Leveraged Buyouts, + Website

A comprehensive look at the world of leveraged buyouts

The private equity industry has grown dramatically over the past twenty years. Such investing requires a strong technical know-how in order to turn private investments into successful enterprises. That is why Paul Pignataro has created Leveraged Buyouts + Website: A Practical Guide to Investment Banking and Private Equity.

Engaging and informative, this book skillfully shows how to identify a private company, takes you through the analysis behind bringing such an investment to profitability—and further create high returns for the private equity funds. It includes an informative leveraged buyout overview, touching on everything from LBO modeling, accounting, and value creation theory to leveraged buyout concepts and mechanics.

• Provides an in-depth analysis of how to identify a private company, bring such an investment to profitability, and create high returns for the private equity funds
• Includes an informative LBO model and case study as well as private company valuation
• Written by Paul Pignataro, founder and CEO of the New York School of Finance

If you're looking for the best way to hone your skills in this field, look no further than this book.

Preface xi

The Heinz Case Study xii

How This Book Is Structured xiii

Part One Leveraged Buyout Overview 1

Chapter 1 Leveraged Buyout Theory 3

Cash Availability, Interest, and Debt Pay-Down 3

Operation Improvements 4

Multiple Expansion 4

What Makes Good Leveraged Buyout? 4

Exit Opportunities 5

Is Heinz a Leveraged Buyout? 5

Chapter 2 What Is Value? 7

Book Value 7

Market Value 7

Enterprise Value 8

Multiples 12

Three Core Methods of Valuation 14

Chapter 3 Leveraged Buyout Analysis 19

Purchase Price 19

Sources and Uses of Funds 22

IRR Analysis 33

Part Two Leveraged Buyout Full-Scale Model 49

Chapter 4 Assumptions 51

Purchase Price 57

Sources of Funds 63

Uses of Funds 69

Chapter 5 The Income Statement 75

Revenue 76

Cost of Goods Sold 76

Operating Expenses 77

Other Income 78

Depreciation and Amortization 80

Interest 80

Taxes 81

Nonrecurring and Extraordinary Items 82

Distributions 82

Shares 83

Heinz Income Statement 84

Last Twelve Months (LTM) 108

Income Statement—Projections 116

Chapter 6 The Cash Flow Statement 133

Cash Flow from Operating Activities 133

Cash Flow from Investing Activities 137

Cash Flow from Financing Activities 137

Financial Statement Flows Example 138

Heinz Cash Flow Statement 144

Heinz Last Twelve Months (LTM) Cash Flow 154

Cash Flow Statement Projections 160

Chapter 7 The Balance Sheet 179

Assets 179

Liabilities 182

Heinz Balance Sheet 184

Chapter 8 Balance Sheet Adjustments 199

Goodwill 200

Heinz Balance Sheet Adjustments 208

Chapter 9 Depreciation Schedule 221

Straight-Line Depreciation 222

Accelerated Depreciation 222

Deferred Taxes 227

Projecting Depreciation 231

Projecting Amortization 241

Projecting Deferred Taxes 244

Chapter 10 Working Capital 247

Asset 247

Liability 247

Operating Working Capital 248

Heinz’s Operating Working Capital 251

Projecting Operating Working Capital 262

Operating Working Capital and the Cash Flow Statement 271

Chapter 11 Balance Sheet Projections 279

Cash Flow Drives Balance Sheet versus Balance

Sheet Drives Cash Flow 283

Balancing an Unbalanced Balance Sheet 301

Chapter 12 Debt Schedule and Circular References 309

Debt Schedule Structure 309

Modeling the Debt Schedule 310

Circular References 329

Automatic Debt Pay-Downs 337

Basic Switches 339

Finalizing the Model 339

Chapter 13 Leveraged Buyout Returns 351

Exit Value 351

Returns to 3G Capital 355

Multiple Expansion 361

Debt Pay-Down 364

Conclusion 364

Part Three Advanced Leveraged Buyout Techniques 365

Chapter 14 Accelerated Depreciation 367

MACRS 367

Accelerated versus Straight-Line Depreciation 372

Chapter 15 Preferred Securities, Dividends, and Returns to Berkshire Hathaway 377

