So welcome to this webinar.

What we're gonna be doing through this session is looking at how we model the effects of a add-on edition within an LBO transaction.

So we're thinking about how we can see whether adding in another company, so one that we've acquired as part of an LBO transaction might actually benefit the returns to the private equity fund as a whole.

So that's where we're kind of going for this.

We'll have a look, little look at the kind of thought process behind it and how we might update our models to pick up all of this content.

But I guess the first thing to note is that a lot of the next hour we'll be looking at building a model or adjusting a model that we've already got a lot of the component parts of effectively.

So please make sure that, you've gone to the relevant section of our website.

I'll just share my screen so you can see what that would look like.

So I can just point you out where to exactly go to find the relevant materials.

So within this section of the screen, what you're gonna need to do is just jump down to the bottom right hand side. There's those green download tabs, the full file. We'll have effectively the solution in it for us when we're done.

So if we do need to drop off, you can see where we get to in the end, but the empty version is the one that we need to be using to start off with.

So that's the file that we're gonna be using and really what we're gonna be doing over the course of the next hour is building the model to allow us to see what the outcome looks like.

If we take an existing model where we've maybe got an IPO, sorry, where we've got an LBO that we're in the process of valuing, we've come up with a, 20, 25% percent, who knows and an IRR and it looks okay, but we might wanna see if adding another company, making this in a large company effectively, whether that is good for the LBO returns to the fund as a whole through the course of that process.

So that's where we're gonna be going.

I've got one very quick slide to start off with, but uh, please do feel to drop me a message in the chat function if you can do that or in the Q&A The Q&A tends a bit, a little bit easier sometimes if you, maybe have some restrictions in terms of what you're allowed to do through what zoom logins.

So sometimes the Q&A point A be a little bit better.

Okay. So in terms of our process, what we're thinking about here for these add-on acquisitions is that we've gone out and acquired a company or in the process of thinking about an LBO acquisition for our private equity fund and through maybe the due diligence process, it's come out that maybe there's a company that we might think about going out acquiring or maybe the company has been investigating potential add-on acquisitions for themselves, in the past.

And maybe that's an option available to us once we go out and buy the target company.

Maybe there's an add-on acquisition that we can do to increase market share or increase product range, all of which is designed to help us reach that desired outcome at our exit point.

So we're looking at maximizing our returns in terms of the process for adjusting our model. What we'll have in place already is our LBO valuation model for our kind of target company.

What we're gonna do is looking to adjust that model to incorporate into it the impact of this additional company that might be acquired during our investment holding period.

So in terms of updating our model, the first most important thing that we need to do is make sure that we turn iterations off before we start so that if we create an inadvertent circular reference, we get told about it just like standard modeling practices.

But if we're looking at editing a model, it's easy to just forget about that and to leave our iterations on.

So we'll leave those on, we'll take those off before we start editing the model.

We'll think about the inputs just like any sort of LBO valuation.

So we'll think about a valuation multiple, we'll think about some assumptions in terms of how much debt capacity there would be.

Because if we're buying another company during the initial investment horizon, we might need to put some of our funds own money into that transaction.

We might be need, might need to raise some additional debt financing.

So we wanna summarize that in a sources and uses table.

We can then go away and build our updated model, essentially update the forecast for the future in terms of what the add-on might add.

The problem we've gotta be a little bit careful with here as we get into the forecasting of the future is that if we're thinking about acquiring another company, the timing of that add-on acquisition might not be certain.

So we wanna make sure that we build in flexibility within a model to update the estimated acquisition date.

So that's one of the complexities that we'll bring in.

The other complexity that we are gonna bring in as we go through doing our analysis is that we want the model to show us the two outcomes, either not going ahead with the add-on acquisition, just the standard LBO acquisition or how things would look in terms of an IRR if we actually did go through this additional add-on acquisition.

So we wanna be able to kind of view it in both pictures with and without the add-on to see which is the better outcome for us in the one model.

And then we can do all of our standard analysis at the end thinking about credit ratios, thinking about the IRR return to the private funds and any sensitivity analysis after that as well.

Okay, I think that's enough of a starting point. We're gonna get into the actual numbers.

We'll see loads more in terms of the processes as we get into the numbers themselves.

So if you could grab open the Excel file, that's all we there on this front page is the LBO analysis.

Complex components empty, which should look somewhat like this.

Now in this model what we're assuming is that we have already an LBO transaction that we're in the process of working through. We're going through maybe the due diligence on that at the moment.

And this is our example company that is a totally made up company that we're calling Talisman.

So we've gone out and we've done all of our analysis for Talisman.

Now at the moment if I just go to the info tab, you can see that the circular switch is off. So I'm just gonna switch that on and I'm gonna get a warning sign to tell me that my iterations are off at the moment as well.

So let's just turn those on and what you can see from all of this that we've got our entry and exit valuation multiples of 11 times.

We've got six times debt capacity that is split four times senior debt and two times subordinated debt or unsecured notes.

As we go down through this kind of standard LBO model, I'm gonna be assuming through the course of today that you've got some familiarity with LBO models. Generally as you go down through this you can see that we've got our income statement, then a kinda short form cash flow statement that just gives us the cash flows available to service debt.

And then we've got the cash sweep through our debt waterfall, paying off senior debt. Then the unsecured notes and as we can see further on actually have rising cash balance towards the very end.

