Hello, good afternoon or good morning depending on where you are joining us from. My name is Maria Weber. I'm one of the trainers at FE and I'm going to be taking you for the next hour roundabout that, for our Felix live session on LBO Exit and Analysis. So the resources that you're gonna need are in the link in the chat, so you've got a link there to the resources. If for some reason your chat is blocked, I know sometimes if you are coming in from an employer's computer, sometimes you might not be able to see the chat. So if your chat is blocked, you should be able to see my screen. Please let me know if you can't either in the chat if you have access or in the question and answer pod. So on my screen you've got Felix, if you go to Felix live and then within the Felix live, if you scroll down to find the session that we are dealing with today, which is LBO Exit and analysis, and click on that, you'll then find the spreadsheet that I'm gonna be using and I'm gonna be using the first one, the Debenhams complex LBO returns empty and then the full solution file is there. So if I may be going a little fast and you wanna just follow along in the solution rather than do the numbers with me, please obviously feel free to do that. Before we dive into the Excel model, I think it would be good to start off with just reminding ourselves about first of all what an LBO is, the objectives of an LBO and then just talking a little bit about the exit. And then we will go and do some analysis in Excel using the Debenhams model. If you have questions at any point, please do come into either the chat or the Q&A pod to answer those, to ask those questions. Okay, so I've just got a couple of slides to help us talk through. Like I said, just remind ourselves what an LBO is overview of the exit strategies and then we are gonna use the Excel model to look at exit valuation IRR and then looking at the impact of different years of exit

and valuation multiples on the returns using a sensitivity table. So LBO, big picture, remember we looking at an acquisition scenario. So we looking at control, this is not someone buying a minority stake in a business. Secondly, this is not a strategic buyer, right? The objective here is not, you know, strategically to create synergies, et cetera. The objective is to make a return, right? This is a financial sponsor, private equity house putting money into a deal and they want to earn a return on that. So the investment horizon is not very long term. It's a shorter term investment horizon. We looking at say three to five years, maybe seven years, and then the objective is to exit so you can earn that return. Now, what makes this a leveraged buyout is the fact that a big part of the deal is financed with debt and that debt enhances the shareholders or equity holders returns, right? Because you're gonna use the cash flows generated by the business to pay down that debt and then any value left in the business belongs to the equity holders. So given the leverage nature of it, it's very important that we have a company that's got a good cashflow generating ability to pay down that debt and we are also looking to make operational improvements in the business. So we can increase the EBITDA for example, through cost savings, operating more efficiently, making improvements, increase in EBITDA, ultimately leads to increased cash flows and increased valuation.

So what makes a company a good LBO target? We've already mentioned a lot of the points, right? The fact that you need a cash generative company, you also looking for a company that doesn't have huge CapEx needs because if you've got CapEx needs or you right at the beginning of a big CapEx expenditure cycle, then that's gonna use a lot of cashflow, right? And that's not what we want. Also, you need debt. So the availability of debt and the cost of that debt is gonna be a factor. And then your entry valuation is very important. It doesn't matter how good the company is that you're buying, if you pay too much going in, you not gonna earn a very good return. If you overpay for something, you're not gonna earn a great return. Whereas if you buy a mediocre company and you pay a good price for it, it's easier to earn a good return. So we've gotta be careful of that entry valuation, right? So if we can find a company that is maybe a bit unloved that we can buy for a lower multiple, that would be a great albe o target. And then obviously the more we can exit for at the end, the better. So what are the ways that we can exit this investment and so consolidate or earn our return? So different paths to exit, and this will depend on market conditions. It'll also depend on the type of the company that's being sold. But probably the most common exit would be a sale and a sale either to a strategic buyer or to a financial buyer. Now there's pros and cons to each of these methods, but if you sell to a strategic buyer, that's good because a strategic buyer, another company that's an operational company, not a financial sponsor, like a private equity house, a strategic buyer would pay for synergies, right? So you could exit maybe at a higher valuation than if you sold to another private equity company or a financial buyer.

