Okay, welcome everybody. Welcome to this session on additional LBO components.

My name's Gerard Kelly.

Today we're gonna be covering the following two things. We're going to be looking at LBO, add-on acquisitions and LBO dividend recapitalization.

Now this is scheduled for an hour.

We're not gonna spend doing an hour on this.

I'm gonna do it as quickly as short and sharp as I can, hoping for about 35 to 40 minutes.

I don't want to take up all of your day.

Now to give you an idea of what I'm gonna be covering, I'm gonna do it as quickly as I can.

These two topics are enormous. They're absolutely huge.

We can't really cover them in their entirety.

So instead I want to give you a really short, sharp intro to it using some slides, give you the concept and then we're going to build a model.

But I've done 98% of it already.

I just want to focus on the 2%. That's hard.

Take you through those two bits there. Okay? And we'll do the same for add-ons and for dividend recap.

So start with the slides really short and sharp, just the new bits and then the modeling exactly the same.

Just just the bits that are gonna be different, the bits that make these things particular.

I'm going to start with some slides.

I'm gonna start with the add on acquisitions.

So what is an add on acquisition? Well, firstly it is just a basic LBO acquisition of a company.

You start with that that model is fully built.

We've got an LBO private equity. This has been done, it's in the past.

And all we do after that is with an add on another company later.

Okay? And that can be called a bolt-on or buy and build.

Now why would we choose to do this? Well, firstly, we may do it to grow our portfolio, but also if we put two companies together, we may get some synergies and cut costs.

Better technical ability by getting economies of scale and lots of people and ideas and expansion into new geographies.

Now, common characteristics we see in add-on acquisitions is that the acquisition that's going to be added on often has a lower valuation multiple compared to the acquirer.

So let's say the acquirer has a EV multiple of 11 times.

We'll often find that the target has a multiple of maybe 6 times.

And we want to try and pull, pull that 6 times target up to the acquirer's level.

So as soon as the add-on is acquired, cash flows may be valued using the higher acquirer multiple.

Great. Now the company's targeted.

They're often underperforming. Hence the low multiple.

The acquirer can quickly turn it around. Great.

So how are we going to model it? It initially, it looks very complicated.

So we came up with these slides to make it look a lot simpler.

So an add-on acquisition starts off with your base case LBO model.

That's what we've already got.

We've acquired a company maybe a year or two or three ago, whatever.

That's a fully fledged LBO model. It's got all of this stuff in.

It's got purchase price sources and uses.

It's got a full on cash flow.

That's a, it's a normal LBO model it's got.

But what we're going to do, the bit that's different is that we're going to add on model inputs and the two of them added together will give us the base case plus the add on.

And all we're going to do in this session is just show you the bits that need to be added on and just show some tricky bits and how to model them.

Great. I want to go straight into straight into that model.

And the file I'm going to be using if you click on that link is this third one here, model add on acquisition park complete.

So let's open it up. Let's see what we have.

I'm going to start on the one LBO base case tab.

Let me just stop my slideshow, make this work a bit easier.

There we go. If we have a look at this LBO tab, this isn't LBO model, a standard LBO model.

It's all finished. It's all finished.

It's got an income statement, it's got cash flows to service debts.

We then service some debts and come up with an IRR, the IRR of this LBO 27.8%.

Great. We don't need to do anything on this tab at all.

What we're going to do is we're going to do some work on the add-on tab and then put them together.

Bring the one and the two tab together on the three tab.

Now I don't want us to spend four hours building this model.

I want us to spend about 10 minutes.

So I've left the tricky bits in orange for us to do together.

And you can see on this tab there's only three rows that we have to do.

So what's going on on this tab? What do we need from an add-on tab? We definitely don't need a full model. We don't need that. We've already got that. We're going to add some lines to it.

In this model, we're just working out what needs to be added to the number one tab and we need some synergy figures.

The add-on company will have some financials. That's it.

That's all we need to do.

So where does the trickiness come in with an add-on acquisition? Well have a quick look up in this first projected year.

Use this one. This first projected year.

I've got sales growth 5%.

Year two I've got 4% great.

Year three I've got 3% et cetera.

We've got figures for the add-on acquisition from now.

Yeah, 1, 2, 3, 4, 5, et cetera.

But we're told the acquisition year is going to be year two and it's going to happen at the end of the period.

This makes the modeling slightly tricky.

I want to exclude all of these assumptions and exclude all of these financials in years one and two.

I only want year three onwards.

So what we're going to do is we're going to use a switch in row 25 here.

We've got this full year of add-on ownership switch.