Okay, what this gives us is a 26.1% IRR, which is all right, that's not bad, but maybe we could do better.

So during the due diligence process, maybe Talisman has suggested maybe their existing management suggested there was a company they were investigating, they're not quite ready for acquiring yet, but maybe in a couple of years that might be something that might be beneficial for this LBO investment for the private equity fund.

And that's what we're gonna be looking at on the red tabs, the two red tabs to the right, the recapitalization tabs in green.

We're not gonna look today, therefore next week's Felix live session.

Okay, so in terms of the add-on acquisition, so we've got this other company that we might be looking to add into effectively acquire buy talisman if we were to acquire them to enlarge the size of the business.

And we've got some forecast here for this company on a standalone basis.

We've also got some underlying assumptions, so we're gonna value it on a six times EBITDA basis.

We've got fees as 3% of our enterprise value.

We've got maybe some additional debt capacity that we can take on up here up to five times EBITDA.

And we've got an interest rate for this additional acquisition.

Now we've put the acquisition date in as a year five, but if you saw from the Talisman acquisition, this is the same as the exit point for the Talisman LBO as a whole.

So this doesn't really feel like an add-on acquisition if the add-on company will be acquired at the same point as we exit the investment in the LBO, that's not really very interesting for us.

So we just changed that to year two.

So let's assume that we're actually making this acquisition in this additional company adding to talismans size and geographical reach and product range.

We'll do that at the end of the second year. So that's our assumption here. Okay.

Now, because we want the model to be fully flexible, we haven't actually got the LTM EBITDA and therefore the enterprise value calculations filled in yet because the LTM EBITDA is sensitized based on based on the acquisition year.

So here we've got an index function, well that index function is looking at, it's saying well let's look in the range of EBITDA numbers forecasting out into the future.

So that's G 26 onwards and pick the relevant year for the historic.

So same year we're acquiring at the end of year two, then the year two EBITDA will be the LTM EBITDA.

So it's just gonna pick that number up.

So before we get any of the sources and uses populated, what we need to do is to forecast what this add-on acquisitions companies numbers will look like on a standalone basis.

We're not gonna go through the whole three step model here. Just gonna calculate what we need.

And what we need to begin with is a growth rate on our revenue.

So the revenue growth rate here, 5%.

So we can just multiply it through, I'll put the formulas in, before copying it across so you can kind of keep up as we go.

Next we also need an EBITDA number.

So the EBITDA is forecast to be 22.5% of sales.

So we can just model that in the standard way.

We also need a number for CapEx. That will be a cash flow once we get into our calculations for cash flows for debt service and CapEx forecast to be three point half percent of our sales.

So just cap at that number.

We need depreciation again for our cashflow calculations and that's expected to be 96% of our CapEx.

And then our ebit, well we can do this slightly more historically as well, is gonna be your EBITDA minus your depreciation.

And then we can just copy that into that. First of all costume. Other thing we're gonna need for our cashflow calculations is a, a change in operating working capital.

And this is simplified just to allow us to get it done in the the next 45 minutes or so.

So clearly you would want maybe want more detail if this was been done in earnest, but historically let's just add up the operating assets and liabilities, current operating assets and liabilities for the first forecast year. We're gonna need to use an assumption and we made a simple assumption here that it is 10% of sales.

So there's a bit of a gap here.

A bit of a jump in EBIT part of that jump in EBIT because we've got this slightly higher EBITDA margin.

Okay? Now these are all data points for the add-on target in isolation.

So we haven't so far thought anything about how this looks within Talisman, our target LBO company going out and buying another company during our investment horizon.

But what I'm gonna do is just copy this all out for the nine years that we've got of the forecast so that we've got all of those data points in there.

I'll try and keep the formulas over here on the right hand side so that if you do get stuck and want me to see the contents of a particular cell, please just shout and I can highlight that for you.

And I'll do the same thing for the operating working capital as well.

Okay, so these are data points just for the add-on target in isolation.

The second thing we're now gonna go on to do is to say, well what would this look like within the context of our framework acquiring this company and adding its into our aliman company that we're looking to acquire? So what of those numbers are we going to need to add to our model for the LBO IRR calculations? Well if we're only gonna be, let's look back at our assumptions.

If we're only gonna be acquiring this company at the end of year two, then any of the income statement numbers for year one and year two won't be relevant for us.

Because we're only gonna buy this company at the end of year two and therefore see them as part of the talisman group if you like, from year three onwards.

So what we need is a couple of formulas that sensitize based on that acquisition year that add-on year.

So if we go to the first forecast year here in that first forecast year, what I'm gonna say is, well I'm only gonna pick up the sales number from row 25 if we are after the acquisition date.

So if excuse a quick if formula here, if the year count in row 13 is less than or equal to the acquisition year assumption end of year two, then we're just gonna put a zero because that will be before the acquisition and we won't get those sales or profits.

You'll note when we get to sell C7, it doesn't say C7, it says add on year. So I've got a named sell here.

It'll make things a lot easier for us, easier for us later on because we're gonna use this sell a lot of the time.

Also it means it's an absolute reference. So I haven't gotta put those dollar signs into lock onto it.

So if the year that we're in is less than or equal to the year of acquisition, the add-on acquisition year, then we just get a zero.