So that is one route to exit the sale. Then another route to exit is doing an IPO. So an initial public offering. Now, the benefit of doing an IPO is you do have a wider pool of investors, but on the downside, an IPO, you are not selling a majority stake. You're not selling control to one party. And so the valuation on IPO tends to be lower than the valuation on a sale because people are not paying a control premium, right? We're selling this into the public markets, so often a low valuation, but then on the plus side you do have a wider pool of investors.

Yeah. And also there is the admin involved of doing the IPO, et cetera.

And then another point with an IPO is that's not normally a full exit all at once, right? So normally what would happen is the investors sell part of their stake and then over time offload the rest of that through block trades. Then finally you get something called a dividend recapitalization. Now this will depend on market conditions, but with a dividend recapitalization, what is happening there is basically adding more debt into the business and paying some cash out to the equity investors in the form of a dividend. So the equity investors get some cash return prior to exit. So this isn't actually an exit, you're not selling your equity stake, you're just extracting some cash out of the company. If you're interested in that, we've got a Felix live coming up on it in a couple of weeks, I think it's or not, a couple more than a couple. I think it's November 17th. But just check the Felix live page if you're interested in recapitalizations. Okay? We are gonna see, hopefully we've got time to have a quick look at a dividend being paid in the model we're gonna have a look at. And then the last point I wanna quickly make is the exit strategy is constantly being assessed throughout the life of ownership of the investment, right? It's not set in stone when you buy, this is when we're gonna exit, this is how we're gonna exit. You're constantly gonna be monitoring the market conditions. So you know, we are gonna be looking at valuations, liquidity in the markets, IPO activity M&A activity. We are also going to be looking at the company's performance. We're going to be looking at the timing of any projects. If we've got a project that's gonna take a few years to generate good recurring returns, we are gonna think what multiple could that be valued at? We'll take that into consideration. Also, looking at enhancing the processes and governance within the company. Not only does that de-risk performance, but what that also does is you're putting your house in order getting ready for a sale, especially if you want an IPO, you've got to have good governance, good processes as well as for sale to a strategic buyer, okay? So you're always gonna be monitoring and fine tuning your exit plan. Now we are gonna have a look at that Excel model and I've got a detailed calculation here of IRR. I'm not gonna talk through this in detail, but I just want to focus us on what we are going to be doing IRR, internal rate of return, compound annual rate of return is the metric we're gonna be using. And typically we would be looking for say 20 to 25% IRR recently maybe or in the recent past with super low interest rates, maybe 18% to 22, 23%. But we're gonna be looking at that IRR. And what we're gonna be doing is we are gonna be comparing the equity that is put in at entry with the equity that's the equity value on exit. So what do the equity providers put in on entry and what do they get out at the end? Now there is a manual calculation to calculating that IRR, but we are going to be using a formula in Excel. So it's flexible, dependent on the exit date. And you can also build in things like having interim cash flows or having maybe a stub period, okay? We're not gonna look into all of that detail in this session.

Okay? So let's go to that Excel model, okay? And have a look first, just let familiarize ourselves a little bit with that model. So I'm in the empty version of the model, just checking the q and a. If you do have any questions, please do ask. So let's have a look at this model and familiarize ourselves with what we are working with. So I'm gonna go straight to the LBO tab. So this is a complete model except for the returns section because that's what we are gonna be completing. So if I just zoom in a little bit, we start off with some key assumptions. So going in, we've got the historic ebitda, we've then got the entry multiple. Now often you will see just one line for the entry and exit multiple because that is often assumed to be the same. Generally investment committees would not like to see, you know, a big expansion in the multiple on exit in terms of that's what we forecasting. If that happens, that's great, but that's something that we would test using sensitivity rather than assuming an exit multiple, right? That's quite a bit higher than what we're going in at. You've also just gotta be careful if you're assuming a constant multiple, if you went in at a very high price, there's no guarantee that you're gonna be able to get out at that price. Okay? So we are gonna sensitize it. We'll look at entry and exit multiples and that's the reason why I've got two lines here. Even though the number is the same, I wanna do a sensitivity on it. I wanna do a data table and so I need two separate input sales. So that's our entry and exit multiple. We've then got the acquisition enterprise value, the net debts, the equity value, this bit at the bottom here, PP&E uplift loan to value for leaseback, lease term interest rates on the lease. That's got to do with a sale and leaseback option, which we'll see a little bit later on. Then we've got uh, some fees. We've got importantly for us looking at returns that exit year. So we are assuming here an exit in year four, but we're gonna flex that in a data table to see what would happen if we exited sooner or later. Now what's interesting about this model is we have got a choice of capital structures that we can model in. We have got at the moment there should be a one selected in your file and that is the standard capital structure. Now if you interested in capital structure of an LBO, my colleague did a session, a Felix live session I think two weeks ago on LBO structure. So I'm not gonna talk in detail about this, but in the standard structure here you can see we've got a first lien, second lien loan and then we've got mezzanine financing shares and common equity.

