1. LEVERAGED BUYOUTS (LBOs) Prepared by: BRENDA E.PALAD Reference: Investment Banking by Joshua Rosenbaum (WILEY-FINANCE)

2. LEVERAGED BUYOUTS The acquisition of a company, division, business, or collection of assets (“target”) using debt to finance a large portion of the purchase price. LBOs are used by sponsors to acquire a broad range of business, including both public and private companies, as well as divisions and subsidiaries.

3. LEVERAGED BUYOUTS The ultimate goal is to realize an acceptable return on its equity investment upon exit, typically through sale or IPO of the target. Historically, sponsors sought 20%+ annualized return and an investment exit within five years. Traditionally, LBOs debt typically comprised 60% to 70% of the financing structure, with equity comprising of 30% to 40%.

4. LBO FUNDAMENTALS Key Participants Characteristics of a Strong LBO Candidate Economics of LBOs Primary Exit/Monetization Strategies LBO Financing: Structure LBO Financing: Primary Sources LBO Financing: Selected Key Terms

5. Key Participants Financial Sponsors Investment Banks Bank and Institutional Lenders Bond Investors Target Management

6. Characteristics of A Strong LBO Candidate Strong Cash Flow Generation Leading and Defensible Market Position Growth Opportunities Efficiency Enhancement Opportunities Low Capex Requirements Strong Asset Base Proven Management Team

7. Economics of LBOs Returns Analysis – Internal Rate of Return The primary metric by which sponsors gauge the attractiveness of a potential LBO, as well as the performance of their existing investment. IRR measures the total return on a sponsor’s equity investment, including any additional equity contribution made, or dividends received, during the investment horizon.

8. Economics of LBOs IRR is the discount rate that must be applied to the sponsor’s cash outflow and inflows during the investment horizon in order to produce a net present value of zero (NPV=0)

9. Economics of LBOs Returns Analysis – Cash Returns Amount of Cash receives versus capital contribution Example – Capital contribution is P250M and receives P750M at the end of the investment horizon, THE CASH RETURN IS 3x

10. How LBOs Generate Returns LBOs generate returns through a combination of debt repayment and growth in enterprise value. Examples show how each of these scenarios independently increases equity value, assuming sponsor purchases a company for P1B, using P750M debt financing and equity contribution of P250M.

11. How LBOs Generate Returns EX.1-Debt Repayment Purchase Price P1B Equity Contribution 250M Debt Repayment 500M Sales Price (Y5) P1B ----------------------------------------- Equity Contribution P250M Increases in Equity Value: Increase in Entr Value 0 Decrease in Debt fr Rep 500M ------------ Equity value at Exit P750M IRR = 24.6%, Cash Returns = 3x Ex.2-Enterprise Value Growth Purchase Price P1B Equity Contribution 250M Debt Repayment 0 Sales Price (Y5) P1.5B ----------------------------------------- Equity Contribution P250M Increases in Equity Value: Increase in Entr Value 500M Decrease in Debt fr Rep 0 ------------ Equity value at Exit P750M IRR = 24.6%, Cash Returns = 3x

12. How Leveraged is Used to Enhance Returns 75% Equity, 25% Debt Purchase Price P1B Equity Contribution 750M Cost of Debt 8% Cumulative FCF (after debt service) 250 Sales Price (Y5) P1.5B ------------------------------------------------------- EQUITY VALUE & RETURNS Equity Contribution P750M Increases in Equity Value: Increase in Entr Value 500M Decrease in Debt fr Rep 250M ------------ Equity value at Exit P1,500M IRR = 14.9%, Cash Returns = 2x 25% Equity/75% Debt Purchase Price P1B Equity Contribution 250M Cost of Debt 8% Cum. FCF (after debt service 118M Sales Price (Y5) P1.5B -------------------------------------------------- EQUITY VALUE & RETURNS Equity Contribution P250M Increases in Equity Value: Increase in Entr Value 500M Decrease in Debt fr Rep 118M ------------ Equity value at Exit P868M IRR = 28.3%, Cash Returns = 3.5x

13. Primary Exit/Monetization Strategies Sale of Business Initial Public Offering Dividend Recapitalization – the target raises proceeds through the issuance of additional debt to pay shareholders a dividend. Dividend recap provides the sponsor with the added benefit of retaining 100% of its existing ownership position in the target, thus preserving the ability to share in any future upside potential and the option to pursue a sale or IPO at a future date.

14. LBO Financing : Structure Bank Debt – First Lien Secured Debt and Second Lien Secured Debt High Yield Bonds – Senior Unsecured Debt and Senior Subordinated Debt Mezzanine Debt – Subordinated Debt and Preferred Stock Equity Contribution – Common Stock

15. LBO Financing:Primary Sources Revolving Credit Facility Asset Based Lending Facility Term Loan Facilities Bridge Financing

16. LBO Financing: Selected Key Terms Security Seniority (Contractual or Structural Obligation) Maturity Coupon Call Protection Covenants

17. LBO Analysis Assesses the following: Financing Structure Investment Returns Valuation of LBOs scenarios

18. LBO Analysis Steps Preparation of Historical BS, IS, CF Preparation of Projected BS, IS, CF Calculation of WACC Valuation of a company Modeling – optimal mix of debt and equity