1. Presented By: Submitted to
Kamal Prajapati (23). Mr. Parth Modi
Ravi Raval (26). S.K.S.B.M. Patan
2. Meaning
• A Leveraged buyout is a takeover of a company, or of a
controlling interest in a company, using borrowed money,
usually amounting to 70% or more of the total purchase price
(with the remainder being equity capital)
• The goal of a Leveraged buy-out can be of a dual nature: a
strategic-industrial nature and a financial-speculative nature
3. Leveraged Buyout (LBO)
Buyout
The purchase of a company or a controlling interest of a
company's shares.
Leverage buyout:
The acquisition of a company using debt and equity finance.
As the word leverage implies, more debt than equity is used
to finance the purchase, e.g. 90% debt to 10% equity.
Normally, the assets of the company being acquired are put up
as collateral to secure the debt. (RJR Nabisco LBO by KKR)
Going Private
Refers to transformation of a public corporation into a privately
held firm.
4. How LBOs work?
Financial buyer like LBO fund takes over public or
private firm.
Synergies?
Financed partly by fund’s own money which is used as
equity, partly with large amounts of debt:
Bank debt
Junk bonds
Fund holds firm for 2-10 years, then must sell it (exit):
IPO
Trade sale
Secondary (sell to other LBO fund)
5. Stages of LBO
I. First Stage: Raising Funds
II. Second Stage: Creating an Shell Company or an SPV
and Transferring the Funds raised
III. Third Stage: Purchasing the Shares or Assets
IV. Fourth Stage: Putting the Taken-Over Company on
Track
V. Fifth Stage: Taking the Company Public again-Second
IPO
6. What are the reasons of LBO?
Private Investment firm may have interest in the target business
firms business, and it may think it will run that firm more
efficiently.
Acquirer may make that business achieve more growth.
With borrowed fund, will help reducing the tax bill as firms won’t
have to pay tax on interest payments.
7. An LBO in Process
A group takes over control of a company (sometimes with hostile
takeovers).
Use high level of leverage and multiple debt layers to take control
Once in control, improve operations – increase EBITDA, divest
unrelated businesses to generate cash for transaction, re-sell the new
company for a profit.
High amortization assures self-restraint on behalf of the borrower.
In a typical LBO, capital expenditures do not exceed depreciation by
much.
By changing the relative participation of debt and equity in the capital
structure, an LBO redistributes returns and risks among providers of
capital.
8. The three main characteristics of LBOs
1. High debt
2. Incentives
3. Private ownership
9. Example of LBO in Daily life
Mortgaging a Home.
Buying a Car/Taxi, financed by bank.
10. Example of LBO
Tata Tea was one of the largest tea company faced several challenges
in 1999, like
In order to overcome, they needed to improve and sustain in the
global competition. For that they needed to acquire other global
brand. The solution provided was Leveraged Buy Out. Therefore Tata
Tea acquired Tetley brand by leveraged buy outing deal. The value of
Tata Tea was $114 million and that of Tetley was $450 million
