Investment Banks, Hedge Funds and Private Equity: The New Paradigm

ServiceCo Case (Chapter 4)

General
Make sure to enable iterative calculation with maxium iteration set to 1000.
Formulas cells are in black text.
Cells with number inputs are in blue text.
Cells that can be modified are in blue text with yellow highlighting. Only change these cells.
These cells are the financials and assumptions which can be changed that drive your valuation model.

Mini-LBO Model
Enter in the operating projections provided by the case in the LBO model. These figures will flow through th
Assume that ServiceCo's existing $800 million in debt is rolled over in the buyout. In addition, assume Serv
Assume the Company does not have any stock options.
Enter in the leverage and interest parameters provided by the case.

Calculate the fees and expenses associated with the transaction and then the incremental amortization ass
Given the projections, leverage and rate assumptions, adjust the purchase price/share and exit multiple to
could pay per share and achieve 15 20% returns in five years. Perform the same analysis under a cre
Remember to review the credit statistics to assess the risk / return profile of the transaction.

5-Yr DCF Model

The operating projections are pulled from the Mini-LBO model.
The model assumes ServiceCo's existing $800 million in debt is a long term bond and incurs annual interes
As with the LBO analysis, assume the Company maintains a cash balance of $200 million throughout the pr
Calculate the Company's weighted average cost of capital (WACC) based on the information provided in the
WACC = Cost of Equity x [ E / (E + D)] + Cost of Debt (1 - Effective Tax Rate) x [D / (E + D)], where:
Cost of Equity = Risk Free Rate + Unlevered Beta x Equity Market Risk Premium, and
E and D are the Equity and Debt portions of the capital structure, respectively.
Determine the appropriate exit multiple range and whether the discount rate assumption or the exit multip
In addition to the base case, consider the impact of potential synergies on valuation.
Remember: only change inputs in the cells highlighted in yellow and blue text

he New Paradigm

hese cells.
ive your valuation model.

figures will flow through the DCF model.

In addition, assume ServiceCo maintains a cash balance of $200 million.

remental amortization associated with the expenses.

hare and exit multiple to determine the maximum that a financial sponsor
same analysis under a credit market downturn scenario.
ransaction.

and incurs annual interest payments of 8%.

million throughout the projection period.
nformation provided in the case and the following formula:
x [D / (E + D)], where:

umption or the exit multiple assumption has a larger impact on valuation.

Projec

Sources
Amount

Leverage
Cash
New Bank Debt
New Bond Debt

Percent
-

0.0%
0.0%
0.0%

Tranche C

0.0%

New Equity

0.0%

0.0%

Total Sources

0.0x

Purchase of Equity
Refinance Exisiting Debt
Transaction Fees & Expen

Total Uses

Interest Rate Assumptions

New Bank Debt (% Spread to LIBOR)
New Bond Debt (%)
Tranche C (%)

Pro Forma
2007
SUMMARY FINANCIALS
Net Sales
% Growth
EBITDA
% Margin
Depreciation & Amortization
New Amortization of Intangibles
EBIT
Total Cash Interest Expense
Interest Income
Other Income
EBT
Taxable Income
Income Tax Expense
% Marginal Rate
Net Income
Depreciation & Amortization
Inv. in Non-Cash Working Capital

2008

2009

--

0.0%
-

0.0%
-

39.0%
-

39.0%
-

39.0%
-

% of Change Net Sales

Capital Expenditures
% of Net Sales
Free Cash Flow

0.0%

0.0%

0.0%

0.0%

0.0%

Total Cash
New Bank Debt
New Bond Debt
Tranche C
Total Debt
Total Shareholders' Equity
Book Capitalization

NM

NM
NM
NM
NM
NM
0.0%
NM
0.0%

Retired In
NM
NM
NM

NM
NM
NM

LIBOR Curve
2007
6.13%

Err:522
Err:522
Err:522
Err:522
1,000.0
Err:522

1,000.0
1,000.0

CREDIT STATISTICS
Total Debt / EBITDA
EBITDA / Interest
(EBITDA - CapEx) / Interest
(EBITDA - CapEx - WC) / Interest
EBIT / Interest
Total Debt / Book Capitalization
FFO / Total Debt
FCF / Total Debt
DEBT PAYDOWN
New Bank Debt
New Bond Debt
Tranche C

--

Err:522
Err:522
Err:522
Err:522
1,000.0
Err:522

NM
NM
NM
NM
NM
Err:522
Err:522
0.0%

NM
NM
NM
NM
Err:522
Err:522
0.0%

NM
NM
NM

NM
Err:522
Err:522

Err:522
Err:522

2008
6.07%

2009
5.66%

Project ServiceCo
LBO
($MM)
Uses
Amount

chase of Equity
nance Exisiting Debt
nsaction Fees & Expenses

Deal and Returns Sum

Agg. Consideration Paid (excl. fees)
Agg. Consideration Multiples
2007E EBITDA
2008E EBITDA
Purchase Price Per Share