And we want this to be a one if we own the company for the whole of that year.

So let's have a look at the formula that's been written into the first year.

We just have to copy it to the rights and it says if G14 the year is greater than the ad on year, year two, just give us a switch of the one.

So if I copy that to the right, even in year two, no not getting the switch but in year three ah, good the switch has worked.

Now that switch controls all the numbers that will be added to the LBO model.

If I scroll down, it looks like all the numbers are being used.

But if I scroll down even more the add on financials for acquire LBO model, we can see that the year three has started to fill itself in.

And that's because these figures are multiplying by the switch.

Guys, let me copy this switch all the way to the right and look what happens to these numbers down here.

What will happen as I copy to the right and numbers appear great.

So that's our first thing.

We've controlled the numbers that are gonna go into the model.

Second tricky thing, this is a bit of a tricky one, is the synergies.

Let's look at road 24, the synergies percentage of prior year sales.

It's gonna go up, it starts at 3%, then 5% and then 7.5 and then we reach our run rates stay at 7.5.

The tricky thing is we don't get 3% in year one, which we get 3% in the first year after the acquisition.

So I'll say that again. This 3% does not relate to year one.

It's not specific to year one, it's the percentage for the first year of the acquisition.

Ah. So I really need not gonna do it, but what I really need is to pick this up and put this into column I.

Oh, that's a bit tricky. Can't do that.

So what we're going to do is we're going to again use that switch above to help us.

Let's have a look at the formula that we've written here for synergies.

We said if G25 equals a 1, so if the switch is on, which it's not, in fact, let's copy it to the right.

So we can't see it on here we go.

If G25 is a 1, which it now is go looking in row 24.

So that's index go looking in those synergy percentages, row number doesn't matter because there's only one, right? The column number, that's what we care about this bit. Here is the column. Which column are we gonna choose? Are we gonna choose that? 3%, 5%, 7.5%.

And it says choose the year in I14 year three and subtracts the add-on year, which is year two.

So year three minus add-on years.

Subtract two gives me number one, the first column.

So the first column number is 3%. What number do we get? We get 3%.

So I've used my switches to control the numbers going into the model and I now need to, and I now use the switch again to control the synergies that go into the model.

So synergy percentages have worked.

Now let's go and do these synergies down here in row 40.

I want to take ah, 0% of rates.

So just copy that to the right and now I get 3%.

Brilliant. So we've done all of this tab.

I've got all of the numbers that need to be included in the next tab.

So the next bit, we just need to take the one tab and the two tab and just put them together and we need to do it again and again and again and again.

But the question is, which items do we need to do it for? Let's go have a look. So here's our kind of consolidated tab, the three tab.

And in orange I've got all the items that need consolidated on tab and the two take tab, put them together.

Sales, we've got the base case.

We now need to add on the add on acquisition.

So this is relatively simple.

It says go to the two tab, find sales and then multiply it by this add on switch a brand new switch up in row six here.

That allows us to turn the add on off and on again.

So I'll copy that to the right.

Ah, nothing in years one and two, how a bit strange.

But as we go to year three, great. The add-on sales appear.

I copy that to the right. Awesome.

I can do the same thing for my EBIT.

So this will take care of my income statements What other items do I need to include? Well, my net, pardon me, my cash flows, net income.

That includes everything above. So that's great.

We've, we've got a consolidated figure already.

Depreciation, I need the add-on and CapEx.

I need the add-on. It's the same formula.

Go to the two tab, multiply it by switch.

So copy that to the right. There we go. Depreciation appears in year three CapEx.

Go to the two tab, multiply it by the switch and it appears in year three.

Good stuff. So income statement is now done.

Cash flows to service debts are now done.

We just now need to add in the extra debt.

When we take on the add-on acquisition, we're going to have some extra debt appear. If I go to the add-on tab and go to the top sources and uses of funds, we took on some debt 146.6.

So we need to include that.

So if I scroll down, there's the base case debt, that's fine. That's the basic model.

But now we're going to have the add-on debt happening here.

We need to work out how much cash we've got available.

Unfortunately we're not going to have much cash in the first couple of years because we're paying off that base case debt.

But once that base case debt is paid off, there it is, it's paid off just there.

We've now got some cash available. Very nice.

We're going to use that 77.9 to start paying off the add-on debt.

So let me copy this into year two.

Let's copy it all the way in that.

So beginning it's just last's ending, ending some of the items above.

But the issuance of the debt, this is where we get a little bit interesting.

We're only going to issue debt in year two.

We buy the company at the end of year two.