Otherwise we will find those sales or we would at least rather want to see the sales being pulled through.

So in year one we get nothing in there at all.

But if I go across to year three, then you'll see that by the time we get to year three, this is now after the acquisition date end of year two.

So that we do then see the revenues being pulled through.

Another thing that I'm gonna do though is I'm gonna apply this formula in a number of different places and I don't wanna have to type out the whole IF formula every time.

And the thing that's gonna be consistent, well first of all it's the add-on year that's already a named sell.

So an absolute reference, don't need to do anything for that.

But the G13, I do want it to change as we go across to the right, but I always wanna look at row 13.

So if I hit F4 twice, you'll then be left with just that dollar sign in front of the 13, which means that if I copy this formula down, it will keep looking at row 13.

If I copy it across to the right, then it'll look at the additional columns as we go further across.

And you can see that as we go down to the ebitda.

If I just hit control D then now what I've got is a formula here is I'm looking at the EBITDA row 26 here.

So if the year that we're in still row 13, if that is less or equal to the year and that it is, we just get a zero otherwise copy each to the right.

You can see that we get the EBITDA coming through in the third year.

Okay? So that nice little lift statements, few little tweaks to it that helps us out, um, quite a bit thereafter.

Okay, now we're gonna, if we acquire Talisman through the LBO, we're then gonna go out and buy the add-on company at the end of year two.

What will happen thereafter is hopefully we'll get some synergies by putting these two businesses together.

So we're gonna model what our synergies might look like and this is definitely the most complicated formula that we're gonna see across this whole model once we've got this one sell done. Everything else is relatively plain sailing after this.

But this is slightly complicated because of two things.

Firstly, we only wanna show the synergies if we are after the acquisition date.

So we need another if statement here.

But if we go and have a look at the synergies, the synergies are being expressed as a percentage of the LTM revenue from the date of acquisition.

But these are synergies from the add-on year.

So these are not synergies gonna be in 20, 23, 24, 25, 26, but rather year one after the acquisition year two after the acquisition and year three after the acquisition.

So whether we acquire this company in at the end of year two or maybe at the end of year three, you would then after that expect to see the ramp up of 3% of SA of sales, then 5%, then seven and a half as we go through the reorganization process and queing these two businesses together.

So we've gotta be a little bit careful here as to how we pick up the right numbers for this.

So what we're gonna do, first of all, we're gonna say first of all, well I'm only gonna get synergies if after the acquisition date.

So same as before. If the year that we're in is less than or equal to the, I'm just gonna use the add-on year here. If I start typing add-on year, I know that's the name of the named cell, I've got add-on year that I can just tap to select it. I haven't gotta go up to C9 C7 every time, then we just want a zero in here.

If not, what we wanna do is take some number for LTM sales, the sales of the year before the acquisition takes place and times it by well three or five or 7% as the synergies whether we are 1, 2, 3 or nine years maybe after the add-on acquisition's taking place.

Sounds relatively complex and it's not straightforward, but what we're gonna use is that same index function that we saw, uh, for the actual EBITDA number, the LTM EBITDA up there on C9.

And so what I'm gonna first of all do is say, well I first of all want to get the LTM sales for the yep LTM sales for the year of the acquisition.

So if we're acquiring at the end of year two, then my LTM sales is the formula those from year two.

So I'm just gonna use exactly the same formula as we did in the top.

So we wanna have an index on all of the sales numbers and lock onto that so it doesn't change as I copy it across to the right and what I want, well if I'm acquiring at the end of year two, I want from all of that selected area, I want the second column.

So all I need to do is to go up and apply to that the add-on date.

So if we're acquiring the end year two, then the second element in this is the one 30.3 acquiring year three, that will give me 134.2.

Okay? So that will give me the LTM sales as of the acquisition and then to multiply that by, well how many years after the acquisition are we? Well I'm gonna take again an index function and multiply it by, well it's gonna be the percentages I've got here on row 21 can lock onto that so it doesn't move as we go to the right.

But we then need to say, well for this I'm gonna need to take the year that we're in minus the add-on year.

So if we're in year two for example, let me just copy this all way across the right so that we can actually see it in effect.

So what we're saying here, I'll just scroll to the right a bit further.

So you can see all of this formula here we are in year three.

We're saying if we are less than or equal to the add on year, we're not, we're year three, add on year is year two.

So we're now after the acquisition, what we then wanna do is look first of all at the LTM sales number, well year two here.

So we pick up the second one 130 and then we look at this column up here. We're in year three. Take away from that the add on year, that's two. So we get the first column 3%.

If we were then to go one further out to the right, we would then get for year four, second year after the acquisition, we'll then get the 5% of sales synergies number and if we go again out to the right one more out here, we'll get the 7.5% of sales.

So you can see that this is the ramping up of that synergies as we go through this.

The kind of integration process.

I copy this all the way out to the right just to demonstrate the validity of this.

If we were to change the acquisition year, you know, we haven't.

So we're definitely gonna buy them into the second year. Maybe it turns around, we only can buy them at the end of the third year.

This add-on acquisition.

Well if I change that acquisition year to year three and then go down to what the synergies look like, the synergies don't start in year three. Now they start in year four and you can see that ramp up in year five and year six until we get to the 7.5%.

