CHARACTERISTICS, STAGES AND

ROLE OF LBOS.

Submitted to: Prof. Sonali

Submitted by: Divya Anand (M.Com H)
Leveraged Buyout (LBO)
• A leveraged buyout (LBO) is the acquisition of another company using a
significant amount of borrowed money to meet the cost of acquisition. The assets
of the company being acquired are often used as collateral for the loans, along
with the assets of the acquiring company.

• One of the largest LBOs on record was the acquisition of Hospital Corporation of
America (HCA) by Kohlberg Kravis Roberts & Co. (KKR), Bain & Co., and
Merrill Lynch in 2006. The three companies paid around $33 billion for the
acquisition of HCA.

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Leveraged Buyout (LBO)
LBOs are often complicated and take a while to complete. For example, JAB
Holding Company, a private firm that invests in luxury goods, coffee and healthcare
companies, initiated an LBO of Krispy Kreme Doughnuts, Inc. in May 2016. JAB
was slated to purchase the company for $1.35 billion, which included a $350 million
leveraged loan and a $150 million revolving credit facility provided by the Barclays
investment bank. However, Krispy Kreme had debt on its balance sheet that needed
to be sold, and Barclays was required to add an additional 0.5% interest rate in order
to make it more attractive. This made the LBO more complicated and it almost
didn't close. However, as of July 27, 2016, the deal went through.

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 Tata-Tetley LBO

The Tata Tetley – leveraged buyout was carried out via a Special Purpose Vehicle (SPV). A special
purpose vehicle is an entity that is floated by the acquiring company to initiate the process of acquisition.
The special purpose entity uses equity and leverages the equity base (use of debt) to finance the cost of
acquisition. The debtholders are paid off by the cash flows generated by the company.
In the case of Tata Tetley, Tata floated an SPV named Tata Tea (Great Britain) to complete the acquisition.
The SPV was able to capitalise £ 70 million of which Tata Global Beverages contributed   £ 60 million.
Using leverage the company was able to raise a debt of £ 235 million.
The debt of £ 235 million was divided into four tranches ( A, B, C and D) .Tranches A, B, and C were
senior term loans, tranch D was a revolving loan that took the form of recurring advances and letters of
credit. Of the four tranches A and B were meant for funding the acquisition, while C and D were
meant for capital expenditure and working capital requirements. 4 4
 Why companies go for leverage buyouts?

●To make a public company private

●To break up a large company
●To improve an underperforming company
●To acquire a competitor

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 ●Mature industry or company
Characteristics of LBO ●Clean balance sheet with low amount
candidate of outstanding debt
●Strong management team and potential
cost cutting measures
●Low working capital requirement and
steady cash flows
●Low future capital expenditure
requirements
●Feasible exit options
●Strong competitive advantages and
market position
●Possibility of selling non core assets
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 Stages of Leveraged Buyouts

Finding the Finding the Receiving the

Completion of
Business to be Right Kind of Capital – Due
the Acquisition
Acquired Capital Provider Diligence
 Advantages of LBO

• You'll have to put some money into the purchase, but nowhere near as much
as in a regular buyout. The premise of the leveraged buyout model is that debt
does most of the work.

• If the acquisition tanks after the purchase and can't pay off the debt, your
company and personal finances are safe. You don't owe the money. Because
the purchase is debt driven, an LBO can give your company some tax
advantages.

• If everything goes well, you can expect an excellent rate of return on the
equity you put into the company.

• The seller usually won't object to selling the company as long as the price is
good enough. However, your lenders may want a protracted investigation into
the company, which can frustrate the seller if they're ready to exit.

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 Disadvantages of LBO

• It's harder to replace assets or to repair

and maintain them. By the time the debt is
paid off, physical assets may have aged a
lot.

• The company may have to curtail R&D

expenses, pulling the company away from
the cutting edge of the industry.

• The leveraged company may downsize,

which puts a lot of employees out of work.
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 Factors affecting LBOs in India
● Limited availability of control transactions and professional
management
● RBI restrictions on lending
● Restrictions on public companies
● Restriction related to exit through public listing
● Prohibition on borrowings from Indian banks

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 Conclusion
Indeed corporate restructuring is becoming the need of hour especially in the current
turbulent economic situations which give a warning signal to restructure the assets to
survive in the competitive industrial world on one hand and take it as an opportunity to
acquire and expand globally. Leveraged buyouts emerge as the most effective way to
restructure the enterprises to position them to be more competitive, more profitable,
survive a currently adverse economic climate, and to achieve growth for survival through
increased sales, increased profits & increased assets values.

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References:
• https://www.economicshelp.org/blog/glossary/leveraged-buyouts/
• http://www.streetofwalls.com/finance-training-courses/investment-banking-tech
nical-training/leveraged-buyout-analysis/
• https://www.shopify.com/encyclopedia/leveraged-buyout-lbo
• https://www.attractcapital.com/different-stages-of-a-leveraged-buyout.html
• https://www.investopedia.com/terms/l/leveragedbuyout.asp
• http://www.streetofwalls.com/articles/private-equity/learn-the-basics/lbo-candidate
/
• https://www.educba.com/what-is-lbo/