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Acova Radiateurs

1. Is Acova a good LBO candidate?


Acova should be a suitable candidate for Leverage Buyout (LBO), given its marketingleading position in a steadily growing industry. Based on its stable historical and
projected sales performance, we believe its prospective cash flow would be sufficient to
offset the debt and interest expenditure incurred with the LBO. Another evidence
substantiating its suitability was the current ROIC of 15%, which implied large rooms for
further utilization of existing assets and hence potential of generating higher sales. Also,
many of its production machines were manufactured internally, i.e. these were real assets
which could further generate values. The competent and enthusiastic management teams
were valuable assets to the company.
All in all, Acova basically fulfilled the criteria of a good LBO candidate, yet whether the
BO was justifiable depended largely on the offered price which was determined by an
accurate valuation of firm value.
2. What is the value of Acova? Does it merit the proposed acquisition price of FFr 340MM?
Based on the calculation.
3. Why does Baring Capital Investors seek such a high rate of return of 30 35%?
Baring Capital Investors should demand a rate of return higher than the market rate of
return under the circumstance of LBO, given a higher risk arising from debt financing.
(The 30 35% would be quantified by re-calculating the WACC in the post-LBO
scenario)
4. How does the levered cost of equity compare to BCIs 30 35% hurdle rate on
investment?
To be discussed