Okay? So, uh, it enables us to effectively always apply this early year ramp up in the synergies no matter when the year of the acquisition is.

So quite a complex formula with two index functions, one of which this first element here allows us to get the LTM sales from the acquisition date.

And the second element gets us the percentage of those sales, which are the synergies that we're enjoying.

Okay? So quite a bit going on with that one, but that, I promise you is the worst formula we're gonna see through the whole of the rest of this model bill.

Okay, so we're back at the acquisition happening at year three and we can see that we get nothing happening in year one, year two, but in year three we've got another year three sales, year three EBITDA and those synergies.

Well, what we now wanna do is add up the EBITDA and the synergies to get our adjusted ebitda.

I'm gonna finish off the list here in the first year and then copy it all across to the right for the remaining eight years.

I can add these up because I've already factored in whether the numbers are gonna take place or not in the EBIT and synergies calculations.

But when I get down to depreciation, I've then got to now start thinking about, okay, well this depreciation, I still want that if statement, but I don't want to apply it to the EBIT I'm just gonna go and change the final element of that formula.

So I just copied it down from sales.

I don't want depreciation to be ebit.

I instead want it to be the EBIT, which is row 28.

So I can just do a quick adjustment to that formula.

And again, if we just push it out to the third year, you can see that we are picking up the depreciation number in the third year EBIT.

Now I'm gonna calculate down here, we could calculate it further up, but save ourselves the hassle potentially of having to do another if statement.

So we'll take the adjusted EBITDA.

So we do need to use the EBITDA number here because we've built the synergies in.

And then I want to deduct from that my depreciation number.

We've still got a zero here, but you can see that this EBIT includes the impact of the synergies and that is different from what we forecast for the add-on acquisition on a standalone basis in the first block of 25.

This includes the benefit of those synergies.

Okay, next we've got the CapEx and CapEx.

We do want to think about the if statement. So I'm gonna copy it from depreciation, just paste it down.

The dollar sign on row 13 will stay the same.

The add-on year as an absolute reference or the same, stay the same. It's currently picking up row 30 that I don't want.

I want the change in operating working capital.

So I've gotta be a little bit careful here.

I want to look at the difference between last year's operating working capital and this year's operating working capital down there on row 32.

Now we did say there's a big jump here from year minus one to our current year or zero zero to year one.

Not the end of the world though because the addon acquisition's not happening until year two. So we don't get any of that into our model until year three.

So one formulation of the if statement, we only type had type the whole thing in once locking onto the row means we can just use make use of that and locking onto the, or having the add-on year as an absolute or name sell makes it an absolute reference.

Makes it much easier to pick those data points up.

Now I'm gonna copy that all the way across to the right. So I've got everything for all nine years of a model in there.

What we've done here, we've calculated the data points for the target, the add-on target in this standalone basis.

The second chunk that we've just gone through is what will those numbers look like if we go and acquire them at as at our acquisition date for this add-on at the end of the second year.

So now we've got the numbers that we will see if we acquire them at the end of the second year, but we can very easily update these numbers if we go and change the add-on year number C7 effectively on this tab.

The next step we've now gotta do is to, if we go to the next red tab, so one to the right, what we now wanna do is build the LBO model that incorporates the talisman or kind of headline company acquisition that we're thinking about doing in the near future and incorporates the effect of the add-on acquisition.

I'll just pause here for a second in case maybe you got a little bit behind and want to catch up on some of those formulas.

Also, gimme a chance to take a break and have a quick drink.

If you do have any questions, please do shout.

No problem at all.

Okay, so what we're now gonna look at doing is adding in this content that we've just built for this add-on acquisition in isolation into the broader LBO model for Talisman as a whole to see whether it'll enhance our returns, right? Again, I'm just gonna zoom in on this, but this is, is all the same data points that we had on the blue LBO initial tab.

But with one additional feature we now have this add-on acquisition switch.

What this switch is gonna allow us to do is to quickly flip backwards and forwards between what all of our LBO analysis would look like if we did the add-on acquisition and what if we didn't.

So we're gonna be very careful as we're adding in the add-on acquisition numbers to always come back and multiply by this switch so that we can turn these things on and off nice and quickly.

So that's where we're gonna be going.

All of these data points in terms of the underlying uh, Talisman acquisition are from the LBO initial tab.

So let's just go through and build this.

I'm gonna zoom in a little bit so you can see what's going on.

To start off with, there's nothing complicated.

It's just standard LBO modeling for all of the first half.

We're not building the full LBO model here.

Balance sheet income statement and cash flow statement. We're just getting the numbers that we need and the assumptions that we need in relation to those as well.

So I'll do this relatively quickly.

I'll do the first column all the way through.

If you wanna copy it across as you go, that's great, otherwise I'll copy across at the end.

So I'm gonna take one plus now all of the assumptions are embedded within these key numbers here for Talisman. So I'm gonna take one plus the growth rate times last year's sales that'll give my forecast sales number, my EBITDA, I've got a 21% EBITDA margin and I'll apply that to the forecast sales for the first year.

I've then also got a cost savings number.

So if we go out and acquire Talisman, we're assuming that we are going to then add in some cost savings.

We're gonna run them a bit more efficiently potentially and then that will deliver us some cost savings.

