LBO Valuation Model PDF

Carl-Johan Strandberg
Leveraged Buyouts
An LBO Valuation Model
Finance
Master’s Thesis
Semester: Spring 2010

Supervisor: Hans Lindqvist
Abstract
During the eighties a new type of financial transaction started to emerge on an increasing basis. It
was the so called “leveraged buyout” also known as the LBO. In the US private equity firms made it to
the headlines in financial media from engaging in leveraged buyouts with small equity investments
and large amounts of borrowed capital, their targets where large solid multinational corporations.
Much has happened since the eighties. Back then leveraged buyouts where often associated with
terms such as “Slash and Burn” or “Buy, Flip and Strip” often meaning hostile takeovers and huge
layoffs. Today private equity firms focus more on active ownership, fast decisions without the
bureaucracy of the stock market and long term value creation in order to profit from their buyouts.
As private equity firms today invest tremendous amounts of capital through their private equity
funds. Leveraged buyouts have become one of the major areas within investment banking. Even
though the LBO is a common transaction it is often hard to find models used for valuation of such a
deal. Private equity funds and investment banks all have their own valuation models but these are
regarded as strictly confidential and seldom revealed to the public. Therefore the creation and
publication of an LBO valuation model should be of great interest for everyone aiming at a future
career within private equity, corporate finance or investment banking.
This thesis derives a complete LBO valuation model including a framework for finding a suitable LBO
target. The LBO valuation model is created in cooperation with the debt capital markets department
at one of the leading investment banks in the Nordic region. The framework is based on a qualitative
study conducted on seven of the most distinguished private equity firms active in Sweden. In order
to show how the LBO valuation model and the framework works, both are applied on the retail
company Björn Borg listed on NASDAQ OMX. To verify the accuracy of the framework, calculated
return from the model is analyzed and compared to the indications given by the framework.
Keywords: LBO Valuation, Leveraged Buyout, LBO, Private Equity, Investment Banking, Corporate
Finance
Acknowledgements
I would like to direct an acknowledgment to the private equity firms and their professionals that took
part in my study. Regrettably their names have to be kept confidential. Without your participation
this thesis would not have been possible. Visiting your organizations and discussing the topic with
distinguished investors have not only provided me with invaluable insight into the private equity
industry, it has also been a source of inspiration through the often long hours spent on this thesis.
My deepest gratitude goes out to you that have provided me with consensus estimates and financial
data not available to the public. Without those numbers the result of my calculations would not have
been relevant.
Also, I would like to thank Mr. X on the debt capital markets department of bank Y. The information
regarding the LBO loan market that you provided me with has been essential for the completion of
the valuation model.
Finally I would like to thank my tutor Hans Lindqvist for giving me useful feedback in the process of
writing this thesis.
Table of Contents
1 Introduction .......................................................................................................................................... 1
1.1 Purpose and Thesis Question ........................................................................................................ 3
1.2 Limitations ..................................................................................................................................... 3
1.2.1 Purpose Limitations ................................................................................................................ 3
1.2.2 Empirical Evidence Limitations ............................................................................................... 3
1.2.3 Input & Assumption Limitations ............................................................................................. 3
1.3 Disposition ..................................................................................................................................... 4
2 Theory................................................................................................................................................... 5
2.1 The Private Equity Firm ................................................................................................................. 5
2.2 The Private Equity Fund................................................................................................................. 5
2.3 The Leveraged Buyout ................................................................................................................... 6
2.4 The LBO Financing Structure ......................................................................................................... 8
2.5 Exit Strategies .............................................................................................................................. 11
3 Method ............................................................................................................................................... 12
4 Empirics .............................................................................................................................................. 14
4.1 Description of Respondents ........................................................................................................ 14
4.2 Interview Findings ....................................................................................................................... 17
4.2.1 Number of Acquisitions during the Last Two Years ............................................................. 17
4.2.2 Impact on EV’s Due to the Downturn................................................................................... 18
4.2.3 Premiums.............................................................................................................................. 18
4.2.4 Holding Periods .................................................................................................................... 19
4.2.5 Exit Strategies ....................................................................................................................... 19
4.2.6 Leverage Levels..................................................................................................................... 20
4.2.7 Value Creating Factors in an LBO ......................................................................................... 21
4.2.8 IRR & Cash Return ................................................................................................................ 22
4.2.9 Characteristics of a Suitable LBO Target .............................................................................. 22
4.2.10 Valuation Models ............................................................................................................... 23
4.2.11 Exit Multiple ....................................................................................................................... 24
4.2.12 Tracking of Financial Statements ....................................................................................... 24
4.2.13 Due Diligence...................................................................................................................... 24
4.2.14 Debt Instances .................................................................................................................... 25
4.2.15 Cash Reserve ...................................................................................................................... 25
4.2.16 Future Outlook on the LBO Market .................................................................................... 26
4.3 Characteristics of a Strong LBO Candidate .................................................................................. 27
5 The LBO Valuation Model ................................................................................................................... 30
5.1 Equity Purchase Price & Enterprise Value ................................................................................... 30
5.2 Income Statement ....................................................................................................................... 32