If we look at the unitranche structure, what's happening in the unitranche structure is all of those components that I've highlighted are being rolled into one package. So a packaged loan with those effective elements in the background, okay? But in terms of what the borrower sees, it's one loan amount. Then we have got a third option, which is a sale and lease back. And hopefully if I've got time at the end, we can have a quick chat through that. If not, I can show you on Felix, there is a little video on it. Now what you'll notice about the sale and lease back is instead of the second lien, right, that five 11 we have got a bridge loan and if we do a sale and lease back after the deal closes, we are gonna repay that bridge loan.

In all of these structures we've got the same pre shares going in and the same common equity contribution going in. So you can see our sources of funds are the same under each scenario. We have currently selected scenario one and that feeds through, if we look just below to our sources and uses of funds, our use of funds, we need to come up with 1, 8, 4, 3 to do the buyout, our sources of funds that is driven by the scenario we select. So just to show you, if I were to go change that scenario, selector to the third financing option where we do the sale and lease back, if you come down and have a look at your sources of funds, you can see that we have now got, should be updating if we do the sale and leaseback.

There we go. We have got only a first lien and then we've got a bridge loan appearing instead. Okay, so let's turn that back to the first option because we first gonna be working with a standard financing structure and in the standard financing structure, I dunno why my Excel is taking its time in terms of updating, just wanna check, I don't have anything else open. There we go. So that has now updated, okay, so we've got our standard structure one and then on the right hand side you can see we've got some costs of financing. I'm not gonna go into that detail. Last important thing before we start analyzing and doing the returns is the ownership, right? So at entry, if we look at the equity ownership, I'm looking at that 10 of common equity going into the deal, that 10 of common equity being put into the deal, who is contributing that? And we have got the private equity institutions contributing 90% of that at entry and management of the company contributing 10%. And that's so that management is incentivized, right? To make this deal work to earn the returns because they are invested. Then at exit, you will notice the mezzanine loan has the right to 5% of the equity and that's what makes this a mezzanine, right? Mezzanine sits between debt and equity. So it's a loan, it's got pick interest, so payment in kind or paid in kind the interest accrues on that loan at the end on exit, the mezzanine holders will get that loan plus interest, but then they also have warrants where they can get 5% of the equity value on exit and you will see that 5% has gotta come from somewhere, right? And that 5% comes proportionally from the PE institution's percentage and management's percentage, okay? So the mezzanine has the right to some equity at exit.

