25575 Finance Assignment-Australia.

This assignment is an LBO proposal where you play the role of an investment bank advising a private equity fund on a possible acquisition deal. As it is customary in this situation, the output of your effort will be a PowerPoint presentation and a series of Excel files containing your
valuation and profitability models.Specifically, you have been asked to prepare a pitch for the management team of a Private Equity fund who is looking for investment opportunities in the US Home building Industry (in the Fact set Industry 1415-Home Building.Your job is to find a suitable target company in this space and suggest a suitable deal structure.
25575 Finance Assignment-Australia.

1. A presentation of the target company
2. An outlook for the industry
3. The valuation of the target company:
   a. Comparables Analysis
   b. Discounted Cash Flow
4. The proposed structure of the deal (financing and offer structure)
5. A profitability analysis

Your deliverable will be a PDF file with your presentation and a zip file containing all the Excel files used for your valuation and profitability models.

25575 Finance Assignment-Australia.

1.Company Presentation
The goal of this section is to give the reader a clear picture of the target company, its business model, growth opportunities and financial situation. After reading this section the client should understand why you think this company is a good target for a leveraged buyout.

To complete this section, you should find all the relevant information in FactSet. You can also find information on the website of the company.

Your company has to be:
• Headquartered in the United States
• Listed on a US stock market (a public company).
• Included in the US Home building Industry

25575 Finance Assignment-Australia.

2.Industry Outlook
The goal of this section is to give the reader a clear picture of the US Home building industry, its current state and its future prospects. After reading this section the client should understand what the main risks and growth drivers in this industry are and how these translate into the assumptions you have embedded into your valuation and profitability models.

You can find information on the state and prospect of the industry in Fact Set. You can also find industry reports on IBIS World via the UTS library. Be advised that IBIS World uses the NAICS industry classification, so home building is the industry 236 (Construction) or 23611(Residential Building Construction). From the IBIS link above you should scroll down and look
for this part:

25575 Finance Assignment-Australia.

The goal of this part is to help the reader to answer the following questions:
25575 – Investment Banking
• How is the industry doing?
• What has been the impact of covid?
• What are the prospects for the next few years?

3.Valuation
The goal of this section is to give the reader a clear understanding of why the target company is worth buying at your suggested purchase price.

The key point of the valuation section is a “football field chart” with input from your valuation methodologies. The graph should also show the trading range of the company in the last 52 weeks, the current stock market price and your proposed purchase price.

3.1 Comparable Companies
For CCA you should use at least 8 comparable companies. You should also choose a variety of multiples (both Enterprise Value and Equity Multiples) on different time horizons (LTM and forward).

Your analysis should contain one table with the bench marking of the comparables. From this table the reader should understand that your comparables are similar enough to your target to provide useful valuation insight.

3.2 Discounted Cash Flows
For DCF you should provide 2 scenarios (a baseline scenario for the firm as it is now and a second scenario with possible operational improvements).

Your presentation should contain one or more slides with your most relevant assumptions,including:

• Expected growth rate for DCF projection
• Capex
• Exit Multiple / perpetuity growth rate
• Operational Improvements

You do not have to use the Excel file designed according to the examples in the book. If you want you are welcome to create your own simplified versions. The important thing is that your file should contain your valuation (With all the formulas! We need to be able to understand the calculations that you made to reach a certain conclusion).

25575 Finance Assignment-Australia.

4.Deal Structure
Your client has raised a significant amount of capital and is now looking for potential investments. The Private Equity fund is willing to invest at most US$1,000m (one billion) as equity contribution in the deal.

You should propose two different deal structures to your client:
1.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 your “baseline” scenario with operational improvements (see paragraph 5 below for a description of the scenarios).
2.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).

25575 Finance Assignment-Australia.

4.1 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.

ATTENTION – CAN YOU AFFORD IT?
When you choose your company, you need to make sure that your client can afford to buy it. From the information above we know that”

• Your client is willing to invest at most US$ 1b in the deal
• Your client can raise external debt for a maximum of 7x the LTM EBITDA of the target

These two factors combined determine how much capital you have at your disposal for this operation.