So how are we calculating this? We say if the year in G19, there we go.

If that equals the add on year, year two, then give me the debts.

So if we're in the right year, so currently in year one, no, no, no debts appeared.

But as I go to year two, there's the 146.

So as we make the acquisition, 146 appears.

No, nothing after that. Nothing after that repayments.

Oh, unfortunately we haven't got any cash.

Well we do when we get to column K.

So if we copy over to here in column K, we just need to start paying off that debt.

And there we go. We use the 77.9 to gradually start paying it down.

Great. The add-on debt is now in there and it's being paid down.

So scrolling down towards the bottom beginning debt repaid.

Well we can just copy the debt repayment across, add on debt drawn down.

Yeah, that debt, that's what we just calculated. Hundred 46. That's great. But we're now down to the bottom.

We're now going to need to work out the returns to equity holders.

Now I need the total EBITDA of the two businesses together and any savings.

So let's have a look where this is coming from.

I've got the total EBIT of the two companies there. It is includes the EBIT, the add on, and it includes the two depreciations.

So I've got my EBITDA here, I copy that to the right.

I multiply it by a multiple, multiply it by 11 in this case to get the EV take off the 2 debts to get us to equity.

Now what's new? What's new? Because this ultimately these four rows look like a normal LBO. So what's new? What's new here? It's this fifth row when we do the add-on, we paid with debts, but we also paid with some equity.

Here's my sources and uses of funds.

We paid with some equity just here, 34.6.

So we're going to need to include that.

So my equity investment, let's have a think what this is saying.

If the year I'm in June 19 is year two, the add on year, then give me the equity that we just saw that 30, I forget what it was, the 34.6.

So let's copy this to the right and as we get to year 2, 34.6, great.

Finishing up the add-on acquisition.

Now what cash flows are we gonna have? Well, if we're in, if F16. So scroll up there.

If our year year five equals the year wherein, then give me G91. Give me this big huge equity value.

So we're gonna exit in year five.

If I just copy this over to year five. There we go.

Huge exit value. Lovely.

But the thing about an add-on acquisition is that we have to include the extra cashflow paid for the add-on acquisition in year two.

So we don't put that H92, we don't put that inside the IF function.

We leave it out whenever that happens, we have to include it.

So here we have the initial payment for the initial LBO.

Then we've got an equity payment for the add-on.

And then we year five, we've got a huge cashflow to the shareholders from uh, selling out from exiting.

So what's the IRR? If I do the IRR function? Select all of those figures.

Ooh, not bad. 29.4%.

Just go back to the one tab.

Let's just remember what it was there. It was only 27.8%.

So the add-on acquisition has helped. It's really helped.

This IRR.

Let's just have a quick think, just a quick think for a second.

What was it that's increased? The IRR is is, is it just lark? Like what, what is it? Well, there's two things. Firstly, when we exit, we exit an exit multiple of 11.

And although we didn't see it, if I just scroll down, how did that come into our calculation? It came into this calculation of enterprise value, which then gives you equity value.

So when we sell the company, we sell for 11 times EBITDA.

Whoa, put the 11 in your, in your brain.

11 we exit for 11, 11, 11, 11.

But what did we buy the add-on for? If I go to the add-on tab, we bought it for 6 times EBITDA.

So there's already, I'm gonna call it free value.

We've already managed to add some free value. It's not free. Really? You bought an underperforming company, sorted out, found some efficiency savings, brings it up to 11.

Great. So that's number one.

Number two, we had some savings.

These synergies, those synergies that give you extra value.

And so instead of exiting a whatever it was 27.8, 27.8%. There it's, we now exit at 29.4% IRR.

Nice. So that gets me through my add-on acquisition.

A short sharp modeling intro there.

Guys, if of course you want to go through, again, this Felix live is recorded.

It'll be available shortly afterwards.

You can of course go back to the websites, can find the add-on acquisition full just here.

All of the numbers filled in, all of the formulas done.

So that was number one. That was the ads on acquisition.

We kept it short, kept it sharp, we just focused on the bits that are gonna be new and different.

I want to do the same thing for a dividend recapitalization.

Let's start with some slides to give you the concept.

Then we'll look at the model.

So dividend recap.

So what is a dividend recap? Well, this is where an LBO target company that, that we've bought takes on extra debt partway through its life.

Okay, well that's fine. How does that help the shareholders? Well what you do is you might take on a thousand of debts, pay off maybe 700 of the old debt, and then you could pay a dividend of 300 to the shareholders.

Ooh, very nice. This means an increased cashflow to the shareholders.

