Corporate Finance Modelling Masterclass

Course Overview

On days one, two and three participants are equipped for analysing and modelling M&A transactions and leveraged acquisitions.

It improves participants’ understanding of the attractions and risks of mergers, acquisitions and levered structures, as used by corporates and private equity firms.

It is run in an interactive, participative format, where participants learn by doing. The key concepts covered in the main teaching sessions are punctuated and illustrated by detailed case and modelling work. The approach has been designed to equip participants to put key concepts into practical use immediately.

Participants will be led through a comprehensive review of analysis practices, from initial principles through to more advanced techniques that are used in transaction analysis.

As part of their work on this course participants model transactions based on real-life companies and scenarios

On the last two days participants will cover the key elements of modelling in an LBO analysis. Participants will value the target business using historic data and available equity research. The valuation process will incorporate absolute and relative valuation techniques. Once the target business has been valued, participants will be introduced to LBO analysis and construct an LBO model.

The LBO modelling analysis will be developed by assessing the debt capacity of the business to determine the range of capital structures available for the transaction and how credit analysis is used in the LBO modelling process.

The participants will then cover more complex LBO instruments such as warrants and PIKs and how to calculate returns to each of the equity and debt providers.

Participants will model a more complex capital structure and calculate exit values and the IRRs generated by each investor. Using the integrated model participants will then analyse various scenarios (management case, base case, payout case) to derive the optimum financing structure taking into account the financial constraints of each investor.

The participants will undertake an adjusted present value (“APV”) analysis to determine where value has been created in the LBO transaction, using an APV model and finally look at recovery analysis for a failed LBO transaction.

Case Study: The participants will use a variety of case studies and exercises during the four days, based on publicly quoted and generic businesses.

Participants will be required to bring a laptop and a calculator to the course.

By the end of this course participants will understand:

• Drivers on M&A
• How to model integrated financial statements
• How to use financial statements to value a business
• How to model the balance sheet impact of transactions
• How to incorporate synergies into modelling work
• How to differentiate between financing and operating synergies
• How acquisition debt facilities can be structured
• Drivers on debt capacity and the interests of debt holders
• Risks and rewards to different parties

Much of the course work involves Excel modelling and analysis, equipping participants with the tools to analyse leveraged acquisitions:

• Building up from partially-complete models
• Working with integrated financial statements
• Developing the acquisition structure and modelling instruments
• Running scenarios, iterating and optimising

Each participant should bring a lap top with USB port to the course to facilitate modelling work

Course Content

M&A model build up: the starting point

• Modelling integrated financial statements
• Model structure
• Key forecast ratios
• Sourcing and cleaning historic data
• What makes a good model?
• Do we really need integrated financial statements in M&A modelling?

Modelling – integrating financial statements: participants complete a partially-developed financial model for the case study which integrates P&L, balance sheet and cash flow. This model is used to analyse an acquisition by the business

Modelling stand-alone valuation

• Overview of valuation methodologies
• What do investment banks do?
• What methodologies could we use?
• How should we define firm value? Equity v.s. enterprise value
• Calculating free cash flow before financing
• Understanding and calculating WACC
• Discussion – calculating WACC
• Conducting a DCF valuation

Modelling – valuation: participants calculate the cost of capital and complete a DCF valuation for the acquirer

Financing acquisitions: debt structuring

• Clear, simple and concise explanation of different debt instruments:
  • Senior debt
  • High-yield debt
  • Mezzanine
  • Payment-in-Kind
• Understanding the nature of different financial instruments and risk profiles
• Modelling waterfall structures
• Estimating and optimising debt capacity

Modelling – debt structure: participants develop a debt structure for the case study and start to flex the structure within given constraints. How much debt could the business support? How big a target could it contemplate acquiring? What impact does changing the debt structure have on debt capacity?