Percent
-

0.0%
0.0%
0.0%

Implied Share Price Premium

2007 Total Leverage Multiple
Exit
$

0.0%

EBITDA

Aggregate

Multiple

Value

(0.5)

0.5

Fiscal Year Ending December 31,

Projected
2010

2011

2012

2013
$

0.0%
-

0.0%
-

0.0%
-

39.0%
-

39.0%
-

39.0%
-

2014
- ## $

0.0%
39.0%
-

2015

- ## $
0.0%
0.0%
39.0%
-

0.0%
0.0%
39.0%
-

0.0%

0.0%

0.0%

0.0%
0.0%

0.0%

0.0%

Err:522
Err:522
Err:522
Err:522
1,000.0
Err:522

NM

0.0%
-

Err:522
Err:522
Err:522
Err:522
1,000.0
Err:522

NM

Err:522
Err:522
Err:522
Err:522
1,000.0
Err:522

NM

Err:522
Err:522
Err:522
Err:522
1,000.0
Err:522

NM

0.0%
0.0%
-

Err:522
Err:522
Err:522
Err:522
1,000.0
Err:522

NM

Err:522
Err:522
Err:522
Err:522
1,000.0
Err:522

NM

NM
NM
NM
NM
Err:522
Err:522
0.0%

NM
NM
NM
NM
Err:522
Err:522
0.0%

NM
NM
NM
NM
Err:522
Err:522
0.0%

NM
NM
NM
NM
Err:522
Err:522
0.0%

NM
NM
NM
NM
Err:522
Err:522
0.0%

NM
NM
NM
NM
Err:522
Err:522
0.0%

NM
Err:522
Err:522

NM
Err:522
Err:522

NM
Err:522
Err:522

NM
Err:522
Err:522

NM
Err:522
Err:522

NM
Err:522
Err:522

Err:522
Err:522

Err:522
Err:522

Err:522
Err:522

Err:522
Err:522

Err:522
Err:522

Err:522
Err:522

2010
5.68%

2011
5.81%

2012
5.81%

2013
5.81%

2014
5.81%

2015
5.81%

eal and Returns Summary

n Paid (excl. fees)
n Multiples

0.0
0.0

Share Information
Diluted Share Calc
Basic Shares
Options

Diluted Shares

ice Premium

-100.0%

ge Multiple

Current Share Price

22.000

0.0x
IRR Check
Equity

5-Year

Investment

Value

Return

0.0

0.0

0.0

Year 2

Err:522

0.0%

0.0

0.0

0.0

Err:522

0.0%

0.0

0.0

0.0

Err:522

0.0%

2016
## $

Year 1

2017

- ## $
0.0%
0.0%
39.0%
-

0.0%
0.0%
Err:522
Err:522
Err:522
39.0%
Err:522
-

Goodwill Calculation
Equity Purchase Price
Shareholder's Equity
Old Goodwill and Intangibles
Prepaid Fees & Expenses
New Goodwill
% of Goodwill Deemed Intangible
Years of Amortization
New Annual Amortization

0.0%
0.0%

0.0%
0.0%

Err:522

Err:522
Err:522
Err:522
Err:522
1,000.0
Err:522

NM

Err:522
Err:522
Err:522
Err:522
Err:522
Err:522
Err:522

NM
NM
NM
NM
NM
Err:522
Err:522
0.0%

NM
NM
NM
NM
Err:522
Err:522
0.0%

NM
Err:522
Err:522

NM
Err:522
Err:522

Err:522
Err:522

Err:522
Err:522

2016
5.81%

2017
5.81%

IRR Check
Year 3

Year 4

IRR

0.0

0.0

Err:522

0.0%

0.0

0.0

Err:522

0.0%

0.0

0.0

Err:522

0.0%

tion
$

Year 5

1,000.0
1,800.0
800.0

Project Servi
DCF
($MM)

Fiscal Year Endin

2007
Net Sales
% Growth
EBITDA
% of Net Sales
Depreciation & Amort.
EBIT
% of Net Sales
Interest Expense
Interest Income
Net Interest Expense
Other Income / (Expense)
Earnings Before Taxes
Taxes
% Effective Rate
Net Income
Plus
A-T Interest Expense
Depreciation & Amort.
Other

2008

2009

2010

$0.0
-0.0
NM
0.0
0.0
NM
0.0
0.0
0.0
0.0
0.0
0.0
39.0%

$0.0
0.0%
0.0
NM
0.0
0.0
NM
0.0
0.0
0.0
0.0
0.0
0.0
39.0%

$0.0
0.0%
0.0
NM
0.0
0.0
NM
0.0
0.0
0.0
0.0
0.0
0.0
39.0%

$0.0
0.0%
0.0
NM
0.0
0.0
NM
0.0
0.0
0.0
0.0
0.0
0.0
39.0%

$0.0

$0.0

$0.0

$0.0

0.0
0.0
0.0

0.0
0.0
0.0

0.0
0.0
0.0

0.0
0.0
0.0

Less
Inv. in Non-Cash WC
% of Change in Net Sales
Capital Expenditures
% of Net Sales
Inv. in Other Non-Current Assets
Chng. in Other Non-Current Liab.
Other / Restructuring

