Simple LBO Template Excel Model (Leveraged Buyout)

Tl;dr: A simple LBO template excel model to review the opportunity in acquiring a company with debt.

You may have heard about LBOs; where a massive amount of debt is used to buy a company. Sometimes it works great and the Private Equity firms make out like bandits, but other times things go pear-shaped.

What’s an LBO? Will, in nerd speak, an LBO is a financial transaction in which a company is purchased with a combination of equity and debt, such that the company’s cash flow is the collateral used to secure and repay the borrowed money.

I’m providing a free Excel template that I made over the weekend for fun.

Want to see examples of LBO presentation slides?

I’ve provided some free examples for you to learn from. There are more in the spreadsheets.

See examples of LBO slides.

Download the LBO template

 

The simple LBO template

In 2010, KKR made a go of acquiring Perpetual Asset Management for $1.73bn. For fun to see what a deal would be like, I made this to have a quick look myself.

There are far more complicated manners of evaluating an LBO, this isn’t one of them. it’s something you can churn out in an hour or two.

Screenshots of the model

Introduction to Leveraged Buyouts (LBOs)

A Leveraged Buyout (LBO) is a financial transaction in which a company is purchased with a combination of equity and significant amounts of borrowed money, structured in such a way that the company’s cash flow is the collateral used to secure and repay the loan.

The purpose of LBOs is to allow companies to make large acquisitions without having to commit a significant amount of capital.

Key Players in LBOs

1. Target Company: The company that is being purchased. Ideal targets are often mature, stable, and cash flow positive companies with low existing debt levels.
2. Financial Sponsor: The entity conducting the LBO, often a private equity firm. They contribute the equity portion of the purchase price.
3. Lenders: Banks or other financial institutions that provide the debt used in the LBO.

What firms have performed best over time?

It’s hard to judge, but a rough list of top LBO funds includes the following:

1. The Blackstone Group
2. Kohlberg Kravis Roberts & Co. (KKR)
3. Bain Capital
4. Carlyle Group
5. Apollo Global Management
6. TPG Capital
7. CVC Capital Partners
8. Warburg Pincus
9. Hellman & Friedman
10. Silver Lake Partners

Examples of LBOs

These are some of the most famous LBO deals:

1. RJR Nabisco (1988)
   • Acquirer: Kohlberg Kravis Roberts & Co. (KKR)
   • Purchase Price: $31.1 billion
   • Notable for: At the time, it was the largest LBO in history. The deal was highly publicized and led to the book and movie “Barbarians at the Gate.”
2. Hospital Corporation of America (HCA) (2006)
   • Acquirers: KKR, Bain Capital, and Merrill Lynch Global Private Equity
   • Purchase Price: $33 billion
   • Notable for: It was the largest LBO at the time. HCA was taken private and then taken public again in 2011.
3. Energy Future Holdings (2007)
   • Acquirers: KKR, TPG Capital, and Goldman Sachs Capital Partners
   • Purchase Price: $48 billion
   • Notable for: It was the largest LBO ever. However, the company filed for bankruptcy in 2014 due to falling natural gas prices.
4. Harman International (2007)
   • Acquirers: KKR and Goldman Sachs
   • Purchase Price: $8 billion
   • Notable for: The deal was agreed upon but was later called off due to “a material adverse change in Harman’s business.”
5. Toys “R” Us (2005)
   • Acquirers: KKR, Bain Capital, and Vornado Realty Trust
   • Purchase Price: $6.6 billion
   • Notable for: The company filed for bankruptcy in 2017 and closed all of its US stores in 2018.
6. Hilton Hotels (2007)
   • Acquirer: Blackstone Group
   • Purchase Price: $26 billion
   • Notable for: Despite the financial crisis, Blackstone managed to double its investment when Hilton was taken public again in 2013.

Key Components of an LBO

1. Target Company: This is the company that is being purchased. Ideal targets are often mature, stable, and cash flow positive companies with low existing debt levels.
2. Financial Sponsor: This is the entity conducting the LBO, often a private equity firm. They contribute the equity portion of the purchase price.
3. Debt: This is the borrowed money used to pay for the acquisition. It’s typically a significant portion of the purchase price.

