The LBO of ISS
Prof Ian Giddy
In early 2005 the Danish management team of the world's largest cleaning services company, ISS, was considering a leveraged buyout of their company. For several months they had worked closely with a Swedish private equity firm, Permira, on analyzing the possibilities. At last they had come up with some numbers to show the banks and potential equity investors. The idea was that the equity partners would form a new company, PurusCo, to buy ISS.
new company would issue debt secured by the shares of ISS. Once PurusCo
had accumulated a controlling stake in ISS, the two companies would be
merged and ISS would be delisted. The proposed purchase price was
billion. In addition the new company would assume EUR1000
of the existing 4.5%, 10-year bonds issued by ISS the previous year.
Fees were expected to run at 2% of the purchase price.
Expected restructuring costs were
estimated at EUR40
million up front. After these investments, capital
expenditures were expected to continue at a rate of about 1.5% of
The challenge was financing the buyout. Recent LBOs had been financed at a level of up to 6xEBITDA. For ISS, discussions with banks suggested that for this kind of business it might be difficult to syndicate an acquisition loan unless EBIT interest coverage was at least 1.8. At this level, the cost of funds would be quite high, but the prospective owners hoped to be able to repay the loans within 4-5 years. Ideally the equity partners would have liked to fund as much as possible with debt, but they knew that the more ISS borrowed, the more expensive would be the average cost of debt funding. The table below gives a rough indication of the tradeoff between the EBIT/interest cost ratio, and the spread over government bonds that the company would face. At the time, the German government bond rate was 3.1%.
The company’s managers, who would continue to run the
managed to raise EUR15 million among themselves to invest in PurusCo.
raised by the private equity firm, whose investors generally look for a
return and an exit plan, possibly an IPO, after about 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 8xEBITDA minus net debt. (This group was hoping for more, but not counting on it).
Table 1: EBIT interest coverage ratios
(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 PurusCo to pay down its debt?
(d) What approximate rate of return can the private equity investors expect to make if the predictions work out?