So we have got various tabs that are completed in this model. I just wanna briefly show you the input tab. On the input tab you will notice this is where the circular switch is. I'm working with the switch on because for returns interest is obviously a really important part of the LBO and I wanna look at the returns after interest. So I've, I've got that circular switch on, even though there's also switch on the info tab, that switch is redundant, it's not being used. So the circular switches on iterations are on. What's also interesting here is we have got two cases. We have got a management case and we have got a bank case. Now the bank case is more conservative than the management case. So what we've got is sg and a costs as a percentage of sales and you can see management's forecasts is for sg and a to be a lower percentage of sales. So 6% in 5%, whereas the bank's forecast more conservative, they forecasting SG&A costs to be a higher percentage of sales. So by switching this button on and off, we've got the option to look at the bank case and you can see up in the header the bank case is now selected or we've got the option to look at the management case. And again, if you look in, your header management case is selected, so I'm gonna work with the management case and we working with funding scenario one and then on our other tabs, I'm not gonna go through all of them, but you've got calculations and income statement, balance sheet, cashflow statement and debt schedule. If you interested in building this model, I'll show you exactly where you can find a blank version in Felix from scratch and you can build that um, with the help of videos if you want to. Okay, any questions please do ask, but let's go back to our LBO tab and start doing our analysis. Now remember what I want to compare is I wanna compare the equity value on exit, what the equity holders will get on exit with what they put in on entry. So the first step is to calculate, okay, well what is equity value on exit? And here we've got our years across the top and I've gotta go pick up the EBITDA in each year and I'm gonna pick that up from the income statement. So if we just go to the income statement tab, you can see EBITDA is in row 14. So in row 14 I'm gonna go and pick up the first years EBITDA of 231, okay? And I'm just gonna do the first year properly and then we copy everything to the right. So we've got ebitda. Now I can work out enterprise value if I know what EBITDA is expected to be, I'm assuming and exit multiple an EV EBITDA multiple of seven and a half times. Let's go back up to our assumptions and we've got the exit multiple there in F8 of seven and a half times I'm gonna lock onto that F4 because I'm gonna have to copy to the right. So I lock onto that and we get just gonna add my formula in 1,734.4 So that is my enterprise value in year one. Now we've gotta go over the bridge from enterprise value to equity value. And so I've gotta go pick up cash and I've gotta go pick up debt and any other funding items other than equity. So sometimes we would include say pre shares with the debt, but here I'm gonna model the returns to pref shareholders separately. I'm gonna model the return to mezzanine separately. So I'm just gonna pull them in separately over here. So let's go get our cash and we've got that in the balance sheet. So if we go to the balance sheet that's in row five and make sure you end column J, the first forecast year, we pick up cash from J five and then I'm going to sum up all of the debt except mezzanine and pref shares. So let's do an equal sum formula. We go back to that balance sheet.

Now let's not forget about the revolver, even though the revolver is not in this scenario being drawn down, we do have to incorporate it in case there is a value in that revolver. So I go and pick the revolver as part of my sum and then I'm also going to pick everything in this debt section.

Make sure you end the projected first year projected column. So column J and I'm gonna pick everything until I get to the mezzanine. So until I get to that 336, I pick everything.

Now I want this to be a negative in my bridge, right? We deduct debt so I'm just gonna turn that into a negative by multiplying by minus one, I've gotta now do exactly the same thing, go pick up the mezzanine and go pick up the pre shares because then I can see what belongs to that pure common equity holders at the end. So if I go back to my balance sheet for the mezzanine, okay, we find mezzanine is in row 27, so I'm going to J27 and I'm gonna make that a negative and pre shares it's gonna be in J28, I could have just copied down, but let's be safe, let's go find J28, my pre shares. And again I wanna turn these into a negative and now I can get my equity value. So alt equals quickly to get your sum function, but be careful it's picked up too many items for me. I only need to add from enterprise value, I add the cash, subtract the debt, it's shown as negatives and I've got an equity value of 140.7 negative. So what this is showing me is given the current assumptions, if I were to exit in year one, the common equity holders actually there's negative value there because we haven't yet generated enough ebitda, we haven't yet generated enough cashflow to pay off the debt sufficiently. Okay? So we have got this negative equity value in year one. What I'm gonna do is I'm gonna select all of this and I'm going to copy it to the right.

So control R to copyright and you should be seeing in year eight an equity value of 333.7

If you're not and you still wanna follow along, you do have the solution file as well. So please do open that solution file and then afterwards you can pick apart what you may be missed. But obviously if there's any questions for now, please do ask.

So now we've got the equity value and what we wanna look at is we wanna say, okay, let's look at each set of investors that have a stake in the equity and see what kind of return they would make.

Let's start off with looking at the mezzanine providers. Okay? So with the mezzanine providers, they have got the right to 5% of equity on exit. Okay? So let's go pick up equity value on exit and then I'm gonna multiply that by 5%. So we are going back up to D49 where it's showing me mezzanine's percentage and I need to F4 lock onto that because we're gonna be copying this to the right and you can see that we get minus seven. Now that appears a bit odd, right? Because the whole thing about a warrant is that it's optional. You are not obliged to exercise that warrant. So in this case, if there's negative equity value, the mezzanine holders will just say, no thank you, I don't want a part of that equity, it's negative, I'm not gonna be paying in for that. So all we need to do to correct this is we just need to input a max function. So I'm just going to come back into my formula F2 to edit it. I'm gonna go to the beginning and I'm, I'm gonna say give me the maximum of zero and the calculation I just did so that if there's a negative equity value instead of equity negative appearing zero will appear, which is what has happened here. Okay? So gimme the maximum of zero and 5% of the equity.