5.3 Balance Sheet .............................................................................................................................. 33
5.4 Cash Flow Statement ................................................................................................................... 35
5.5 Debt Schedule ............................................................................................................................. 38
5.6 Returns Analysis .......................................................................................................................... 41
6 Input & Assumptions .......................................................................................................................... 42
6.1 Historical Income Statements ..................................................................................................... 42
6.2 Income Statement Assumptions ................................................................................................. 43
6.3 Opening 2009, In the Balance Sheet ........................................................................................... 45
6.4 Balance Sheet Assumptions ........................................................................................................ 45
6.5 Cash Flow Statement Assumptions ............................................................................................. 46
6.6 Financing Structures, Margins and Base-Rate ............................................................................. 47
6.7 Financing Fees and Other Expenses ............................................................................................ 49
6.8 Equity Purchase Price and Premium ........................................................................................... 50
6.9 Exit Multiple ................................................................................................................................ 51
7 Analysis ............................................................................................................................................... 52
7.1 Björn Borg’s Suitability for an LBO .............................................................................................. 52
7.1.1 Strong and Predictable Cash Flows ...................................................................................... 53
7.1.2 Leading and Defensible Market Position.............................................................................. 53
7.1.3 Realizable Growth Opportunities ......................................................................................... 54
7.1.4 Efficiency Enhancement Opportunities ................................................................................ 54
7.1.5 CAPEX Light, Small Initial Investments ................................................................................. 54
7.1.6 Strong Asset Base ................................................................................................................. 55
7.1.7 Low Entry Multiples .............................................................................................................. 55
7.1.8 Competent Management ..................................................................................................... 56
7.1.9 Moderate Leverage Level ..................................................................................................... 56
7.1.10 Strong Owner Structure ..................................................................................................... 56
7.1.11 Exit after the Holding Period .............................................................................................. 56
7.2 Result of the Björn Borg LBO ....................................................................................................... 57
7.2.1 Base Case & Financing Structure 1 ....................................................................................... 57
7.2.5 Management Case ................................................................................................................ 61
7.2.6 Ambition Case....................................................................................................................... 61
7.2.7 Bank Case ............................................................................................................................. 62
7.2.8 Sensitivity analysis ................................................................................................................ 62
8 Conclusion .......................................................................................................................................... 64
9 Discussion ........................................................................................................................................... 65
10 Future Research................................................................................................................................ 66
11 Reliability & Validity ......................................................................................................................... 67
12 References ........................................................................................................................................ 68
13 Appendix I - The LBO Valuation Model .............................................................................................. 1
14 Appendix II – List of PE Firms with Presence in Sweden .................................................................... 1
15 Appendix III - Interview Inquiry .......................................................................................................... 1
16 Appendix IV - Interview Outline ......................................................................................................... 1
17 Appendix V – Björn Borg Annual Reports ........................................................................................... 1
1 Introduction
During the eighties a new type of financial transaction started to emerge on an increasing basis. It
was the so called “leveraged buyout” also known as the LBO. The general idea behind an LBO is that
an investor acquires control of a company without disposing the capital normally required for these
types of acquisitions. The essential part of this equation is spelled debt. Leveraged buyout
investment firms also called “private equity” firms1 or “PE” firms made it to the headlines in financial
media with their remarkable deals. One after the other private equity firms took on deals that were
even more spectacular than the ones before.
Buyout models have shown to be successful in both rising and falling markets this might be one
explanation to why these kinds of deals have increased steeply in popularity excluded the last two
years. Much has happened since the eighties. Back then leveraged buyouts where often associated
with terms such as “Slash and Burn” or “Buy, Flip and Strip” often meaning hostile takeovers and
huge layoffs. Today focus is more on active ownership, fast decisions without the bureaucracy of the
stock market and long term value creation. This together with the leverage caused by the capital
structure in the portfolio companies often means growth rates and earnings that exceed the
performance of public noted companies. As a result of this, private equity funds today are being
sought after both as buyers of mature companies with solid cash flow but also by investors trying to
leverage their investments. Private equity funds are no longer only for institutional investors. This is
another explanation to why private equity deals have significantly increased during the last decade.
Today deals are bigger and private investors can now place smaller amounts in a broad variety of
funds.
Figure 1: Global private equity transaction volume between 1985 and 2006.
Source: (Kaplan & Strömberg 2009)
1
Private Equity or PE is equity capital not quoted on a public exchange. Private equity consists of investors and
funds that make investments directly into private companies or conduct buyouts of public companies that
result in a delisting of public equity.
1
Figure 1 show how both the number of LBO’s and the aggregated equity value of LBO transactions
have increased almost exponentially from the mid eighties until 2006. A dip in deals can be seen
through the financial downturn during 1999-2001. Since then, the increase in transactions has been
steadily growing from 2001 until the most recent economical slump starting in the summer of 2007.
