famous in the whole world because they can provide what are the requirement from their buyers and sellers. With this assignment, firstly I would like to give a brief explanation about the definition and purposes of TQM. Furthermore, I would like to describe the implementation of TQM application, thus the achievement of the company for conducted TQM application.
characteristics of a good LBO target include steady cash flows, limited business risk, limited need for ongoing investment (e.g. capital expenditures or working capital), strong management, opportunity for cost reductions and a high asset base (to use as debt collateral). The most important trait is steady cash flows, as the company must have the ability to generate the cash flow required to support relatively high interest expense
6. Issues to Consider in an LBO Transaction Industry characteristics:
•
Type of industry
•
Competitive landscape
•
Cyclicality
•
Major industry drivers
•
Potential outside factors (politics, changing laws and regulations, etc.)
Company-specific characteristics:
•
Strategic positioning within the industry (market share)
•
Growth opportunity
•
Operating leverage
•
Sustainability of operating margins
•
Potential for margin improvement
•
Level of maintenance CapEx vs. growth CapEx
•
Working capital requirements
•
Minimum cash required to run the business
•
Ability of management to operate effectively in a highly levered situation
Market conditions:
•
Accessibility and cost of bank and high yield debt
•
Expected equity returns
S&P defines a good LBO as one that restores credit quality in a meaningful way, typically returning the rating on the company to investment grade after the buyout. In the bad group are those that faced significant financial stress after the LBO, often ending in bankruptcy in succeeding years.