Preferred Securities 377

Preferred Dividends 378

Returns to Berkshire Hathaway 388

Chapter 16 Debt Covenant Ratios, and Debt Fee Amortization 395

Coverage Ratios 395

Leverage Ratios 397

Debt Fee Capitalization and Amortization 399

Chapter 17 Paid-in-Kind Securities 409

Apendixes

Appendix 1: Model Quick Steps 417

Appendix 2: Financial Statement Flows 419

Income Statement to Cash Flow 419

Cash Flow to Balance Sheet 420

Appendix 3: Excel Hot Keys 421

About the Companion Website 423

About the Author 425

Index 427

“Pignataro’s step-by-step approach is ideal for anyone trying to learn or hone the analytical skills necessary to model the basic viability of an LBO, from the point of view of the company as well as the investor. He explains valuational concepts and how to capture them in Excel spreadsheets, the latter described down to the level of individual keystrokes…. Leveraged Buyouts is a self-contained course in rudimentary financial modeling (and a crash course in Excel as well). It’s a perfect read for anyone wanting to enter the world of investment banking or private equity.”
—Investing.com

PAUL PIGNATARO is the founder and CEO of the New York School of Finance (NYSF). He has over thirteen years of experience in investment banking and private equity in business mergers, acquisitions, restructurings, asset divestitures, asset acquisitions, and debt and equity transactions covering the oil, gas, power and utility, Internet and technology, real estate, defense, travel, banking, and service industries. Mr. Pignataro continues to participate on the training team, actively providing training at bulge bracket banks and M&A teams at corporations, and billion-dollar funds. Prior to his entrepreneurial endeavors, Mr. Pignataro worked at TH Lee Putnam Ventures, a $1 billion private equity firm affiliated with buyout giant Thomas H. Lee Partners. Prior to TH Lee, Mr. Pignataro worked in the investment banking department of Morgan Stanley.

The private equity industry is thriving. To get some idea of just how fast the industry has grown over the past decade, one only need consider that private equity firms invested nearly 90% more capital in 2010 than they did in 2009, for a total of $225 billion invested in more than 3,000 transactions, compared to $119 billion the year before. And that trend has continued at a rapid clip in the three years since.

But turning private investments into successful enterprises, while pulling down promised, or better than expected, returns for partners takes a particular skill set and technical know-how not readily acquired by those outside the industry—until now.

In Leveraged Buyouts, Paul Pignataro, founder and CEO of the world-renowned New York School of Finance, takes a unique approach to educating you in the tools of the private equity trade—by building on a book-length case study of the 2013 Berkshire Hathaway/3G Capital $28 billion Heinz Co. LBO.

How viable is such a buyout? How are Berkshire Hathaway and 3G Capital finding value in such an investment? What are their potential returns? Clearly and concisely, Paul Pignataro explains the analytical approach used by Wall Street analysts to answer such questions, guiding you, step by step, through the process of developing a sophisticated financial model.

Assuming the role of a Wall Street analyst, you get an up-close and personal look at how the modeling process works, while acquiring the tools for developing your own analyses. You'll evaluate the potential leveraged buyout of Heinz, determining its current financial standing, projecting its future performance, and estimating the potential return on investment.

And to help further your LBO education, the Leveraged Buyouts companion website supplies you with downloadable models that bring all the methods described in the book to life, while offering you an opportunity to hone your analytical skills by building an original Heinz Co. LBO model from scratch. You'll also find chapter questions and answers to help you test your knowledge of the material presented in the book.

Whether you are an investor or fund manager looking to make your own acquisitions, or you aspire to a career in the burgeoning private equity or investment banking industries, Leveraged Buyouts gets you up and running—fast—with the tools and techniques you need to perform expert LBO analyses. If you're a private equity or investment banking professional looking for a reliable way to refresh and fine-tune your analytical skills, this book definitely is for you as well.