After that restrictive debt markets, lack of companies for sale and macro economical factors has lead
to a decrease in LBO’s during the last years.
Even though the last years and specifically the 2009 decrease in the Swedish private equity market
has been worse than ever before seen in history, optimism can be heard among professional
investors. In an article in Dagens Industri (Mellqvist 2010), the chairman of SEB, Marcus Wallenberg
assures that Swedish banks are open to deals. Deals are still done but to lower leverage levels further
a stronger focus is made towards core activities in companies today according to him. Even though
there are fewer active funds on the PE market today than two years ago and their aggregated value is
lower than before the trend is slowly increasing (Mellqvist 2010).
The four big PE firms with strong presence in Sweden Nordic Capital, EQT, Altor and IK Investment
Partners have all done few acquisitions during 2009. However investment activity has slowly started
to grow recently and many of the big funds have a positive view on the near future. According to
calculations made by SvD, these four PE actors have at least 216 billion SEK in investable capital
(Neurath 2010). Björn Savén founder of IK Investment Partners states that 2010 will be an active year
for IK (Neurath 2010). In the same article Björn Savén reveals his forecast that buyouts of medium
sized companies will increase in the near future while deals including bigger firms will probably never
reach the top levels seen during 2006/2007. Björn argues, back then the market was driven by
extremely cheap financing in relation to risk. This was not sustainable. In the longer run it is more
reasonable to believe that the market will establish itself on levels seen during 2000-2005 (Neurath
2010).
2
1.1 Purpose and Thesis Question
The purpose of this thesis is to create an LBO valuation model including a framework for finding a
suitable LBO target.
With the purpose stated above, this thesis aims to apply the created LBO valuation model and
framework on a company in order to show how they both work.
1.2 Limitations
In this thesis a number of limitations are set up in order to define the area of research. These are
purpose limitations, empirical evidence limitations and input & assumption limitations.
1.2.1 Purpose Limitations

The aim of this thesis is to apply the created LBO valuation model and framework on one single
company. Testing the framework against several companies should increase its validity but in order
to limit the work one single company is used for the analysis.
1.2.2 Empirical Evidence Limitations

The qualitative nature of the conducted study has an inherent limitation. Often quantitative research
provides stronger evidence for the findings. However as a qualitative approach is somewhat easier to
administer and interpret it is deemed sufficient for the purpose of this thesis. The study is realized on
a sample group of seven PE firms with presence in Sweden. This is a limitation as extending the
sample group both in number of interviews and geographical coverage could increase the validity of
the result.
1.2.3 Input & Assumption Limitations

Companies listed on NASDAQ OMX are used as the sample base for finding a suitable LBO target in
accordance with the derived framework. This limitation of the sample group assures for the
possibility to acquire company specific information required as input to the LBO valuation model.
Further, as most companies traded on the Swedish stock market have SEK as their currency base it is
convenient to use NASDAQ OMX as the sample base.
Availability of company related information is a limitation to the input and assumptions used in the
LBO valuation model. In order to predict levels of sales and expenditures, historical financial data is
used together with predicted sales growth from the selected company’s financial goals. This is a
limitation as historical figures might not reflect the future estimates of a company to the fullest
extent. In real life, expensive analytical tools such as Capital IQ, FactSet or Thomson ONE banker is
used in order to retrieve consensus estimates. In addition to this professional investors conduct a
deeper analysis of the company in order to reach credible estimates for the future development of
the target.
3
1.3 Disposition
This thesis is divided into the following sections Theory, Method, Empirics, The LBO Valuation Model,
Input & Assumptions, Analysis, Conclusion, Discussion, Future Research and Reliability & Validity. In
the theory section a general description of the private equity setting is done. Here the different
aspects of the PE firm’s business model including their management of the PE fund, the LBO, its
financing structure and exit strategies are explained. The method chapter describes the approach
used to fulfill the purpose. It includes a description of how the qualitative study on Swedish PE firms
where conducted. Under empirics respondents of and findings from the study are presented
together with the derived framework for choosing an LBO target. The LBO valuation model section is
a step by step passage, showing how the LBO valuation model, attached in appendix I is constructed.
In the paragraph input & assumptions all of the inputs to the LBO valuation model are introduced.
The analysis section contains an analysis of Björn Borg’s suitability for an LBO and an analytical
approach to the result of the LBO valuation model. Conclusion reveals the findings of the work. Then
a discussion around the conclusion and factors impacting the result is held. Future research contains
suggestions for future research that would broaden the understanding of the topic. Finally, a
discussion around the validity & reliability of the conclusion is held in order to confirm the accuracy
of the result.