0.0
-0.0
0.0%
10.0
(10.0)
0.0

0.0
0.0%
0.0
0.0%
10.5
(10.5)
0.0

0.0
0.0%
0.0
0.0%
11.0
(11.0)
0.0

0.0
0.0%
0.0
0.0%
11.6
(11.6)
0.0

Unlev. Free Cash Flow

$0.0

$0.0

$0.0

$0.0

Total Debt, Pref. Stock & MI

Cash
Diluted Shares (MM)

Terminal Year Figures

0.0
0.0
0.0

EBITDA
EBIT

0.0
0.0

Exit EBITDA Multiple High

Exit EBITDA Multiple Low
Discount Rate High
Discount Rate Low

Project ServiceCo
5-Year DCF - Exit Trailing EBITDA M
($MM, except per share amoun
Valuation Matrix as of January 1, 2008
Trailing Exit EBITDA Multiple

0.0

Discount Rate

0.0%

0.0%

0.0%

PV of 1st Year Cash Flow

PV of Cash Flows Through Year 5
Terminal Value
Implied EBIT Multiple
Implied Perpetual Growth Rate
PV of Terminal Value

$0.0
0.0
0.0
0.0
0.0%
0.0

$0.0
0.0
0.0
0.0
0.0%
0.0

$0.0
0.0
0.0
0.0
0.0%
0.0

Asset Value

0.0

0.0

0.0

Less Total Debt

Plus Cash

0.0
0.0

0.0
0.0

0.0
0.0

$0.0

$0.0

$0.0

Equity Value
Equity Value Per Share
% Value in Terminus
% Value in Cash Flows

NM

NM

NM

0.0%

0.0%

0.0%

100.0%

100.0%

100.0%

Valuation
Equity Value
Equity Value Per Share
Prem/(Disc) to Unaffected Stock Price

Project ServiceCo
DCF
($MM)
Fiscal Year Ending December 31,
2011
2012

2013

2014

2015

2016

$0.0
0.0%
0.0
NM
0.0
0.0
NM
0.0
0.0
0.0
0.0
0.0
0.0
39.0%

$0.0
0.0%
0.0
NM
0.0
0.0
NM
0.0
0.0
0.0
0.0
0.0
0.0
39.0%

$0.0
0.0%
0.0
NM
0.0
0.0
NM
0.0
0.0
0.0
0.0
0.0
0.0
39.0%

$0.0
0.0%
0.0
NM
0.0
0.0
NM
0.0
0.0
0.0
0.0
0.0
0.0
39.0%

$0.0
0.0%
0.0
NM
0.0
0.0
NM
0.0
0.0
0.0
0.0
0.0
0.0
39.0%

$0.0
0.0%
0.0
NM
0.0
0.0
NM
0.0
0.0
0.0
0.0
0.0
0.0
39.0%

$0.0

$0.0

$0.0

$0.0

$0.0

$0.0

0.0
0.0
0.0

0.0
0.0
0.0

0.0
0.0
0.0

0.0
0.0
0.0

0.0
0.0
0.0

0.0
0.0
0.0

0.0
0.0%
0.0
0.0%
12.2
(12.2)
0.0

0.0
0.0%
0.0
0.0%
12.8
(12.8)
0.0

0.0
0.0%
0.0
0.0%
13.4
(13.4)
0.0

0.0
0.0%
0.0
0.0%
14.1
(14.1)
0.0

0.0
0.0%
0.0
0.0%
14.8
(14.8)
0.0

0.0
0.0%
0.0
0.0%
15.5
(15.5)
0.0

$0.0

$0.0

$0.0

$0.0

$0.0

$0.0

Project ServiceCo
Exit Trailing EBITDA Multiple
xcept per share amounts)

0.0

0.0

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

$0.0
0.0
0.0
0.0
0.0%
0.0

$0.0
0.0
0.0
0.0
0.0%
0.0

$0.0
0.0
0.0
0.0
0.0%
0.0

$0.0
0.0
0.0
0.0
0.0%
0.0

$0.0
0.0
0.0
0.0
0.0%
0.0

$0.0
0.0
0.0
0.0
0.0%
0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0
0.0

0.0
0.0

0.0
0.0

0.0
0.0

0.0
0.0

0.0
0.0

$0.0

$0.0

$0.0

$0.0

$0.0

$0.0

NM

NM

NM

NM

NM

0.0%

0.0%

0.0%

0.0%

0.0%

0.0%

100.0%

100.0%

100.0%

100.0%

100.0%

100.0%

Valuation Range

cted Stock Price

NM

$0.0

to
to

0.0%

to

NM

$0.0
NM
0.0%

2017
$0.0
0.0%
0.0
NM
0.0
0.0
NM
0.0
0.0
0.0
0.0
0.0
0.0
39.0%
$0.0

0.0
0.0
0.0

0.0
0.0%
0.0
0.0%
16.3
(16.3)
0.0
$0.0