The LBO Process

1. Identifying a Target: The financial sponsor identifies a potential target company. They look for companies with strong cash flows, stable and predictable business, and potential for improvement.
2. Financing: The sponsor arranges debt financing. This often involves multiple layers of debt, from senior loans to mezzanine debt.
3. Acquisition: The sponsor acquires the target using the arranged financing. The debt becomes an obligation of the target company.
4. Operation and Improvement: The sponsor often takes an active role in managing the company, seeking to improve efficiency and profitability.
5. Exit: After several years, the sponsor seeks to exit the investment, often through selling the company or taking it public.

What kinds of debt are used in LBOs and how they have changed over time

Type of Debt	Description	Evolution Over Time
Senior Debt	This is the most secure type of debt, often secured by the assets of the company. It has the first claim on the company’s cash flows or assets in the event of default.	Senior debt has always been a significant part of LBO financing. However, its proportion relative to other types of debt can vary depending on market conditions and the risk profile of the deal.
High-Yield Bonds (Junk Bonds)	These are riskier and have higher interest rates. They are subordinated to senior debt.	High-yield bonds were a significant part of LBO financing in the 1980s, but their use declined in the 1990s due to regulatory changes and market conditions. They have remained a part of the LBO financing mix but are less dominant than they once were.
Mezzanine Debt	This is a hybrid of debt and equity financing. It is subordinated to senior debt and high-yield bonds but has a higher claim than equity. Mezzanine debt often comes with warrants, which are options to buy equity in the company.	The use of mezzanine debt has fluctuated over time. It was more common in the 1990s and early 2000s, but its use has declined as other forms of subordinated debt have become more prevalent.
Payment-In-Kind (PIK) Notes	These are a type of subordinated debt where the interest is not paid in cash but is added to the principal of the loan.	PIK notes were more common in the 1980s and early 2000s, particularly for riskier deals. Their use declined after the 2008 financial crisis but has seen a resurgence in certain situations.
Unitranche Debt	This is a relatively new type of debt that combines senior and subordinated debt into a single debt instrument.	Unitranche debt has become more common in the 2010s as lenders seek to simplify the financing structure and speed up the lending process.

What LBO deals have done well?

Here are some of the most successful LBOs based on the return on investment and the overall impact of the deal:

1. RJR Nabisco (1988)
   • Acquirer: Kohlberg Kravis Roberts & Co. (KKR)
   • Purchase Price: $31.1 billion
   • Outcome: KKR sold off divisions over time and took the company public in 1991. The deal was ultimately profitable, but the exact return is not publicly available.
2. Hilton Hotels (2007)
   • Acquirer: Blackstone Group
   • Purchase Price: $26 billion
   • Outcome: Despite the financial crisis, Blackstone managed to double its investment when Hilton was taken public again in 2013.
3. Dollar General (2007)
   • Acquirer: KKR
   • Purchase Price: $7.3 billion
   • Outcome: KKR took Dollar General public in 2009 and exited its investment by 2013, reportedly making over $5 billion in profit.
4. PetSmart (2014)
   • Acquirer: BC Partners
   • Purchase Price: $8.7 billion
   • Outcome: BC Partners spun off Chewy.com, PetSmart’s online business, in an IPO in 2019. The IPO valued Chewy.com at about $8.7 billion, effectively recouping BC Partners’ initial investment while still retaining a significant stake in both PetSmart and Chewy.com.
5. HCA Healthcare (2006)
   • Acquirers: KKR, Bain Capital, and Merrill Lynch Global Private Equity
   • Purchase Price: $33 billion
   • Outcome: The group took HCA public in 2011 in an IPO that valued the company at about $28 billion. The private equity firms reportedly made about $5 billion in profit from the deal.

Why do LBOs go wrong?