So our cost savings are forecast to be 2% of our sales That and allow us, allow us to calculate an adjusted EBITDA so the EBITDA for Talisman on a standalone basis, staying as they are adding on what we would do if we acquired them as part of the LBO transaction.

And that would give us an EBITDA margin of that adjusted EBITDA divided by the sales 6, 16 16 to give us a 23% EBITDA margin if we were to acquire them and deliver those cost savings.

Not a huge surprise. EBITDA is 21% in our sales cost savings are 2% of sales.

So 23% gives us our adjusted ebitda.

We also need some CapEx. If we went out and bought Talisman, you'd need to spend some money buying some CapEx for them.

And again, that's a percentage of 6.3% of the sales and the depreciation we're assuming here is 70% of the CapEx number.

So Valley Standard up here, obviously we need to take some time to get these numbers in the first place, but once you've got them the building of the model of the model isn't so far thereafter. Hopefully it's not too much of a model.

Okay, the operating working capital is 13.5% of sales again.

So all of these values been driven off that sales, these are all of the numbers for talents man on a standalone basis.

We're then going to pull them together with the add-on numbers from the add-on acquisition tab to see what the whole thing would look like together.

I'm just gonna copy these values across out to year nine.

We'll do that nice and quickly if you've done this already, that's great, but then it means we've got all of the numbers for Talisman, the kind of main LBO acquisition already in place.

Great, okay.

What we're gonna now look to do from here on down is again standard LBO modeling, but where we're having both the main talisman acquisition but also incorporating alongside that the effect of the add-on acquisition that we might do at the end of year two. Hopefully fingers crossed because it is effectively hopefully fingers crossed we might do it at the end of year two.

We've got all that flexibility about whether it's gonna take place or not.

So we're gonna build the income statements.

We're then gonna build the, not a full cash flow statement, but the cash flows available to the service debts and then we'll go down through the cash sweep section and essentially pay off uh, as much of debt as possible. We haven't got a minimum cash balance here, but this is just giving you the overall process hopefully.

And that will then down the bottom, once we've gone through the senior debt on the main talisman acquisition, senior debt on the potential add-on acquisition and then the unsecured or subordinated notes, that's our essentially priority through those three.

We can then look at the returns to the equity investors, the LBO fund or the private equity fund.

Okay? So that's our process. We're gonna go going through here and because as we go through this, what we're gonna be building is an income statement which will create for us that circular reference. We've gotta be careful that we have our iterations turned off.

So hopefully we did that before we did any starting at all.

I've also gotta then turn off the switch because otherwise the LBO initial will not be working like that.

Okay, so what we're gonna look to do here is to build up what the income statement look would look like for the LBO acquisition if we went and bought Talisman in the near future and then had this Add-on acquisition two years later.

So in terms of the labels here, anything that says add-on is to do with the add-on acquisition year two at the moment.

Anything else is the kind of main talisman acquisition.

So sales are gonna be there from year one.

Just gonna grab those for Talisman to start off with.

The add-on sales though are only gonna be there from year two onwards, but down in row 35 of the add-on acquisitions tab, we've already done that.

Those if statements that we had down there in that second block has already dealt with the fact that this add-on acquisition won't take place in the first year.

It's gonna take place at the end of the third year.

Okay, so you can see that as we pull those two through, I'll only copy these across just to demonstrate what's going on here.

Just to start off with, you can see that we now get the effect coming in at in the third year of those sales coming into essentially this enlarged group after Talisman has gone out and acquired this at an acquisition.

Okay, so that'll give us our total sales, no problem with that.

We can then grab our EBIT number.

We're, don't forget, we're looking at an income statement here.

So ebit, this is the slight first slide problem.

We don't have adjusted EBIT, we've only got an an EBITDA number and then later the cost savings give us an adjusted EBITDA because we're gonna bring the cost savings in as well.

We're gonna take this EBITDA number and take off it the depreciation to give us our EBIT pre-cost savings for the main Talisman acquisition.

We're then gonna build in the cost savings for the Talisman acquisition on its own.

And then none of those have add-ons so they're nothing to do with the add-on.

And then we're gonna bring in the effect of the add-on acquisition as well.

Okay? So we'll go back to the add-on acquisition tab and you can see that there's an EBIT row here that picks up the effect of the synergies.

So that will be what things will look like. Okay? So that's great. We can then go through and just add up everything from EBITDA down. So that's great and that's fantastic.

Now we've got an EBIT number.

If we go out to year three, we can now start to see the effect of the acquisition boosting the EBIT for our group.

The problem we've got though is that I said that I wanted to have this flexibility in the model where I can see what things would look like with the add-on acquisition or also hopefully very quickly, but it would look like without the add-on acquisition.

And that's why we've highlighted this rose red. Just to make it obvious for us as we're building the model, this is telling us we've gotta do something extra.

Now in the real world you might well not do this, but this is just to say okay, well just to remind ourselves that actually I want this to be zero the whole way across this whole column.

If I decide not to do the add-on acquisition, this gives us that extra flexibility.

And remember that up there on C6 we had a switch of the add-on acquisition that was called add-on switch.

So to actually make this flexible to switch off the add-on acquisition at the click of a button, all we've gotta do is multiply everything here by the named sell of the add-on switch.

So if I copy that across to the right, and I'll do that for both the add-on sales and add-on EBITDA.

So if you do that for both of them, you see that's in the formula now but the numbers haven't changed.