Now that is not the only return the mezzanine holders are gonna get, they've got the loan which has pick interest. So in addition to whatever equity value they get, I'm gonna go pick up the value of that mezzanine loan and I could go back to the balance sheet, but we've already extracted it from the balance sheet in row 59. So row 59 there we've got the mezzanine shown as a negative in the bridge. I wanna show that as a positive. So I'm just gonna change the sign by multiplying by minus one. So now I've got that mezzanine loan of 3, 3 6.

So what are the cash flows that belong to the mezzanine holders? What are they gonna get out of this deal if they exit in year one? Well it's the sum of the warrants, the share value plus the mezzanine loan plus interest. But I can't just do an equal sum function because they're not gonna exit in every single year. Here I've got exit values. If you exit in year one, that's the equity value if you exit in year two, year three, year four. So what I need to build in is I need to say if we are in the exit year, then give me the sum of these two values. But if we not in the exit year, give me nothing.

And that's what I'm gonna do now. So equals if if this year that I'm looking at year one is equal to the exit year assumption. So I've gotta go all the way back up to the top to my assumption section and I'm going to the exit year. There we go. We've got J 10 for the exit year, we're gonna F four lock onto that because I don't want that moving around. So if I'm in the exit year, then give me the value that the mezzanine holders will get the equity value plus the return of their loan plus interest, otherwise give me nothing.

And you can see we get nothing because we are not in the exit year, we are in year one and we planning in this case an exit in year four in our model. But if we copy this to the right, hopefully in year four we are gonna see a value come through in row 66. So let's do that sorl R to copyright. And that is correct in year four, that's when we are exiting. We can see we've got a mezzanine value of 4 88 0.9. The last thing to do for the mezzanine is to work out well what is their internal rate of return? What's the compound annual rate of return? So I've got the cash they're gonna get coming out, that's the 488.9 and I've gotta compare that to what they invested initially and I get that from the sources of fund section.

So I'm going to go up to the sources of funds and in my sources of funds, there we go in row F41 mezzanine holders contribute 300, I'm gonna turn that into a negative. So times by minus one they put in negative or not negative, they put in 300, that's what they invested.

And now I can use the IRR formula to work out the internal rate of return. I'm not gonna do it manually and say the exit value divided by the entry to the power of one over four because that's not flexible. What if I change my exit year to year five, year six? So I'm gonna use the IRR formula, so equals IRR you select from your initial cash flow and that has to be a different sign to your cash inflows, right? That's gotta be a negative, otherwise your IRR formula won't work. So you go select your initial cash outflow and then all of the other cash flows. Don't worry about the fact that there's zeroes after our exit. The IRR function makes certain assumptions and that doesn't affect our return. So if we press enter, we have got an internal rate of return for the mezzanine holders of 13% and we can see they've got an uplift because of the value of the equity, the mezzanine interest rate is only 12%, it's a 12% pick interest rate, but they've got a nice a hundred basis points increase over that due to the equity warrants. Okay? So that is our mezzanine returns. We are gonna do exactly the same thing for the private equity institutions to look at their returns and then we'll do a data table. I'm gonna leave management because if you can do private equity returns and the mezzanine returns, you'll be able to do the management returns. So I'll rather show you something else. Any questions please do ask. I'm keeping an eye on the q and a, not seeing anything. Okay, so let's have a look now at the PE institutions. Now the PE institutions don't only contribute common equity here, those preference shares that are going into the deal. If we look at our sources of funds in our sources of funds, we've got pref shares of 622 going in and we've got common equity of 10. The PE institutions contribute the pref shares as well as 90% of the common equity. So when we evaluating their returns, we need to take the pref shares into account. So what are they gonna get out? Well it's the pref shares plus interest because it's pik interest on these pref shares and we've got the pref shares above in row 60. We pulled that from the balance sheet already. I'm just gonna change the sign to make them positive.