LBO are not the safest of bets and can go wrong often. Some of the reasons include:

1. Over-leveraging: If the acquired company is burdened with too much debt, it may struggle to make the necessary interest payments. This can lead to cash flow problems and, in the worst-case scenario, bankruptcy.
2. Overpaying for the Acquisition: If the buyer pays too much for the target company, it may struggle to achieve a good return on investment. This can be particularly problematic if the company’s performance doesn’t live up to expectations.
3. Economic Downturn: LBOs are often dependent on strong economic conditions. If the economy takes a downturn, the target company’s revenues may fall, making it harder to service the debt.
4. Poor Business Performance: If the target company’s business performance deteriorates – whether due to competitive pressures, loss of key customers, or other factors – it may not generate enough cash flow to service the debt.
5. High Interest Rates: If interest rates rise, the cost of servicing the debt can increase significantly. This can put additional pressure on the company’s cash flow.
6. Failure to Achieve Operational Improvements: LBOs often assume that operational improvements will be made that will increase the company’s cash flow. If these improvements fail to materialize, the company may struggle to service its debt.
7. Inadequate Due Diligence: If the buyer fails to identify key risks during the due diligence process, they may be caught off guard by problems after the acquisition.
8. Regulatory Changes: Changes in regulations or legal environment can also impact the success of an LBO. For instance, changes in tax laws or industry-specific regulations can affect the company’s profitability and ability to service debt.

What LBO deals have gone the worst?

1. Energy Future Holdings (2007)
   • Acquirers: KKR, TPG Capital, and Goldman Sachs Capital Partners
   • Purchase Price: $48 billion
   • Outcome: The company filed for bankruptcy in 2014 due to falling natural gas prices. It was the largest LBO ever and is considered one of the biggest failures.
2. Toys “R” Us (2005)
   • Acquirers: KKR, Bain Capital, and Vornado Realty Trust
   • Purchase Price: $6.6 billion
   • Outcome: The company filed for bankruptcy in 2017 and closed all of its US stores in 2018. The private equity firms reportedly lost all of their equity investment.
3. Caesars Entertainment (2008)
   • Acquirers: TPG Capital and Apollo Global Management
   • Purchase Price: $30.7 billion
   • Outcome: The company filed for bankruptcy in 2015. The private equity firms reportedly lost most of their investment.
4. iHeartMedia (2008)
   • Acquirers: Bain Capital and Thomas H. Lee Partners
   • Purchase Price: $24 billion
   • Outcome: The company filed for bankruptcy in 2018. The private equity firms reportedly lost most of their investment.
5. Tribune Company (2007)
   • Acquirer: Real estate mogul Sam Zell
   • Purchase Price: $8.2 billion
   • Outcome: The company filed for bankruptcy in 2008, just a year after the deal. It was one of the largest bankruptcies in the history of the American media industry.

What are the common mistakes made when making an LBO model?

1. Overly Optimistic Assumptions: Analysts may make overly optimistic assumptions about revenue growth, cost savings, exit multiples, or other factors. This can lead to inflated valuations and unrealistic expectations.
2. Ignoring the Capital Structure: The structure of the debt used in the LBO can have a significant impact on the outcome of the deal. Ignoring the specifics of the capital structure, such as the interest rates, repayment schedules, and covenants of the different tranches of debt, can lead to inaccurate models.
3. Neglecting Working Capital: Working capital changes can have a significant impact on cash flow, particularly for certain types of businesses. Neglecting to properly model changes in working capital can lead to inaccurate cash flow forecasts.
4. Failing to Properly Model the Exit: The exit is a crucial part of an LBO, as it’s typically how the financial sponsor realizes their return. Failing to properly model the exit, including the timing and the exit multiple, can lead to inaccurate return calculations.
5. Ignoring Fees and Expenses: There are often significant fees and expenses associated with an LBO, including banking fees, legal fees, and debt issuance costs. Ignoring these can lead to an overestimation of the returns from the deal.
6. Simplistic Debt Repayment Assumptions: Some analysts use overly simplistic assumptions for debt repayment, such as assuming that all available cash flow is used to repay debt. In reality, companies may retain some cash for future investments or for a buffer against future uncertainties.
7. Not Stress-Testing the Model: It’s important to stress-test the model against different scenarios, including changes in revenue growth, margin assumptions, interest rates, and exit multiples. Failing to do this can lead to a lack of understanding of the risks associated with the deal.