So paying a dividend increases, paying a dividend, increases your IRR rate.

How can it be done? You borrow a thousand pay off the old debt 700.

The excess is paid as a dividend of 300. Awesome.

Now how can we do this? Why didn't I just take on the extra debt when I bought the target initially? Why wait until year two or three to do this? Well, borrowing is based on EBITDA multiples.

And since I bought the company, we've now got a higher EBITDA.

As we've got a higher EBITDA. That means I can borrow more.

When I bought the company cash flows were uncertain.

Maybe banking conditions have improved since then.

I can now get more debt.

Now this does mean when you sell a company, your exit cash flow is reduced.

Some people would think, oh, well I, I earn a dividend now, but I earn less in the future.

Well where's the benefits? Well, the new dividends, it says it compensates for that production, but it should more than compensates.

So we're looking to increase that IRR to the owners, to the shareholders.

So we're gonna open up a model.

Now we're gonna spend about 10, maybe 15 minutes looking at that to show you just the new bits, just the interesting bits.

Let's go do it at this file here.

Model dividend recapitalization, part completes.

Let's open up that. Okay, so what are we gonna do? Well, we've got this base case.

Again, it's the same as the previous model that we looked at, the base case, an LBO that I've done.

But when we're not gonna make any changes to that tab, but we're now going to include a recapitalization and that in in the green tab.

We've got a couple of lines that need doing that, not really much at all.

And then we'll put the blue base case and the green recap.

We'll put them together in this final tab here.

Squash the two together. So let's look at the recap tab.

On the recap tab.

We've got the LBOs existing debt pre recapitalization.

We've bought, we bought this company, we're gonna own it for two years.

We're going to have a recapitalization in year three.

So that means we need existing debts pre recapitalization, but now it's year three.

We need to work out the recapitalization i.e..

How much new debt can I get? Can I pay off the old debt and the difference dividend? Well, let's have a quick look at our senior debts.

Excuse me. So it says if the year we're in G16 equals the recap year, that's up at the top there in C7.

So if we're in year three, we're not in year three, then go and get me EBITDA.

That's base case recap and multiply it by 3.5 times.

Give me some new debt, is what it's saying.

So let's see what happens if I copy this into year three.

Oh wow, new debts. Make a note of that number.

We're going to have new senior debts of 1,531, huge number, but the current senior debts is only 512.

Money. Money. We're going to do exactly the same with a second tranche of debt.

Unsecured notes. So again, the formula is identical.

So if we're in the recap year, go get me EBITDA and multiply it by this 1.5 multiple here.

So I copy that to the right, the new unsecured notes, 656, the old unsecured notes.

Ooh, 562.

So about another 90, 90ish of extra debt.

So my total refinancing, I'm gonna copy this all the way to right now, comes to 2,187.

Now what do I need to use that money to do? I need to use that firstly to pay off the old senior debts, pay off the old unsecured notes.

But then we've got some fees. We've got an arrangement fee.

We may have to pay a prepayment fee, the senior debts and a prepayment fee for the unsecured notes.

So my 2,187 pay off two types of debts.

So let's do those first two. There we go. There's the old debts at the top there in green.

Old debt there, great yellow greats.

And all we've done there for those formulas, lemme just get rid of these colors for a second.

We've said if the senior debt recap is a 0, don't do anything.

If there is a number here, if we are doing a recapitalization to acts as a switch, then pay off the old debt up here.

Now the arrangement fee, prepayment fee and other prepayment fee. If I just copy these to the rights, we just need to calculate fees that there's nothing crazy here.

We have included a switch here.

So for the senior debt and the unsecured notes, we could use a switch.

If there is going to be a prepayment fee, have a one.

If there's no prepayment fee, just have a 0 there.

So my total repayments okay is 1,124.

And if you look at the difference between those two numbers, that gives us around about a thousand that could be paid out as a dividend.

That's a dividend recap. That's that's the big number. That's the number we're after. We can share that with our shareholders.

Improve the IRR.

So the difference between those two yellow numbers, that's what we're after.

So my excess net profits, that's exact net proceeds.

That's what we want to find out here.

Copy that to the right. That's the thousand I was just talking about the recap. Funds available for dividend distribution. It's the same number again, but we may have decided not to pay out 100% of it in here.

We've had percentage of proceeds available, but dividend distribution, we've had a hundred percent.

I'm going to copy all of that to the right and we just have all this dividend recap just happening in that year. Nowhere else. Just in year three, that's what we had up at the top here.

So now what do we do? Now I've got my base case, LBO.