For example, if your intended target has a LTM EBITDA of $300m, the maximum amount you can spend is US$3.1b:
Max Cap = Equity + Debt
Max Cap = 1,000 + 7 × 300 = 3,100

25575 Finance Assignment-Australia.

You have at most $3.1b to pay for:
• The equity of the target (Purchase price x FDSO)
• The existing debt of the target
• Financing fees and other deal-related costs

So before you decide on a target I suggest you make a quick “back-of-the-envelope” calculation to see if you can afford it:

1.Take the current trading price of the stock, add a reasonable purchase premium (for example 30% just to be safe) and multiply this for the Fully Diluted number of Shares Outstanding (FDSO).
2.Add to this amount the current debt of the company.
3.Compare this total number with the max capital available measured with the formula above.

For example, let’s take a company in this industry, M.D.C. Holdings, Inc. (MDC), as of the moment I am writing this document we have:

• Share price: $60.27
• FDSO: 73.19
• Debt: 1,249.78
• LTM EBITDA: 392

The maximum available capital is:
Max Cap = 1,000 + 392 × 7 = 3,744

The estimated amount necessary to complete the deal is:
Amount = (60.27 × 1.3) × 73.19 + 1,249.78 = 6,984.36

Clearly we cannot afford to buy this company. We could have reached the same conclusion quicker just looking at the current Enterprise Value of the company ($4.9b). This is equal to the equity value (without any purchase premium) plus (net) debt value. Even if we were able to buy the equity without any purchase premium, the cost of the investment would be $1b higher than our available capital!

5.Profitability Analysis
The goal of this section is to provide the reader with an estimate of the profitability of the deal (in terms of 5-years IRR) under a number of possible scenarios:

1.Baseline with operational improvements. This scenario will be based on your baseline assumptions and will include your expected operational improvements to the target company.
2.Baseline without operational improvements. This scenario will assume that none of your operational improvements will be achieved.
3.Major Stress. This scenario is designed to test the resilience of your investment to a significant negative systemic shock, such as another pandemic or another global financial crisis. You should also include a clear explanation of how the key assumptions for this scenario have been built.

For each scenario you should present the IRR and a picture of the evolution of the financial health of the company in the 5 years of your projection.

6.Structure of the presentation
There is no formal requirement on the length of your presentation but from the example posted you will see that this type of document usually has between 25 and 50 slides including appendices. Here is an example breakdown of the body of the presentation.

You will not be judged on the length of the presentation but on the quality of the content. Do not pad your deck with useless junk to make volume.

All the important information should be included in the body of the presentation. The appendix should contain additional information that may be useful for the reader but not essential to understand your proposal.

7.Data and Timeline
Financial data can be found in Fact Set. Instruction on how to access the data can be found in the tutorial videos.

Firm and industry reports can also be downloaded IBIS World via the library.

The best assignments from last years will be provided as a reference. These are provided only as an example of our expectations. They should not be followed closely because the content of the assignment has changed! I will also upload a real pitch book to give you a feeling for the style.

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. Specifically:

You could start the valuation component relatively early in the semester. The only issue is that the choice of a good target company is based on content explored in Week 5.

This content is non-technical, so if you want to move ahead you can simply have a look at one (or more) of the following teaching materials that cover this topic:

1.Chapter 4 of the Ros Investment Banking book, the part titled “CHARACTERISTICS OF A STRONG LBO CANDIDATE”.
2.Slides 17-25 in the Presentation used for the preparatory work of Week 5.
3. part 3 of the videos for the preparatory work of Week 5.

8.Submission

You will submit:

1. A PDF file with your presentation names IBK_XXXXX.pdf
2. A ZIP file with your excel models IBK_XXXXX.zip

Where XXXXX is your Student ID. Files with wrong names or wrong format will attract 1-point penalty. The PDF file should not be included into the zip file.

Your Excel files should not contain links to any external spreadsheet. So be careful with your cut and paste.

25575 Finance Assignment-Australia.

ATTENTION

To check if your worksheet has links to external sources you can use the Excel tool available in Data Tab >> Queries & Connections Group >> Edit Links button. You can find a more complete explanation at this

The file will be submitted electronically using the electronic drobox that can be found in Canvas.The same place where you have downloaded the assignment file from.