4
2 Theory
2.1 The Private Equity Firm

As private equity is money invested in companies that are not publicly traded on a stock exchange or
money invested in a buyout of a publicly traded company in order to make it private. Private equity
firms are companies that manage private equity funds investing in private companies or buyouts of
public companies. Private equity firms are often categorized as VC2 firms or PE firms depending on
their investment profile. In general VC firms provide venture capital to companies in their early stage
of development while PE firms invest in mature companies. Venture capital is used by new
companies with large up-front capital requirements which cannot be financed by cheaper
alternatives such as debt. PE capital is used for growing and enhancing existing companies with well
proven business models that often have stagnated in development. A VC firm mainly provides capital
to their investments for a stake in the company. As PE firms invest they typically acquire control of
their targets through a buyout. These buyouts are often associated with a substantial amount of debt
or leverage therefore they are referred to as leveraged buyouts. Leveraged buyouts can be done in
several ways. In addition to the LBO, where a PE firm steps in as the new owner, management
buyouts and club deals are also common. In a management buyout, MBO, the management of the
company becomes the new owner through a buyout. In a club deal, several PE firms work together in
order to raise capital for buying-out the target company. Even though the owner structure differs
between the buyouts they are all valued in the same way. Here the LBO valuation model is used in
order to calculate expected return of the deal.
2.2 The Private Equity Fund

A PE firm raises equity capital through a private equity fund also called PE fund. The PE funds are
legally organized as limited partnerships, LP’s where the general partners, GP’s manage the fund and
the LP’s provide most of the capital.3 However it is common for the GP’s to provide at least 1 percent
of the total capital. The typical PE fund are a “closed-end” vehicle which mean that investors commit
to provide a certain amount of money to the fund until date of termination.4 A PE fund typically has a
fixed life between seven to ten years but can be extended for up to three additional years. Invested
capital is used for investment in portfolio companies5 as well as management fees to the PE firm. The
PE firm normally has up to five years to invest the fund’s capital committed for portfolio companies.
After that it has an additional five to eight years to return the capital to its investors. After
committing their capital, limited partners have little say in how the general partner deploys the
investment funds as long as the basic covenants of the fund agreement are followed. Common
covenants include restrictions on how much fund capital that can be invested in one company and
types of securities the fund can invest in etc.
2
VC or venture capital is money provided by investors to startup firms with perceived long-term growth
potential. This is a very important source of funding for startups that do not have access to capital markets. It
typically entails high risk for the investor, but it has the potential for above-average returns.
3
The PE firm serves as the fund’s general partner. Limited partners typically include institutional investors such
as corporate and public pension funds, endowments, insurance companies and wealthy individuals.
4
This contrasts with mutual funds which are so called open-end funds where investors can withdraw their
invested capital whenever they like.
5
Companies bought and managed by PE funds are referred to as portfolio companies.
5
By managing PE funds the PE firm or general partner is compensated in several ways. First the
general partner earns an annual management fee, usually a percentage of capital committed. As
investments are realized the general partner gets a percentage of capital employed. Also the general
partner earns a share of the profits of the fund, a so-called “carried interest” that almost always
equals to 20 percent (Kaplan & Strömberg 2009). Finally some general partners charge deals and
monitoring fees to the companies in which they invest.
2.3 The Leveraged Buyout

Finding a suitable target for an LBO is very much about finding companies that has unused debt
capacity. Here cash flow plays an essential role. In an LBO, free cash flow is used to pay down debt. In
theory the value of the equity in the firm will increase as debt is amortized. Also, in the post-LBO firm
managements share ownership significantly increases their incentives to work hard in order to
maximize their own wealth provided by their equity stake. This is sometimes referred to as a “carrot”
effect on the management. The heavy debt burden also forces managers to run the company
efficiently in order to avoid bankruptcy. This is referred to as a “stick”. Both the “carrot” and the
“stick” ensure that management is doing their best in order to run the company as efficient as
possible. In addition to this third-party investors such as the PE firm acquire a large equity stake in
the target company. This provides these investors incentives to motivate and monitor managers. In
order to do this PE firms often hold chairs in the board of the company. Arguments of how these
incentives works together and creates value in an LBO are presented by Jensen’ in his studies (Jensen
1986) and (Jensen 1991). Further many studies have provided empirical evidence that supports
Jensen’s arguments (LEHN & POULSEN 1989), (Kaplan 1989), (Baker & Wruck 1989), (Smith 1990),
(Denis 1994), (Wruck 1994).
Figure 2: The LBO concept.
Source: (Citigroup corporate and investment banking 2006)
6
Figure 2 show the LBO concept where the purchase price is primarily financed through different debt
instruments that are paid down with future operating cash flows6 of the acquired company.
According to the source (Citigroup corporate and investment banking 2006) initial capital structure
typically consists of 75% debt and 25% equity. These numbers varies from deal to deal and also
depends on macro economical factors and debt issuer’s willingness to take on risk. The same goes for
stated IRR7 in the figure as it also differs depending on demands from investors. However, an IRR of
25-30% seems likely to be accepted by most PE investors in Sweden as the mean value of cost of
capital for Swedish buyout firms is 23% according to a study by the Swedish Venture Capital
Association (Svenska Riskkapitalföreningen 2009).