So if we exit in year one, PE institutions get 696.8 from those pref shares. On top of that, they're going to get their cut of the equity value. So we've got the equity value in row 61 and we need to multiply that with the PE institution's equity holding on exit. And that is not gonna be the 90% they put in on entry, it's gonna be the 85.5% exit because 5% is being given away to the mezzanine holders. We're gonna F four lock onto that.

Okay? So in this case it's negative because like we said by in year one the steel hasn't yet generated um, a return for equity holders.

Common dividends I'm going to leave out for now because that relates to the sale and lease back. If we've got time we can have a quick chat about that. And for the PE institution's cash flows, we are gonna use the same formula as we did for mezzanine. I'm gonna say if we are in the exit year, if this year we are in is equal to the exit year. So all the way back up to our assumptions and across to my exit year, I'm gonna lock onto that. If I'm in the exit year, then give me the pre share value plus the equity value.

Otherwise give me nothing.

I'm not gonna press enter just yet because if there's a dividend, I want that dividend to be picked up. So I'm gonna add outside of the F statement the dividend because the dividend has not got to do with when we exit. The dividend has got to do with when we do the recapitalization, if we do scenario three sale and lease back, there'll be a dividend. And so I want to pick that dividend up if it's there, it's independent of the exit year. So it's outside of that if statement.

And we can see that we get zero, right? Because we are not exiting in year one. We've got an exit assumption of year four, but let's copy this to the right and see what we get in year four.

And you should be seeing 1,266.5 as our exit value in year four. And those of you that joined a little bit late, the solution file is available at the resources link. So if you're a little bit lost, please look at the solution file and follow along. Okay, last thing we need to do here before we work out the PE institution's IRR is we need to see, well what did they put into the deal? I'm going to put brackets around what I'm adding up because I'm gonna make this a negative because it's a cash outflow for them initially they invest this amount and I'm gonna go up to the sources of funds section under the sources of funds. The private equity firm puts in all of the pre shares plus they're gonna put in 90% of the common equity. If you look at entry, they put in 90% of the common equity in your sources of funds. That common equity is 10.

And I'm gonna make this a negative because it's a cash outflow for the PE firms. They're putting money into the deal. So that's negative 631.2.

And now we work out their IRR equals IRR open brackets and go and select everything.

And we can see that the private equity company or private equity house fund, whatever you wanna call it, makes a 19% internal rate of return given the set of assumptions. Now that's a hybrid return, right? Part of that return is from the pre shares. So they basically guaranteed the pref share return of 12%. And the reason I say guaranteed in inverted commas is because pre shares are very low in the pecking order. If the deal goes bad, the pre shares will get paid out below everyone else basically accept common equity. But if things are good, the institutions are guaranteed a return of 12%. On top of that, they've got the common equity participation and that has boosted their I R R from 12% to 19%. Okay? I'm not gonna do the management because if you can do, like I said, the other two management works the same effectively.

I wanna go down now to looking at doing a little bit of sensitivity analysis. So I've got a couple of data tables or three data tables set up here. I'm gonna do the first one with you just to remind you of how a data table works and then we can just maybe have a quick look at the solution for the other two. So in my data table I'm looking at the PE institution's, IRR. So the first thing I need to do in the top left hand corner is go and pick up that IRR we've calculated of 19%, right? So I'm picking up I74 because I want the data table to tell me what that IRR is gonna be under different assumptions. And in this data table I wanna look at the exit year. Currently we are assuming exit year four. I wanna see what happens if we exit in the years I've chosen. And then I'm looking at the entry multiple, what we pay going in. So once we've set out our, set up our table, we select everything and then we do alt DT for data table and then our row input cell in the row, we've got the exit year. And in the column we've got the entry multiple. So let's go pick up it for the row. I need to go get that exit year. So exit year for the row is that four over there in J10.

And then I'm just gonna use my mouse here 'cause I don't wanna scroll all the way back up and down. My entry multiple is the common, is the column input cell, so that's F7. Okay? And we should have our data table, if you've got zeros in your data table, if you just press F9 to refresh F9 to refresh if you've got zeros, it could be that your Excel calculation settings are on automatic except for data tables or maybe manual to F9 to refresh. Now what's useful in data tables is to do a little bit of conditional formatting to just help highlight, you know, returns that we would wanna look at. So I'll do that for this one data table to remind you or show you how to do that. You select everything on the inside of your data table. And then if I use my keyboard shortcuts, alt H for the home ribbon and then conditional formatting is L.

