25575 Investment Banking Assignment - University of Technology Sydney

Assignment Task

Your boss was duly impressed with your work on Oh!media Ltd. and so instead of giving you few days off, you are immediately assigned a new job. This time you are in charge of assessing the profitability of a leveraged acquisition your bank is planning to offer to one of your best private equity clients.

One of your colleagues in the Capital Market teams has recently brought to your boss’s attention that the board of Boral Limited has recently recommended shareholders should reject an offer made by Seven Group Holdings Limited (SGH). At the time of the announcement, Seven Group disclosed they held 71.6% of Boral shares. The Board judges the implied value of the Minimum Consideration ($6.07 per share) is below the implied value of Boral shares according to the Board ($6.50 to $7.13), and therefore not convenient for minority shareholders.

Your boss thinks that this rejection may make Seven Group Holdings fall out of love with Boral and create an opportunity to acquire one of the top Cement producers in Australia. Boral Limited (BLD- AU) closing price on 26/03/2024 was $6.03 per share. According to your boss, an offer of $7.42 per share (representing a 23% premium over the current trading price) could be interesting for the company’s Board and shareholders. For this reason, he has decided that this offer should be brought to the attention of a private equity sponsor with whom your bank works on a regular basis.

Your job is to assess how profitable this deal could be for the private equity company given a set of reasonable assumptions on the future of the company and the financing cost of the operation.

The output for this assignment will be one Excel file with the result of your valuation. The file Assignment 2 provided in Canvas will be the shell in which you will do your valuation. Prior to submitting the file, you should change the in the file name with your student ID number .

In performing this valuation, you are not allowed to use any information outside of what can be found in FactSet .

1. Operational Scenarios

Your profitability analysis should be based on three operational scenarios:

1. Baseline (without operational improvements). This scenario will assume that the financial sponsor will not take any major managerial decision to improve the profitability/growth of the company.

2. With Operational Improvements . This scenario will assume a range of reasonable improvements to the management of the company.

3. Major Stress . This scenario is designed to test the resilience of your investment to a significant negative systemic shock (High interest rates and slow growth in construction). Specifically, you should assume that the current level of interest rates (4.35% in March 2024) will persists until the end of 2025. Interest Rates in this scenario are only expected drop 0.50% in 2026 and an additional 0.50% in 2027. This rates scenario will have a negative impact on construction. You are to consider the impact of the high interest rates and slow construction growth on the operation and growth of the company. Please show your assumptions in the “major stress” scenario.

Your Operational Improvements and “Major Stress” scenarios should affect both sales growth and the cost structure of the company.

In the worksheet Questions , you should explain your philosophy for the various scenarios.

2. Financing Costs

After consulting with your capital markets division, you estimate that the PE fund could finance the deal with a combination of the following sources of funds:

The maximum size for all forms of external financing is measured as a multiple of the LTM EBITDA of the target company. For sake of simplicity, you can assume that all sources of debt have maturity of 10 years (outside your modelling horizon). The term loan has 5% annual mandatory repayment.

The Revolving credit facility is not to be used for financing the deal. It will be activated only in case of bankruptcy.

Loan covenants restrict the PE fund to maintain at least 10% equity in the company.

The company should also close every year with at least $75m in cash. This is a minimum amount considered necessary to safely run the company.

3. Financing Structures

You should propose two different deal structures to your client:

• One where the amount of equity and debt used to finance the deal are chosen to maximize the profitability for the Private Equity fund (measured with a 5 years IRR) under the scenario with operational improvements.
• One where the amount of equity and debt used to finance the deal are chosen to ensure the survivability of the company under a “major stress” scenario (see paragraph 5 below for a description of the scenarios). [If your company does not default under the structure 1, your structure number 2 should be the same as the previous one]

4. Alternative Value Creation

Your boss is eager to show your PE client a variety of value creation strategies. Specifically, he wants you to test:

• The profitability of strategy where, under your operational improvements’ scenario (and financing structure 1) you extract as much extraordinary dividends as possible in the first 5 years of the deal. You should still respect the minimum cash requirements.
• The profitability of a multiple expansion strategy where, under your operational improvements’ scenario (and financing structure 1) you assume the possibility of increasing the exit multiple above the level of the entry multiple.

Both the Exit Multiple for the Multiple Expansion scenario (Profitability Scenario 5) and the extraordinary dividends (Profitability Scenario 6) inputs should be recorded in the Profitability worksheet.

5. Profitability

The 6 Profitability Scenarios measured with the IRR assuming exit in year 5 will be recorded in the “Profitability Scenarios” table in the TS worksheet. Each scenario reflects the following circumstances:

1. Baseline Scenario and Financing Structure 1

2. Operational Improvements scenario and Financing Structure 1

3. Operational Improvements scenario and Financing Structure 2

4. Major Stress scenario and Financing Structure 2

5. Operational Improvements scenario and Financing Structure 1 plus multiple

6. Operational Improvements scenario and Financing Structure 1 plus

6. Data and Timeline

Financial data can be found in FactSet. Instruction on how to access the data can be found in the videos of the guided valuation exercises.

The knowledge necessary to complete the assignment will be covered in the subject, with the theoretical aspects analysed in class and the technical components (including how to use the excel models and how to access information in FactSet) explored in the valuation exercises.

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