The different debt layers in figure 2 represents the various sources of debt ranging from high cost
debt such as High-Yield / PIK note financing in debt layer 1 down to low cost financing such as a
revolving credit facility and term loans in layer 5. The “revolver” in layer 5 is typically undrawn at the
exit of the deal. However a certain amount of debt is often left after exit due to tax shield benefits.
From time of entry throughout the time until exit, debt is repaid. As the enterprise value remains
constant, these transactions result in a considerable equity growth. Equity growth together with
value creation activities conducted by management and sponsors are translated to proceeds for
investors at the time of exit. In order to keep cash flows maximized during the holding period, no
dividends are paid out to share holders.
Further, the key return drivers of an LBO can be categorized as follows (Citigroup corporate and
investment banking 2006).
 Leverage on acquisition and subsequent debt pay down. This is done through maximizing of
free cash-flow through strict CAPEX, R&D and working capital discipline.
 Increased firm value through EBIDTA growth between time of investment and exit. Possible
through sustainable earnings growth, cost control and possibly restructuring upside or
synergies with other companies in the portfolio of the financial investor.
 Increased firm value through multiple-expansion between time of investment and exit.
Driven by evolving industry fundamentals (e.g. cyclicality of industry), quality of assets,
enhanced organic growth outlook and improved equity capital market conditions.
 Limited duration of investment. Value is created by, buying in weak markets and exit during
robust M&A and equity market within a 3-7 years period. Here, tradeoff between time to
exit, total proceeds and IRR is important.
6
Operating cash flow, OCF=EBIT+Depreciation-Taxes
7
IRR or Internal Rate of Return is a discount rate often used in capital budgeting. IRR makes the net present
value of all cash flows from a particular project equal to zero. Generally speaking, the higher a project's internal
rate of return, the more desirable it is to undertake the project.
7
2.4 The LBO Financing Structure
Traditionally in an LBO transaction, debt has typically been around 75% of the financing structure
(Citigroup corporate and investment banking 2006). However, today financing with debt levels
somewhere close to 50% is more common. Given the high levels of debt included in transactions like
this, the ability for PE funds to lend money is crucial. The information regarding the different debt
instances provided below is extracted from discussions with the debt capital markets department of
a leading Nordic investment bank8 and a report written by Citigroup’s corporate and investment
banking department (Citigroup corporate and investment banking 2006).
Interest rates for loans issued by investment banks through a syndicate of lenders consist of two
parts. The first part is the official interbank offer rate for short term loans in Sweden. The Stockholm
Interbank Offer Rate is referred to as STIBOR. STIBOR is the interest rate banks are charged when
borrowing from other banks for maturities longer than overnight. The rate is determined by
Riksbanken9 and fluctuates over time10. In order to hedge interest rates on loans in an LBO an
instrument called Interest Rate SWAP, or just SWAP, is utilized. SWAP instruments are OTC11
contracts provided by investment banks and financial institutions. SWAP rates are fixed during the
instruments term and the actual rate differs depending on the term of the contract. Common terms
for SWAP instruments are 1, 3, 5 or 10 years.
On top of the SWAP rate banks charge a spread or margin on their loans. This spread/margin is the
premium that the bank charges in order to make a profit. Spreads are negotiated for each debt
facility and is highly dependable on the current capital market as well as the risk associated with each
loan. For example, if the spread is 2.50% for a revolving credit facility and the current SWAP rate is
3.16%, the actual cost of the loan is 2.50%+3.16%=5.66%.
The debt part of the LBO financing structure often includes a broad array of loans, securities or other
debt instruments with varying terms and conditions that appeal to different classes of investors. The
financing structure is unique for each deal. Each credit facility is negotiated and therefore the cost
and size of the different facilities differs from deal to deal. However a similar financing structure is
applied to all buyouts. The structure comprises of the following sources of finance.
 Senior debt or first lien secured debt such as a revolving credit facility and term loan
facilities. This is the cheapest type of debt.
 Mezzanine debt, ranked between traditional debt and equity.
 High-Yield Bonds, referred to as corporate bonds.
 Equity contribution, the lowest ranked source of finance and therefore the most expensive.
8
No further reference can be done due to the banks confidential policy.
9
Riksbanken is Sweden’s central bank.
10
STIBOR is often set for a period of three months.
11
OTC, Over The Counter
8
Senior debt is the main financing source in an LBO and typically has a term of 5-10 years. It consists
of bank loans with a higher ranking, lower flexibility and lower cost of capital than the other sources
of funds. As it ranks higher than other securities in regards to the owner’s claims on assets and
income in the event of the issuer becoming insolvent, it has a lower cost than lower ranked debt such
as mezzanine, high-yield bonds and equity contribution. Interest rate is SWAP plus a spread of 2-3%
with the credit spread tied to the appraised fair market value of land and buildings, enterprise value
as well as the liquidation value of machinery and equipment. Senior debt is somewhat flexible with
varying collateral and covenant packages as well as amortization schedules. It often comprises of 25-
50% of the total deal. The debt is used to finance property and equipment as well as other long-lived
assets, acquisitions, buyouts and stock repurchases. Main lenders are commercial and investment
banks, mutual funds, structured investment funds and finance companies.
