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 EUR120 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, and was optimistic about the prospects for Cap des Biches. Based on past performance the company was expected to generate free cash flows of EUR2.57 per share next year, an increase of 3.6%  from the current level of EUR2.48. 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 at a price of EUR216 million? How much of a premium over that amount should the LBO group be willing to pay?


1. Can the managers of GTI-Dakar succeed in financing their acquisition of the company through a leveraged buy-out (LBO)? In what way could this increase the value of the firm to shareholders? 
2. Work out what it would cost to buy out the existing shareholders.
3. Develop a post-LBO plan, assuming senior debt pays 12% and subordinated debt pays 15%. The effective tax rate is 30% and depreciation is a constant EUR20 million per annum.
3. Would the company be able to pay down its subordinated and senior debt?
4. How much of a return can the LBO group expect to earn if their projections work out, and they can take the company public in 5 years at a multiple of 12 times Net Operating Income? | | | | contact
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