The LBO of Plato Data.
Prof Ian Giddy
The management team of the data services division at Kluwer Publishing is considering a leveraged buyout of the services division of their firm. For several months they have worked closely with a private equity firm on analyzing the possibilities. At last they have come up with some numbers to show the banks and potential equity investors. The idea is that they would form a new company, Plato Data, to buy the division.
The new company would issue 12 million shares with a nominal par value of $5. The proposed purchase price of the Kluwer division is $450 million. In addition the new company would assume $55 million worth of long-term lease obligations (this is the present value of the lease obligations). Fees are expected to run at 7% of the purchase price. Expected new capex and restructuring costs are estimated at $51 million up front. After these investments, little or no new capital expenditures would be needed for several years.
Plato Data expects to have EBIT of $90 million in the first year after purchase. This is predicted to grow at 6% for the first 3 years and 3% thereafter.
Because of depreciation expenses amounting to some $30 million p.a., the company does not expect to pay any taxes for at least 4 years.
The challenge is financing the buyout. Discussions with banks suggest that for this kind of business it might be difficult to syndicate an acquisition loan unless EBIT interest coverage is at least 1.8. At this level, the cost of funds would be quite high (see table), but the prospective owners expect to be able to repay the loans within 4-5 years.
The division’s managers, who would run the company, have managed to raise $15 million among themselves to invest in the company. The remainder must be raised by the private equity firm, whose investors generally look for a 25% return and an exit plan after 5 years.
The partners have pledged that no dividends will be paid for the first 5 years. Similar companies (with little or no debt) have been able to go public at a multiple of 6x EBIT. (This group is hoping for more, but not counting on it).
(a) What is the total cost of the deal?
(b) What is the company's debt capacity, and how much additional private equity financing is needed?
(c) How long do you estimate it will take for Plato Data to pay down its debt? (1 year, 2 years, 3 years, 4 years, 5 years, 6 years)
(d) What approximate rate of return can the management team expect to make if the predictions work out? (-15%, 15%, 20%, 25%, 35%)