Case Study
Cap des Biches  ( D)
Restructuring to Realize Value

Prof. Ian Giddy, New York University

The Cap des Biches Power Company, located about 20 kilometers east of Dakar at Cap des Biches in Senegal, consisted of a 56-MW, oil-fired elctricity generating power plant . The IPP (Independent Power Producer) plant uses naphtha fuel produced at the nearby SAR refinery.

In late 2004 the company had been bought by management and an international venture capital group by means of a leveraged buy-out (LBO). This meant borrowing EUR30 million from the seller, GTI, and another EUR120 million from Credit Lyonnais and other banks. The interest rates were 15% and 12% respectively.

Two years after the LBO, the company was having difficulty paying the interest and principal on its debt. Because of this, the company and its banks restructured the financing. Cap des Biches did a debt-for-equity swap, reducing its bank debt from EUR110 million to EUR67 million but paying a higher interest rate of 14% on the remaining debt.

Three years later, the debt had been reduced to EUR25 million and earnings were solid and growing steadily. The company's owners now had the opportunity to take advantage of the turnaround. The summary financial statements were as follows:

Balance sheet
Other current assets
Long term assets, net
Total assets

Noninterest bearing short term debt
Short term debt (10%)
Senior long-term debt (14%)
Subordinated debt
Total Liabilities & Equity
(EUR millions)

Interest Coverage
Net Operating Income (EBIT)
Interest Expense
- Short term debt
- Senior long term debt
- Subordinated debt

EBIT/Interest expense
Effective tax rate
Capital expenditures
(EUR millions)



Now the venture capital investors who held 27% of the equity, and the banks who held 67%, were seeking a way to realize the value of their investment. They had an offer of EUR200 million for the company from a French energy company, but they wondered if perhaps the company was not worth more. The first step, therefore, was to perform a rough valuation of Cap des Biches. Free cash flow to shareholders was EUR29.75 million. Growth was now steady at about 4% per annum, and they estimated that the required return on equity was about 20%.

One of the orignal shareholders, IFC Ventures, argued that since there was good cash flow, Cap des Biches could do a leveraged recapitalization. This would mean raising a considerable amount of debt and paying shareholders a large, one-shot dividend with the proceeds. Rates were down, and several banks had indicated a willingness to lend money at a rate of about 11% as long as it could be paid down within 8 years and the interest coverage ratio did not fall below 2. This would make the company more leveraged and therefore more risky for all shareholders, however, raising the required return to about

Another possibilty was to take on additional debt and use the money to buy out the banks' shareholding. After all, the banks only held shares because they were forced to, and they would be happy to get cash instead, especially if it meant recovering all their pre-restructuring EUR110 loan plus 14% p.a. interest.


1. What is Cap des Biches worth?
2. Can the company afford to issue more debt? How much?
3. What should Cap des Biches do? Borrow money to pay a big dividend? Buy back some or all of the banks' shares? Or should the shareholders accept the offer to sell the company? Explain. | | | | contact
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