Maybe just to make it super obvious, let's go the whole way across.

Sorry, I'll leave the formula on for on for you here.

If we were to go to the add-on switch and we can get there by F5 and then all the names sales are labeled for us. So add-on, switch within the go-to button, I can turn that off and if I just hit F five again, it'll just jump us back to where we came from.

You can see that we now have no sales or EBITDA EBIT from the Add-on acquisition in the third year and then onwards once we copy it across for all nine years, the switches miles away so it's not too hard to find it to put it back on again.

Okay? But that gives us the flexibility to see what things look like with the acquisition and without the admin acquisition.

Nice and straightforward, nice and quickly.

Okay, good stuff. Like all modeling.

Next we've got our interest stuff and we can only calculate how much interest income we'll earn on any spare cash and how much interest expense we've got on any debt.

Because we can only do that once we've done our cash sweep.

Yeah, the recording's available afterwards.

It should be up there at some point.

I don't think later today, but it should be there tomorrow.

I think it's automated so it should be there in the near future for sure.

Okay, good stuff.

Standard model build from here. Okay, in that I'm gonna assume we're working under IFRS.

So we're going to have the interest expense being negative, interest income being positive. So I can just add everything up for the top for the three rows above our profit, our profitable tax. Then 300 tax expense is gonna be 20% of the profit for tax, but I wanna make that negative.

So multiply by minus one and then our net income will just be the sum of the two rows above that would give us two 40.3.

And just for reference, that's the same that we've got on the LBO initial on a standalone basis.

So in year one there's no difference between the LBO without any of this additional add-on modeling in there or just what we've got with it in there as well.

Okay? So that gives me some comfort at least that we're in the right place stuff.

Let's build the income statement the whole way across.

We might as well do it as we go.

So let's get that whole income statement the whole way across out to year nine.

I get all the formulas in for us, again, we're just making it crystal clear by having the red font on the add-on specific content.

You wouldn't necessarily need that in the real world but that's just for our teaching purposes. But today, okay, so we've got down to our income statement number.

Next thing we need to do is to go on to have a look at the cash flows and again standard stuff here, but just gotta be careful with the add-on acquisition only being there if the switch is on.

So we'll take the net income which just calculated no different from our we'll build any other sort of cash sweep model.

We then need to add back depreciation and we've calculated that or the main taliman acquisition.

We then need to look at the add-on line and we've got depreciation for the add-on line just in row 39 of the add-on acquisition model.

But although it's zero now it's easy just to leave it like this.

When you get to year three and onwards, it won't be zero.

So we've then got to remember to multiply this by the add-on switch.

We've then got our change in operating working capital.

Same as always. Okay, so the standard model, our operating working capital we've got going up here.

So last year minus this year for the main talisman acquisition minus rather than equals.

And then for the add-on acquisition, we've already got the number on the previous page.

We've got it as a increase as being a deduction for our cash flow. So I don't need to change the sign on this.

Okay, but I do need to again multiply it by the add-on switch CapEx main model.

Okay, well CapEx again, we calculate that earlier on. So that's our CapEx number, the 101.8 flip the sign because it's a cash outflow.

And then as always we've got the number already for the number within our, excuse me, put it on the wrong row.

So my operating working capital stuff is all on the wrong row.

I'm just gonna move that down one row and the CapEx number also should look the same but just gotta change.

So we're only picking up the CapEx on row 27.

Apologies for that, we missed that earlier on.

But again, it's just the same approach as we have the depreciation but we just need the if statement there.

Okay, so the change in operating working capital is now looking at row 42 correctly for the CapEx, I want to look at row 41.

Okay, so we've got the CapEx on row 41 and again multiplied by the add-on switch, but it's positive here.

So I wanna make it negative as it would be a cash outflow.

So multiply by minus one just to flip the sign around, we just add everything up, it will give us our cash flows available for debt repayments and if we just copy everything, I'm gonna go across to Rowe three just to give us the comfort that all of the add-on acquisition numbers are working.

That we get the depreciation being added back.

We then get the change in operating working capital as a deduction. Operating working capital is increasing and then the CapEx is a deduction cash outflow.

Also, just to make the point crystal clear, if we go up and turn the switch off and then come back and have a look at these numbers again, you can see that all of those red rows would end up being back at zero if we had the switch off.

That's while we're multiplying everything by the add-on switch each time.

Okay good.

So we've got to a stage, we've effectively built the cash flow statement numbers that we need to now go on and do our now from here basically standard cash sweep modeling.

So let's get all the numbers across for the whole of the nine years for those cash elements and now we can just get on with building the cash suite.

Okay, so what we need is we're saying we've got 167.1 before the interest goes in uh, available.

Put that repayments that's gonna pay off the senior debt but the initial talisman transaction first, once we've paid that all off, we'll start paying off on the additional debts, the add-on acquisition if it happens.

And then after that we'll start paying off the unsecured notes third.

So it's gotta be a little bit careful with that.

We're gonna try and use all of our cash and we'll start off with no cash.

So row 88's got zero for the ending cash.

Okay, that means that we've got the 176.1 plus the zero opening balance as the cash available to make debt repayments. These are principal repayments because interest will go into the income statement at the top, which gets into the net income. Gets into the cash flows as you go through the model.

