Public company LBO
I have a take home company for a PE shop which is a take private for a public company. Have been given very vague instructions, but essentially need to build a LBO / investment recommendation with my own projections and financing structure
Two questions;
1) I’m pretty comfortable with private company LBOs but haven’t done much public company LBO, could anyone guide me to some relevant resources?
2) Also given it’s a 5 day case study do you think they will require more detail in the modelling? Instead of modelling individual cost items it seems wiser to assume an EBITDA margin?
Thanks a lot
Answers below:
1. I don't have any good resources off hand. I think the reason they are doing this way is it does not drastically change your model, but it does limit what they have to give you to complete the model, as in Comps should be sourced from public markets, you have historical through the SEC, general forecast guidance is provided in earnings calls, etc.
You may have some private comps, but I would not expect someone to go through this exercise unless provided with the data for the comps
2. 5 days, does this include a weekend? I personally hate time like this because you don't know if they are thinking - Oh they have a job and we need to give them ample time during this period or, lets see how many hours they will sink into this case. Generally, I think rule of thumb is 3-4 hours on market research, 1.5 hour on putting historical together, 2-3 hours on putting together a clean LBO, 1 hour model review, 2 hours on producing clean outputs this is about 10-12 hours in a 5 day period. Hope that helps.
If mods remove it for "outside sources", feel free to PM me and I can share it that way
1) Ultimately a big difference is about sources and uses. Think about what uses there are in a P2P?: Do you assume management rolls with the deal? If they roll what does that mean for your equity ticket? What happens to the PF ownership structure if there are share warrants? Are there any activists in the shareholder base?
2) It really depends on the industry. E.g. if you are modelling a business in an industry where there is cost pass through, EBITDA /gross margin is completely meaningless as metric - contribution margin is key here.
Do you have an investment thesis? e.g. if you believe the SOTP valuation of a business is higher than the current valuation (at which you do the P2P), then maybe you spin out the asset heavy part of the business? This has implications for your capex intensity for example (hence impacting UFCF, the rate at which you deleverage etc)
I'd focus more on the actual company - the model is more of a way to flex your thesis and to help you understand your need to believe to reach a target return
If it’s a simple business model, may make you look better to be more detailed with cost items- perhaps you weave that into the investment thesis (ex: manufacturing cost will decrease XYZ, thus the margins increase).
5 day case means a detailed model - project each type of revenue, show some understanding on costs so I would project that individually as well. Typically thesis has one key point that interviewers are really trying to get out of you - if you do not understand the biz you will never figure that point out.
Since it is public co, I would do a premium analysis.
Since it’s a public company make sure you do a more detailed build to get to equity value, look in the 10-k for options, warrants, and RSU’s to get the FDSO. Also you can do a more detailed analysis of their debt # and cash #.
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