A traditional cash flow revolving credit facility also called “revolver” is a senior debt secured by
inventory and accounts receivable which is the most liquid operating asset. It is a line of credit
extended by a bank or group of banks that permits the borrower to draw varying amounts up to a
specified aggregate limit for a specified period of time, often 5 years or more. It is unique in that
amounts borrowed can be freely repaid and re-borrowed during the term of the facility. A revolver
requires the borrower to maintain a certain credit profile through compliance with financial
maintenance covenants contained in a credit agreement. It is common for companies to utilize a
revolver or equivalent lending arrangements to provide ongoing liquidity for seasonal working capital
needs, capital expenditures, letters of credit and other general corporate purposes. A revolver is
most often not used to fund the purchase of the target in an LBO. Also it is usually undrawn at close.
Revolvers are typically arranged by one or more investment banks and then syndicated to a group of
commercial banks and finance companies. In order to compensate lenders for making this credit line
available to the borrower, a nominal annual commitment fee is charged on the undrawn portion of
the facility. The revolver often comprises of 5-15% of the total deal but depends on the fluctuations
in working capital. Typical interest rate is SWAP plus a spread of 2.0-2.5% cash interest only, with
credit spread tied to value of current assets, financial performance and risk measures.
A term loan, called “leveraged loan” when non-investment grade, is a loan with a specified maturity
that requires amortization according to a defined schedule. Like a revolver, a traditional term loan for
LBO financing is structured as a first lien debt obligation and requires the borrower to maintain a
certain credit profile through compliance with financial maintenance covenants contained in the
credit agreement. Unlike the revolver a term loan must be fully funded on the date of closing and
once principal is repaid, it cannot be re-borrowed. Term loans are classified by an identifying letter
such as A, B or C etc. in accordance with their lender base, amortization schedule and term.
Term loan A, called “TLA”, are commonly referred to as amortizing term loan because it typically
require substantial principal repayment throughout the life of the loan. Term loans with significant
annual required amortizations are perceived by lenders as less risky than those with a looser
repayment schedule. Consequently, term loan A’s are often the lowest priced term loans in the
capital structure. Term loan A’s are syndicated to commercial banks and finance companies together
with the revolver and are often referred to as “pro rata” tranches because lenders typically commit
to equal percentages of the revolver and term loan A during syndication. Term loan A’s in the LBO
financing structure often have a term that ends simultaneously with the revolver.
9
B term loans, or “TLBs”, are commonly referred to as “institutional term loans” due to the fact that
they are sold to institutional investors. Term loan B’s are used to a greater extent than term loan A’s
in LBO financings. Typical, term loan B’s are larger in size and has a longer term than term loan A’s. A
reason for the longer term is that, bank lenders prefer to have their debt mature before term loan
B’s. Term loan B’s are generally amortized at a nominal rate such as 1% per annum. The rest is repaid
as a bullet at maturity. Common tenor for term loan B’s is up to seven years. As institutional
investors prefer non-amortizing loans with longer maturities and higher coupons, TLBs are more
suitable for them to invest in than term loan A’s.
Mezzanine debt is a highly negotiated instrument between the issuer and investors. It is tailored to
meet the financing needs of the specific transaction and required investors return. As such it allows
for great flexibility in structuring terms. It provides incremental capital at a cost below that of equity,
which enables stretching of leverage levels and purchase price when alternative capital sources are
inaccessible. Mezzanine debt has embedded equity instruments, usually warrants attached to it.
The issuance of corporate bonds is an additional more expensive source of finance if senior debt is
used up. Because of the inherent high leverage levels associated with an LBO, these bonds are
usually deemed non-investment grade. This is a rating of “Ba1” or below from Moody’s Investor
Service (Moody's 2009) and “BB+” or below when using a rating scale from Standard and Poor’s
(Standard & Poor's 2009). Due to this, bonds issued through an LBO are often referred to as “high-
yield” or in some cases “Junk” bonds because of the relative high risk associated with this type of
investment. Typical term of the bonds is 6-10 years and they mature after the senior debt. Issuance
of bonds is a flexible instrument that can be structured as a debt security with fixed equity coupon
and equity-linked features such as warrants. High-Yield debt is often structured as 20-40% of total
deal cost. It has yearly payments of interest and repayment of principals at maturity. Interest rate is
SWAP plus a spread. Size of spread is tied to cash flows and depends on the investment grade of the
bond. Main lenders are pension funds, insurance and finance companies, debt and mutual funds,
hedge funds or other institutional and private investors. High-Yield debt is usually publicly traded.