Developing a new deal structure – sources & uses of funds

• Developing a “first cut” debt structure
• Calculating refinancing needs
• The role of working capital and extra cap ex requirements
• Typical financing and transaction fees
• Determining the equity gap

Modelling: delegates develop their own deal structure for a transaction conducted by the case business

Acquisition modelling – consolidating accounts

• Key adjustments
• Working from the post-acquisition balance sheet
• How to model and consolidate accounts
• Modelling pro-forma accounts post acquisition

Modelling – consolidated accounts: participants incorporate the new deal structure into their model and analyse its impact

Merger modelling case study

• Completing a merger model
• Getting to DCF valuation for the combined business
• Valuing operating synergies
• Valuing financing synergies
• Analysing the results
• Sense-checking the output
• Drawing the right conclusion

Modelling – post acquisition valuation: participants complete a merger model for a case business after it has completed its acquisition

Making money in private equity

• How private equity works
• How investors make money
• Drivers on gains
• The rationale for leveraged finance
• Review of the market for private equity
• Private equity fundamentals
• How private equity players make their money
• Private equity life cycle
• Jargon-busting

Financing alternatives: equity

• The nature of equity instruments
• The different risks and rewards accruing to different parties
• The impact of loan stock & preference shares
• Iterating to optimise rewards to key participants
• Key drivers for equity investors
• Exits: the good, the bad & the ugly

Exercise – the choices for exit – a real case study: you are a private equity firm’s representative on the board of an investee company. The business has grown to the point where exit is a possibility and management are still ambitious for the business. Which exit route are you going to recommend to the board?

Completing the analysis: repaying debt and building value

• This session will take much of the third day and will also allow some time to catch up or cover in more detail issues arising out of other parts of the course:
  • Iterating around value
  • Rewards to the various parties (institutional equity, management, debt)

Modelling – finalising a buy out model: Participants modify their model, providing an opportunity to understand the likely impact of key adjustments to assumptions and analyse the risks and opportunities the transaction will face. Participants model returns to the various parties and iterate to optimise returns.

At the end of this session participants will have a simple and working buy out model that is structured clearly

Course conclusion: best practice in transaction analysis

• Participants who have improved their understanding of and have had experience of modelling mergers, leveraged acquisitions and buy outs
• Simple and clear reference Excel models – providing participants with a platform for future internal modelling efforts and aiding decision making
• Participants who, at the end of the course, understand the drivers on transactions and how transactions can be modified to suit the various parties

Leverage Overview

• Background to the LBO market
• Basic theory – The effect of leverage on firm value

Valuing the target

• Sourcing information – Historic and forecast date
• Analysing equity research
  • Key attributes of broker analysis
  • Pluses and minuses of equity research
• Building a DCF valuation using equity research
• Modelling the stand alone valuation

Case Study I: Participants model the stand alone valuation of the target using historic data and equity research

LBO Modelling Overview

• Key elements of an LBO model
  • Comparing and contrasting DCF and LBO models
  • Sources and uses of funds
  • Key drivers in an LBO model
• From stand alone valuation to LBO analysis

Case Study II: Participants use the stand alone valuation of the target to complete and LBO model

Assessing debt capacity for LBO financing

• Financial interdependencies
• Financing growth
• Sustainable debt
• Target debt capacity assumed in a WACC calculation, debt capacity and interest cover
• Debt capacity in LBOs
• Debt capacity multiples in practice and credit analysis

Case Study III: Modelling the debt capacity of the target using multiple and credit analysis

Capital providers and their typical characteristics

• Institutional and management equity
• Traditional/new lenders
• Senior tranche profiles
  • A, B, C, RCF
• Subordinated tranche profiles
  • Second lien
  • Mezzanine (with/without warrants)
  • PIK
  • High yield bonds
• More complex issues – warrants and options
• Typical LBO transaction sensitivity analysis, management, base and payout cases

Case Study IV: Modelling a more complex capital structure with various scenarios calculating exit value and IRR for each of the capital providers

Assessing value creation in LBO transactions – APV analysis

• Key components of an APV valuation
  • Unlevered value
  • Value of the tax shield
  • Direct and indirect cost of leverage
• APV valuation and DCF valuation
• APV valuation in a steady state
• Calculating AP in a steady growth environment
• Incorporating APV analysis in an LBO transaction analysis

Case Study V: Where has value been created, modelling APV analysis for an LBO transaction

LBO failure

• Calculating recoverability for different capital providers

Case Study VI: Estimating recoveries for different debt tranches

Delivering this course in-house for you to a number of participants could be very cost effective. Please call us on 020 7387 4484 to discuss this further.

If you have any questions about this seminar please write to us at post@redcliffetraining.co.uk.