We then have to think about how much of the senior debt for the initial talisman transaction can be paid off.

So that's just gonna come from the sources and uses table and we've got 1125 of senior debts at the date of the acquisition.

What we're gonna do here last year's closing this year's opening, we then need our standard negative min for the cash available and the opening balance just to make sure that we never pay more than we've got outstanding at the beginning of each period.

And we add those up to give us our closing balance.

The interest expense while the interest rate is in the assumptions up there in column F, the senior debt it's 4.92%.

Got a lock onto that and multiply it by the average of opening and closing senior debt that first year.

So this is just standard cash sweep calculations, standard modeling with iterations calculations.

What that means then if we go down to the next row is that all of the 176.1 that spare right add on to that the cashflow for the senior debt.

I've used all of that cash to make the repayment on the senior debt and there's nothing left over for any other debt instruments.

We're gonna build the formulas all the same. The formulas will look basically the same but just gotta be careful with the add-on debt.

That'll only be there if the transaction goes ahead.

So what we're gonna say is opening for this year, there's definitely no debt for the admin acquisition on entry because the admin acquisition hasn't happened yet.

So opening for this year is if I get the right row closing for last year, okay, repayment is gonna be the same negative min of the opening balance or cash available for debt repayments.

But here we get our next problem.

What are we gonna have in terms of the opening balance? Well it's either gonna be the sum of the two above rows or if we're on the year where the addon acquisition takes place, then that will be our opening balance.

We'll kind of fudge it in here a little bit.

So I'm gonna say if the year that we're in or the open row 22 is the same as from the addon acquisition tab, now you can just use the name sell if you want.

Okay? Is the same as the acquisition year.

Then what we're gonna do is say well I've got a whole bunch more debts that I was boring at that point in time.

This is from the add-on acquisition tab sources and nuss table at the top of the add-on acquisition tab, we will just be borrowing the 146.6 if I change the acquisition year for the add-on acquisition and the number of debt will change because the LTM EBITDA will change and therefore the enterprise value will change. So I do need to lock onto that.

So if we're in the year for the admin acquisition, we'll borrow the money.

Otherwise let's just go back to the elements here and we'll add up the two numbers above.

So this formula's telling us if we just go through it step by step, if statement says are we in the add-on, are we in the acquisition year? If so, then we get the number from the sources uses table from the add-on acquisition tab.

If not, just do the standard stuff, adding the two above rows, no problem at all.

Okay? One thing we've gotta be a little bit careful with as always is that we've gotta multiply this by the add-on switch.

Because if the add-on is switched off, then we wouldn't want to say we borrow any money at all.

So it's probably the second most complicated formula that we're gonna see across the whole of this.

The first one was to get the synergies right, but that's hopefully not too bad now.

Okay, uh, we then need to calculate interest.

So the interest rate was on the add-on acquisitions tab 6%, lock onto that, multiply it by the average of the opening and closing balances and then see what that leaves us for the unsecured debt.

So we're gonna take the cash available plus the cash flow for the add on acquisition debt balance balance.

So nothing left over again.

Exactly the same process for the unsecured notes as we had for the senior debt.

No complexities here just from the sources and uses table for the main talisman acquisition. Sorry, just trying to do it all too quickly.

So that's our 562.6, that's the opening balance.

And then same as before from here, opening closing flash, year's opening for this year, negative min on the cash available and opening balance and then add everything up.

And then our interest expense again from column F, we've got a 7% interest rate lock onto that, multiply it by average of the opening and closing balances to get the interest calculation there as well.

What will leave that'll leave us with while the cash available for the unsecured notes plus the cash flow on the unsecured notes will give us the amount of money left over, which is zero.

But if we get to a stage at the end of all of this modeling where all of the debt has been repaid, then we'll start building up our cash balance.

And if we do start building up our cash balance, then we'll have some interest to earn on it.

And we've got a fairly low interest rate here.

Lock onto that F4, 0.3% right average of the opening and closing debt balances.

Okay, so that's all our interest calculation sorted out.

Okay, what we've got left to do, well what we've got left to do is to copy this all across for the later years.

So let's go and do that.

So I'm just gonna go and grab those numbers all the way out to year nine that to the right I'll put the formulas in as well.

And what you can see at this stage now is that if we just go across the time periods with the add-on switch turned on, we pay off by the end of the 2027 year all of the senior debts, we've got a bit extra here. So we've gotta pay off the ad, the senior debt on the add-on acquisition that gets paid off by the 2028 year.

And then during the 2028, 9 and 30 years. 29 we're able to pay off all of the unsecured notes as well.

And then we start building up our cash balance so we can see the sort of waterfall effect as we go through.

Couple of last things to get done, maybe in about five minutes might be a little bit over, but I hope that's not too bad for you on a Friday afternoon.

We've gotta link up our model first of all.

So we've gotta get the interest numbers into the income statement.

So let's just get all these numbers in.

I'm gonna, because they're all positive, I've got three numbers to pick up here.

We've got the interest on the senior debt, we've also got the interest on the um, add-on debts senior add-on debt and the interest on the unsecured notes.

They're all gonna get added in.

Gives me a circular reference.

I can then let's just go and grab the interest on the interest income on cash just so that we're complete here.

Now obviously you would need to put your circular switch on here just to make sure this is robust.