I've just worked out a whole load of recapitalization stuff.

Pay off the old debts, get new dividends, and we need to put the two together, put the model and this recap stuff together.

So we now go to this final tab here in this final tab.

It's a standard LBO model, okay? You've got sources and uses up at the top here, we've got our income statement here, okay, standard stuff. We'll pay off some debt, work out an IRR.

But the new thing we've got in the income statement are the fees, prepayment fees, fees on the financing.

All need to now be included. So that's fair. That's fair.

Let's have a look at what this switch is saying.

It's saying if the circ switch is turned on, this will create a circular because more fees.

Ah, well that means more debt, okay? But more debt means more fees and it just goes around and round around around.

So we need a circ switch to be turned on.

That's on the info tab. It's just here.

I'll turn that to a one.

I then get the circular warning, which means I need to go into my options.

So file options, formulas, and I enable iterative calculations.

I now go back to the base case recap.

So if the circ switch is on, which it is, it tells me to sum up the three fees, sum up the three fees.

On the recap tab, there was a prepayment, prepayment and a financing fee.

So if I copy this and it then says multiply that by the recap switch.

If I copy this into year three, there we go.

Those fees suddenly appear.

Now as I copy to the right, we don't see them appear again because they're one-off fees.

Okay? Income statement has now been adjusted.

Cash flows to service debts, no adjustment needed, but my debt servicing.

Ooh, let's have a think my beginning debt.

Well that's gradually being paid off, gradually being paid off, gradually being paid off. Great. That gets me in my ending senior debt balance.

But we now need to include the recapitalization, the extra debt we're gonna take on.

So what we're gonna say here is recap 32 minus 37. Let's have a quick look. 32 minus 37 senior debt recap there minus 37.

There we go. There's the extra, it's roughly 1,050 thousand of extra debt there.

So copy that and very good in that third column there, extra thousand of debt appears.

Copy that all the way to the rights. Extra thousand of debt.

And there's interest on that already done exactly the same for the unsecured notes, the unsecured notes, the beginning amount is not being paid off until we've got some cash.

Okay, easy getting. The venture gets paid off.

That gets us the ending. Unsecured notes pre recapitalization, but the recapitalization now says, ah, pay off the old debts, grab the new debts.

So G33, G38, pardon me.

So that's the new debt minus the old debts, what it is.

So 33 minus 38, there is the new debt.

638 old debt.

So that's about an extra 90, an extra 90 of unsecured notes.

Copy this to the right. There's the extra 90, 93.7.

Great, that needs some interest. Nothing too crazy there.

Just copy that to the right.

So how much is our dividend recap then? Well, we already had that on the previous tab. It was row 45, 1,063.

Copy this to the right. There's the thousand and 63 excellence, and there are the fees being paid off.

Great. So we're into the final minutes now.

We're about to pay a huge dividend to the equity holders in year three.

So down at the bottom here, we're trying to work out returns to equity holders. We've got this equity value and when we get to year five, so what 1, 2, 3, 4, 5, we'll pay a big amount of equity out to the shareholders.

But prior to that, in year three, we'll pay a dividend recap.

So we're going to say go up to row 80, find the dividend recap. There it is. Copy that to the right.

In year three, get this huge positive.

So my cash flows to equity holders is going to grab those two numbers, but it will only grab this equity value if we are in year five if the exit year is deemed to be year five.

But it will always grab this dividend recap regardless of whether it's an exit year or not.

So as I copy this to the right, it grabs that dividend, that green figure, and then when we get to year five, it grabs that yellow figure.

So let's compare this to the base case.

We've got now an IRR 28.4.

Remember I turned the circ switch on interest is now flowing.

My base case IRR will be a bit lower than we saw earlier.

So my base case, IRR 26.1%.

What has the dividend recap done? It done. It's taken on a bit of debt, paid a dividend.

What's it done to that figure? It's changed it to 28.4.

Amazing. So it's made a big difference.

It's made a big difference. 26.1 up to 28.4.

Amazing. So two things.

Two things that can help augment those returns to equity holders.

We've got the add-on acquisition added on partway through the life of the LBO.

Can have a dividend recap debt, pay a dividend to yourselves.

Each of them increases that IR role and that gets us to the ends, guys.

I hope you found that useful.

Of course, if you want to have a look back at those materials, they're available on our website, the full file for both of them.

Just at the top here. The recording for this will be available shortly, probably the end of today.

I hope you found that useful. Hope, see on another Felix Live soon.

Have a great day. See you later guys. Bye-Bye.