Giddy: Case Study of a Leveraged Buyout

Case study
Jordan Cement
An exercise in leveraged finance modelling

Prof. Ian Giddy, New York University

The Proposal

Jordan Cement

Samer Biriqadar, the owner of Jordan Cement, wants to sell his family's company for $19 million. He is prepared to offer a vendor note at 10% p.a. for up to $2 million of the financing. A preliminary agreement for the sale has been reached between the Biriqadar family and the sponsors of the acquisition, an Egyptian construction company called Orascom and a European development bank. Together with management, the sponsors are able to contribute equity capital totalling $5.5 million. Their challenge is to raise the remainder of the financing. Other details are as follows:

Balance sheet 2005 (US$ millions)
Assets	Cash	0.5
	A/R	1
	Inventory	1
	PP&E	6.5
Liabilities	A/P	1.5
	LT Debt	1
Equity		6.5

Income Statement 2005
Sales		20	growing at 12% p.a.
Cost of Goods Sold		16	80%	of sales
SG&A		2	10%	of sales
Depreciation		1
EBIT		1
Net interest expense		0.6
Tax	35%	0.14
Net Income		0.26

Proposed Financing
Sr debt		12	8.50%	with 7 yr amortization
Mezz debt		3	13%	plus warrants for 2% of equity
Equity	Orascom	2
	Dev Bank	2	Exit in 5 years at 7xEBIDTA-Net Debt
	Management	1.5
		20.5

Additional constraints:
Sr. debt/EBITDA: Max 2.5x
Total debt/EBITDA: Max 5x
EBITDA/Sr. interest: Min 3x
EBITDA/Total interest: Min 2x
Capex: 2% of sales
Min cash balance: $0.5 million

Questions
1. Use the Jordan LBO Model spreadsheet to model the cash flows, valuation and rates of return in this proposed deal
2. Does the deal work for all the parties?
3. Is there a role for mezzanine finance? If mezzanine investors expect a total return of 17.5%, how can that be achieved?
4. What rate of return can the lenders, the equity partners, and other investors expect to earn?