And within conditional formatting I'm gonna do a very simple conditional formatting H. The first one highlight cell rules and I wanna highlight IRRs that are greater than, so G, let's say 18%, I wanna look at all IRRs that are greater than 18%. And the color I want, I don't want red because that indicates you know that it's maybe negative. I want it to be green. So I'm going to just select instead of light. And you can format this however you want with more options. If you customize it, I'm gonna go for green and if I press enter, what you'll see in my table is that it has highlighted all IRRs that are more than 18%. And this should be logical, right? The lower your entry multiple is the less you pay going in, the more return you're gonna make. So you can see we've got these high returns where we've got low multiples.

Also your return is being spread over a certain number of years. The longer you spread that return over, the lower the return is gonna be because I'm splitting it out over many years. So it's a balance because if you exit too early, maybe you're not gonna achieve the savings, cost savings, EBITDA improvement, you're not gonna have paid down enough debt. So it is a balance to be achieved between exiting too early and too late. But as we can see here, the earlier you exit, the higher the IRR, the higher the return. Okay? And all else remaining equal. If we wanna exit in year four, which is what we had built in originally, if we wanna exit in year four, we actually can't pay more than seven and a half going in, right? If I wanna exit in year four, if I pay more than seven and a half, I'm gonna get a very low IRR. Okay? So this table is useful to do some analysis in terms of exit year. I've looked at entry multiple. If we have a look at the solution file. So if I just open up, oh not my test ones, if I open up the solution, the full file you'll see there, I'm not gonna talk through it in detail because you can have a look and play around and analyze. And also you can change from management case to the bank case. And you'll see under the bank case things actually look a lot worse. But if you go to the LBO tab here, I've got some more data tables underneath, I've got exit year and exit multiple. And as you might imagine, the higher your exit multiple the better because you're selling for a higher value. Now I'm maybe being a bit ridiculous going up all the way down to 15.5, exit multiple. I mean if you are entering at seven and a half, unless this is the best deal ever, maybe that's unrealistic, but I just wanted to prove the point, right? The higher you exit for the higher your returns are gonna be coupled with that shortness of investment period. And then another one that I did as well is looking at entry multiple versus exit multiple. So if we wanna exit in year four, which is what we've currently got, I can then go have a look and say right with exiting in year four, basically if I go in at seven and a half I've gotta exit at seven and a half or lower or not lower or higher. Otherwise I'm not gonna generate that return, right? And so this is another bit of analysis that you could do.

Okay? So I'm just gonna close the solution file down because it causes things to run a little bit slower.

