LBO Modeling Private Equity Case Study TPGs 3

LBO Modeling Private Equity Case Study: TPG’s $3 Billion Buyout of J. Crew

Prerequisites… • Understand LBO concept • Completed the 3 -statement projection model homework • Understand debt basics (interest rates, principal repayment)

Why an LBO Model? • Always in the News • PE Interviews – Required! • Learn/Review Accounting • Need to Learn to “Speed Build”

The Case Study (1 / 3)

The Case Study (2 / 3)

The Case Study (3 / 3)

Game Plan: • Assumptions • Modify Income Statement • Adjust BS / CFS • Debt Schedules & Linking • Returns & Case Answers

Assumptions:

More Assumptions:

Debt Assumptions:

Sources & Uses

Pop Quiz Q: How would Sources & Uses Change if the PE firm assumed J. Crew’s existing debt instead? A) We would remove the “Repay Existing Debt” item. B) We would add a “Debt Assumed” item under both Sources and Uses. C) We would add a “Debt Assumed” item only under Sources.

Final Assumption: Goodwill

Existing Income Statement…

LBO Effects…

Income Statement, Post-LBO

Pop Quiz Q: What’s the flaw with the way we just modified the income statement? A) Depreciation and Amortization are non-cash items so they shouldn’t be there at all. B) We need better estimates for the periods for the PP&E write-up and intangibles. C) We can’t just divide the amount by the period, because the period may be less than 5 years.

Balance Sheet: Assets

BS Adjustments: Assets

Pop Quiz Q: Wait a minute, why do Capitalized Financing Fees count as an asset? A) Because they reduce the amount of taxes the company will pay in the future. B) Because they correspond to another item (debt) that remains on the balance sheet for years. C) Both of the above.

Balance Sheet: L & E

BS Adjustments: L&E

Pop Quiz Q: Why do we wipe out all of J. Crew’s shareholders’ equity? Don’t they still have retained earnings? A) Because the PE firm gets everything, including the retained earnings, in the transaction. B) Because the PE firm purchases everything and replaces it with their own equity. C) It’s just an accounting convention and doesn’t actually affect the model.

Projected Balance Sheet: Assets

Projected Balance Sheet: L&E

Projected CFS:

Debt Schedules – Interest Rates

Debt Schedules – Repayment

Explaining the MIN Formula: • =MIN(Prior Year Debt, Beginning Balance * Yearly Amortization) • Prior Year Debt = 400, Beginning Balance = 500, Yearly Amortization = 10%. . . • Repay 50, since 50 < 400 • Prior Year Debt = 20, Beginning Balance = 500, Yearly Amortization = 10%. . . • Repay 20, since 20 < 50

Debt Schedules – Repayment

Explaining the MAX/MIN Formula: • =MAX(MIN(Prior Year Revolver, Cash Flow Available – Debt Repaid So Far), 0) • Revolver = 100, Cash Flow Available = 100, Debt Repaid So Far = 50… • Repay 50, since 50 < 100 • Revolver = 20, Cash Flow Available = 100, Debt Repaid So Far = 50… • Repay 20, since 20 < 50 • Revolver = 100, Cash Flow Available = 100, Debt Repaid So Far = 120 • Repay 0, since 0 > -20

Debt Schedules – Repayment

Final Version of Debt Schedules:

Pop Quiz Q: Why do we need the MAX function in the optional debt repayment formula? A) Because the Subtotal Before Revolver – All Payments So Far might be negative. B) Because the Prior Year Term Loan – Mandatory Repayment part might be negative. C) We should always include MAX(Formula, 0) around repayment formulas to error-check the model.

Debt Schedules – Interest

Linking – Debt Payments

Linking – Net Change in Cash

Linking – Long-Term Assets

Linking – Liabilities

Linking – Income Statement

Make Sure Circularity Works…

Calculating Returns

Back to the Case Study…

Sensitivity Tables

Case Study Answers • Investment: No – only way to get solid returns is multiple expansion or lower price • Exit Multiple: Select range based on purchase multiple • Tweaks: Debt barely changes anything; need multiple expansion or higher growth to win • Additional Information: Expansion plans, customer/store data, competition, cost cutting possibilities, retail indicators

What Next? • Go Practice Yourself • Download the Model and Files • Learn More Advanced Topics

Job. Search. Digest. com