But let's just go and assume that we've done that in the interest of time for this afternoon.

This is a problem, okay? The interest expense here is showing up as a positive number.

Oops, showing up as a positive number.

I want this to be negative.

So good thing I've got the brackets there, but multiply by minus one to flip that sign around.

Okay? So interest ups all in and copy this across to the right and we've got our interest numbers the whole way across.

Start earning some interest income now because you've got the interest expense. There's less cash available to make the debt repayment. So the debt takes longer to pay off.

So the cash is only there in the last year. Okay? So that gives us all of the numbers that we need. Okay? We can see the debt waterfall, we've used all that spare cash to pay that debt off.

I'm not gonna worry too much. And again, in the interest of time looking at paying off these debt numbers.

But one thing just to note is that if we do go in and turn this switch off now we should see that as we go down to the senior debt for the add-on that there's now zeroes the whole way across.

So it just wouldn't be there. And again, we can pay off the debt slightly earlier and have a higher cash balance at the end.

Okay, good. So last couple of things to do.

I'm not gonna worry about the proportion of debt we pay, the debt, the credit calculations, they're not so bad.

Last thing we've gotta do then is to think about what things would look like from an IRR perspective. That's the whole point of this exercise.

What are we left with from an IRR perspective? So what we're gonna figure out is what does the combination look like multiplied by the exit multiplier to get the exit enterprise value and go over our bridge.

So combination EBITDA is gonna be, we'll look at our EBITDA with all of the uh, adjustments.

Let's get the right first year in here.

So column G from the first kind of key financials, we got the adjusted EBITDA number.

Gonna add onto that the adjusted EBITDA for the add-on get down row 38 but only gonna add it in if the add-on is taking place.

So multiply by the add-on switch.

Good. We then need to figure out our enterprise value.

So I'm gonna take my assumption here for the exit multiple.

Exit multiple here is soon to be 11.

Gonna lock onto that and I'm gonna calculate the exit enterprise value if we exit after one year, not necessarily gonna do that, but I'm gonna calculate that for every one of the nine years just to give me that flexibility.

If we go over the bridge or we need our net debt, sorry first before we can go over the bridge.

So I need to pick up our debt numbers.

So we've got the senior debts for the whole tellers man transaction.

We've also got the add-on debts, which is zero in that first year.

And the unsecured notes then take off the ending cash balance to get my net debt numbers.

And then enterprise value minus your net debt will give you your equity value.

So that's what we'll get if we exit at the end of year one.

We're not planning on doing that, but if that were to be the case, this is what we'd get coming out as the equity investor copy that across for the whole nine years. We can get all of the different nine scenarios for all those different exit years.

But one extra thing we've gotta think about is that the addon acquisition will require us as the private equity fund to put some more money into this transaction.

So again, we need another final if statement here.

So if the year that we're in up on row 22, if that is the add-on year, use that name sell, then we still need to go back the add on acquisition tab.

Up in the top we've got sources of uses we're gonna need to put that equity amount in and lock onto that.

If it's not, we wanna put a zero in there.

And again, because this is to do just with the add-on acquisition, we are as always gonna need to multiply by the add-on switch.

So if we now could be this out to the right, we can see that there would be a need for an additional cash outflow 34.6 at the end of the second year.

That's the date when we're doing this at an acquisition.

And now we can go through to our IRR calculation.

Okay, so our IRR calculation is gonna be our outflow in the imminent near future equity chunk of the main Talisman acquisition.

We then will receive in what wasn't quite the final lift statement.

Last one coming up here for sure, need another one If this year is the exit year.

So if the year that we're in row 22 is the same as, and it's just a little bit higher are assumed exit year gonna lock onto that.

So for the year that we're in is our exit year, then we will receive in this equity value.

If not, we just get a zero.

But I'm also gonna deduct from this what I've got as the equity injection for the add-on that will be a cash outflow.

Gotta be careful with this initial cash flows and outflow as well.

So then if I copy this all the way to the right now, what we should find is that at the end of year two we have an additional cash outflow and then the year five we've got the cash inflow from exiting the investment And that's it.

Now we've got our IRR calculation.

We do the IRR on all of those numbers.

It will give us the IRR for this whole transaction.

So 27.7 better than we had before, all the way back at the start of this hour.

I think it was 26.1 we had for the IRR.

If the add-on doesn't happen, but we don't need to remember it, what we've gotta do is go back to that, add-on switch, turn it off, and fingers crossed we get that same 26.1.

So you can see. Now pretty quickly if the switch is off, we have the 26.1.

If we don't make this add-on acquisition, if we do make the add-on addon acquisition, then we're saying here effectively that we'll get a higher rate of return.

How else could we flex this modeling? Well if we went back and made the acquisition at year three, let's say, or change that in the addon acquisition tab.

Well, slightly worse.

Slightly worse mainly because those synergies won't have fully been realized by the end of the fifth year. That would just be the, the second year after the acquisition. So we won't have got as much of the synergies won't have got as much of a benefit from that additional revenue.

So hopefully that gives you the, uh, complete story then in terms of how we can model and fully flex this model for the add-on acquisitions.

There is a solution file available for this.

It is there within the same location where you found the empty. So that's there. Otherwise, thanks for your concentration. Hopefully this was useful for you.

Have a good rest of your day and weekend ahead.

Thanks very much.