Case Study
Cap des Biches (B)
Financing a Leveraged Buy-Out

Prof. Ian Giddy, New York University

The Cap des Biches power project, owned by GTI-Dakar, consisted of a 56-MW, oil-fired plant located about 20 kilometers east of Dakar at Cap des Biches. The IPP (Independent Power Producer) plant uses naphtha fuel produced at the SAR refinery.

In late 2004 the original sponsors, having changed their worldwide investment strategy, were seeking to exit from their participation in the project. One possibility was to sell to a French power company.

On the other hand, the managers of GTI-Dakar were considering taking over the project themselves, though a Leveraged Buy-Out (LBO). To do this, a new company, Cap des Biches Power, would be formed and it would buy all the shares of GTI-Dakar.

GTI and the other owners favored the idea of giving key officers a stake and control of their company, but they wanted to get a good price for their shares, which were currently valued at EUR24 per share. GTI was willing to receive payment partly in cash, and partly in the form of a EUR30 million, 15% prepayable subordinated note.

Management had discussed the LBO possibility with IFC Ventures, a private-sector venture capital firm that was part of the World Bank group. The firm's advisors had calculated that of the minimum amount of EUR216 million needed for the LBO, EUR20 million would have to come from management sources, as much as EUR125 million could be raised through a senior debt issuance led by Credit Lyonnais, and the remainder from IFC Ventures. Credit Lyonnais indicated the rate would be 12% and that lenders would need a Net Operating Income/Interest Expense ratio of at lease 2x. At this time 35% of the 9 million shares outstanding were held by GTI, and the remainder was held by other institutions. Net operating income was EUR30 million. Other key indicators are listed below.

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

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

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

NOI/Interest expense
Effective tax rate



EUR20 million

IFC Ventures aimed to get a high return on their equity investment, at least 25% p.a., but it was optimistic about the prospects for Cap des Biches. The company benefitted from a recent EUR100 million capital investment, which was to be depreciated over the next five years. Based on past performance the company's operating income was growing at about 3.6% annually. If management acquired GTI-Dakar, they estimated that the long-run EPS growth rate could be raised to 5.5%, but Cap des Biches Power would incur upfront capital investments and other costs of EUR18 million.Was the company worth buying?


1. Work out how much money would be needed to effect the LBO, assuming the buyer would have to pay a 5% premium over the current market price.
2. Estimate how much debt the LBO company could take on.
3. Develop an LBO financing proposal.
4. How soon would the company be able to pay down its subordinated and senior debt? You can assume depreciation is a constant EUR20 million per annum for the first 5 years, and during that period no new capital investment will be needed.
5. How much of a return can the LBO group expect to earn if their projections work out, and they can take the company public as soon as the debt is paid off, at a multiple of 12 times Net Operating Income? | | | | contact
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