Equity stake in an LBO today usually comprises of 50-60% of the total capital. However this figure
varies through time and is highly dependable on bank covenants. As dividend and liquidation rights
are subordinated to the interest of the debt lenders, equity contribution provides a cushion for
lenders and bondholders in the event that the company’s enterprise value deteriorates. Shareholders
often receive their invested capital back at the time of exit, typical after 3-7 years. Management
often invests in equity with the LBO sponsor. In most buyouts, a PE firm is the LBO sponsor. Sponsors
typically seek a 25-30% compounded annual total return over five years. For large LBO’s several
sponsors may team up to create a consortium of buyers, thereby reducing the amount of each
individual sponsor’s equity contribution. This is known as a “club deal”.
10
2.5 Exit Strategies
As stated above most PE funds exit/monetize their investments in a portfolio company within
approximately 3-7 years. This is done in order to provide timely returns to their LPs. The primarily
exit strategies are:
 Financial sale includes sale to another PE fund, LBO-backed firm or investment company.
 Industrial sale means sale to strategic buyer or sale to management.
 Secondary buyout, recapitalizations of the company in a new LBO.
 IPO, in an Initial Public Offering the PE fund sells a portion of or all its shares in the target to
the public. This means bringing the company back to the stock market.
 Dividend Recapitalization, while not a true exit strategy this means issuance of new debt
used to pay shareholders a dividend instead of proceeds from a company sale.
 Bankruptcy, this option is not preferred.
Figure 3: Exit strategies used by Swedish PE firms during 2007.
3%
8%
8%
Industrial sale 41%
41% Other exit 30%
10% Finansial sale 10%

Sale to other PE firm 8%
IPO 8%
Sale to entrepreneur 3%
30%
Source: (Swedish Private Equity & Venture Capital Association 2009)
11
3 Method
To build a relevant framework for finding a suitable LBO candidate a series of interviews with PE
firms active on the Nordic market where conducted. The study revealed what distinguished
investment professionals look for in a potential target company. It also gave answer to other
important questions needed for the creation of the LBO valuation model. Some of those questions
discussed demands on expected return, average holding periods, reasonable premiums and suitable
exit strategies etc.
Due to the high level of secretes in the PE industry, many of the approached firms were reluctant to
participate in the interviews if their identity where revealed. Therefore no firm names are used when
presenting the results of the study. Instead a short description of the interviewed firm regarding its
size and investment profile assures the reader that the participating firms are among the absolute
top tier investors in the Nordic region.
In order to find suitable interview candidates the Swedish PE setting was screened. From the
screening procedure a list of twenty-eight interesting companies appeared. The list is presented in
appendix II. Each company from the list where sent an envelope containing a personally signed
interview inquiry. See appendix III for the complete inquiry letter. As the companies responded to
the inquiry a discussion regarding their participation emerged. While some of the approached firms
claimed that they were not suitable to participate in the study due to their lack of knowledge
regarding LBO’s, others referred to secretes as a reason to decline the offer. Also, after digging
deeper into the asked firm’s business models some of the companies where taken of the list due to
their lack of experience from LBO’s. As the list narrowed down, only a few firms showed extensive
experience from LBO’s and PE investments. From those, seven firms were chosen as interview
objects. These seven all has a long history on the Swedish PE market and has participated in
numerous well known LBO’s during the last decade. As such, they all provide a solid foundation of
knowledge suitable for deriving the framework and LBO model in this thesis.
The qualitative study that this paper is based upon is of a semi-structured character. Each interview
was an open discussion but with certain questions guiding the outline. See appendix IV for the
complete interview outline. Each respondent had been sent the questions in advance in order for
them to think over their answers. This was also a good way to assure for the discussion to flow as
smooth as possible. Six of the interviews were conducted face-to-face at the interviewed firm’s
offices. Being able to sit down with the interview target and talk over the topic gave the interviews a
good depth. The interviewed persons were asked to contribute with their experience regarding the
topic. This assured that important aspects of the topic not covered by the outline also where
discussed. Each interview where recorded, this was strictly for academic purpose and all recordings
where erased after the completion of the thesis. One of the interviews where responded to by email.
In this case the respondent wrote answers to the questions formed in the outline, here no deeper
discussion where conducted.
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Companies listed on NASDAQ OMX where used as the sample base for finding a suitable LBO target
according to the framework. A thorough analysis indicated that Björn Borg could be appropriate for a
buyout. Further an LBO valuation model was created from discussions with debt capital markets at a
leading Nordic investment bank. To evaluate validity of the derived framework, the LBO valuation
model was applied on Björn Borg and the result was analyzed.