And the last thing I wanna do with our last few minutes is I want to show you that sale in leaseback because it's an interesting scenario and it is effectively a recapitalization. So what that scenario is, I'm come, I've come back to my file that I've been working on is we are gonna change, where are we here? Financial structure choice in D18, we're gonna change that to three to the lease scenario. Now in the lease scenario what we are looking at is if you compare the standard to the lease scenario, we've still got the first lien debt. But then we're saying the second lien debt actually we think we could borrow more against the property. Debenhams has got a valuable property portfolio, their retail locations. So we think if we sell those retail locations, but then we gotta lease them back because we need those retail locations to operate. But if we do a sale and lease back, I think we could actually get more than 511. I think we could get, and in this case I think it's 700 and something. So what you'll see in the lease scenario, everything else is the same except that second lien is replaced with a bridge loan and the bridge loan is going to be replaced with the sale and lease back. Now we have got assumptions for the sale and lease back up at the top here. So we think there's gonna be an uplift to the property portfolio value compared to what it's currently on at the balance sheet. We think it will be valued at 40% more than that. We think the amount of the lease that we can get is gonna be 75% of that the lease term super long funding horizon 25 years. And then we've got an interest rate on the lease. Now I'm not gonna go into the detail of the calculation, but if you come down here to row 32, you can see we've calculated the value of that lease given those assumptions. So we think we can effectively sell the property for 709. We get cash in for 709, but then straight onto our balance sheet comes a lease liability debt for 709 because now I owe, I'm leasing this over the next 25 years, I'm going to use the proceeds of 709 to pay off the bridge loan. But guys, what about this difference? I have got cash in from the sale of 709 but I only have to repay the bridge loan of 511. And remember the purpose of a bridge loan is it's temporary. The sale and leaseback will take a while to organize and execute. I wanna close the deal, I need the funds. So I take out a bridge loan of 511 and then as soon as I do the refinancing, I pay off that bridge loan. So the difference between the cash I get from the sale and leaseback and the bridge loan that I have to pay off the 198.1 that is a dividend that will be paid out to the equity holders and that is going to boost their returns. So they're not exiting, they're not selling their equity stake, they're just getting some cash out by piling more debt on instead of debt of 511 in the balance sheet. Well we've got other debt as well, but that 511 is gonna be replaced by a lease liability of 709. And so you can go and look at the balance sheet, the debt schedule, et cetera. But let's have a look at the impact on returns. So remember we said that 198.1 is gonna be paid as a dividend. Now that is not gonna impact the mezzanine holders. They don't have a right to those dividends. They've only got a right to equity on exit. But what it will who will have a right to those dividends is the PE institutions and the management. We haven't modeled management but it would work in the same way. Now I'm going to go pick up those dividends from the calc tab. So if we just go down to the calculations tab, we can see there's my common dividends in J16. And the reason I'm picking it up from the calc tab is because built into the model you can play around with the timing of the sale and lease back. So here we assuming sale and lease back will happen at the end of the first year, but that timing could change. So you don't just wanna hard code in that dividend. We wanna link it to the rest of our model. So I've gone and picked up J16, but you notice that's a negative. I don't want a negative because this is a dividend that's income cash coming in for the investors. So I'm just gonna change the sign. So multiply by minus one, but then I'll have to recognize that the PE institutions don't own a hundred percent of the equity, they only own 90%. So they're only gonna get 90% of the dividend and management get the other 10%. So I'm gonna go back to my LBO tab back to the ownership percentages and I'm gonna go pick up that 90% and I'm gonna lock onto that F4 because we're gonna be copying to the right and you can see 90% of the dividend comes through. We've got that 178.3 coming through as a dividend and if I copy to the right, there's gonna be no other dividend coming through, right? It's a one off sale and lease back, you get the cash in, you pay out a dividend. So we've got that coming through in the first year and you can see we've done our formula correctly because even though we only exiting in year fall four, we still have a dividend coming through in year one. That's why I said it's gotta be outside your F statement. That dividend comes through in year one regardless of when we then exit. Now look what has happened to that IRR, the IRR was previously 19% and now the IRR is 22.3%. So we have boosted our returns by a good few percentage points because we have extracted some cash flow out of the business sooner and that has boosted our internal rate of return.

And then it'll also obviously boost management's internal rate of return as well.

And you can see actually interestingly enough, the mezzanine, if you remember mezzanine was previously 13%. They a little bit worse off. So with this dividend being paid out because the mezzanine holders don't share in the dividend, they don't get that boost. And also on exit there's more debt in the business now on exit because we've got this higher lease amount and not as much debt has been paid down. And so you also have a slightly lower equity value on exit and so the mezzanine holders actually get a slightly worse return with that dividend than if there were no dividend. So the beneficiaries are the people getting that dividend, the PE institutions and management, Okay? So you have got the full solution file under the resources if you are interested in having a look at this full Denis model. So going through from building income statement, balance sheet, cashflow statement, debt schedule, where you will find that is if you go to topics and you go to private equity.

And within that, if you go to LBO modeling complexities, LBO modeling complexities, there we go. We've got everything all the way down through to the sale and lease back at the end. So if you are interested in testing yourself, doing it on your own, you can download the empty file from I think the model map and then you've got the videos to support as well.

So that is all from my side, I've just checked, I don't see any questions having come through. I will stick around for a few minutes now if anyone does have any questions, but hopefully you found that useful. Please do give feedback. There is a feedback link at the end of the session so please do give us feedback, let us know how you found it and thank you very much. Enjoy the rest of your afternoons or evenings.