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4 Empirics
4.1 Description of Respondents

Firm A is one of the leading alternative asset managers in the Nordic countries and Russia. They
manage funds with approximately €3.6 billion in total capital. Their team comprises 150 people in
Helsinki, Stockholm, Copenhagen, Oslo and Moscow. Buyout investments have been a part of firm
A’s investment strategy since the company’s foundation in 1989. Their buyout team is working locally
in the Nordic countries. The firm’s investment professionals work closely with the management
teams to develop their portfolio companies. They are aiming to be an active value adding owner of
its portfolio companies. Firm A buyout invests in mid-sized unquoted Nordic companies in various
industries. Their team has in-depth expertise in multiple sectors such as manufacturing and
engineering, industrial services, retail, outsourcing, and healthcare. Main targets set for portfolio
companies are growth, improved profitability and strengthened strategic position. Firm A buyout has
currently 27 portfolio companies and invests in businesses with typical net sales of €50-500 million
and market cap of €50-250 million.
Firm B is a private equity investor that owns and develops middle sized companies whose revenues
range from 400 million to 4 billion SEK. Their target profile is profitable and stable companies with
dedicated and ambitious management teams. Firm B currently manages 8.5 billion SEK invested in
three funds. Their primary sources of capital commitments come from international pension funds,
endowments and insurance companies. In their role as owner they appoint boards of directors,
which give tight support to management and foster continued development of the business. They
recruit prospective board of directors from their extensive network of industrial advisors. Since its
inception, firm B has been introduced to more than 2000 companies across the Nordic region. In
total, this has so far led to 30 acquisitions and 71 follow-on acquisitions. The firm aims to double the
earnings of portfolio companies they own. Firm B is an active owner, bringing focus, know-how and
capital to its portfolio companies. In 1997 firm B launched a 200 million SEK fund. Today the fund is
closed and all its capital, including profits, have been returned to investors. An independent
evaluator ranked a firm B fund, as one of the world’s most successful funds of its vintage. Their latest
fund was launched in 2007 and has aggregated capital commitment of 5.2 billion SEK. Firm B has
been generating excellent returns to their investors over the last fifteen years.
Firm C is a leading independent Nordic buyout firm with exclusive focus on middle market
transactions where enterprise value typically ranges between €50-200 million. They have an
experienced team with demonstrated ability to create investment opportunities. Their team is a
complementary combination of investment, operational and consulting expertise. It consists of 17
persons with extensive local and international expertise. Firm B targets companies with a sustainable
competitive advantage in the Nordic marketplace. They have a proven track record of building better
and more competitive companies. In order to do this firm B engages in intensive partnerships with
management to generate tangible operational improvements. The firm has a strategy to deliver
returns through organic growth and add-on acquisitions. They act as a provider of equity capital and
debt facilities but also a strategic sparring partner with an extensive analytical toolbox. Since 2000,
firm C has invested more than €226 million in 39 transactions. Today they manage three funds
aggregating over €550 million. Firm C is one of the most experienced Nordic middle market buyout
firms.
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Firm D is a private equity firm focused on investing in and developing medium sized companies in the
Nordic region. The typical size of their investments is €25-150 million in equity, but selectively they
can take on investments with up to €400 million in equity. Firm D provides buyout and growth capital
in companies with revenues of €50-500 million. They have an investment team with members
presenting every Nordic country. Their members all have international experience in fields such as
private equity, consulting, investment banking and various industrial sectors. Leading institutional
investors from the Nordic region, the rest of Europe and the US have committed a total of €3.8 billion
to firm D in three funds. Their latest fund was closed in 2008 with a committed capital of €2 billion.
Firm D’s investment strategy is to target sustainable performance improvements in order to build the
strongest possible business over time. Such fundamental improvements are pursued within all fields
including enhanced revenue growth, margin expansion and capital efficiency. Firm D also actively
seeks to build and develop businesses in partnerships with the incumbent owners and has achieved
such co-ownerships in a majority of its investments to date.
Firm E is a private equity firm focusing primarily on investments in large- and medium-sized
companies in the Nordic region and on selected international investment opportunities. Since 1989
firm E’s funds have invested in a large number of Nordic-based companies operating in different
sectors. In a dedicated partnership with management of the portfolio company, firm E seeks to
create value in its investments through committed ownership and by targeting strategic
development and operational improvements. Their model for value creation is characterized by a
careful approach to investment selection, a drive for excellence and a committed ownership mindset.
The firms disciplined investing involves multiple deal sourcing channels, careful analysis, thorough
due diligence and a clear post acquisition plan. Their overriding aim is to build enduring partnerships
and create long-term value, whether by creating new industrial combinations, pursuing a strategic
repositioning or exploring internationalization opportunities. Firm E’s investment advisors have
extensive experience in private equity investments, mergers, acquisitions and public equity offerings.
Their investment professionals have backgrounds in investment banking, management consulting
and industry. In addition, a unique and extensive external network of experienced industrialists and
specialists advise them on a situation by situation basis. Firm E is currently investing their latest fund
which reached its hard cap in 2008 with €4300 million in committed capital. Well-known
international institutional investors including private and public pension funds, insurance companies,
endowment funds and funds-of-funds have invested capital in firm E’s funds. They currently have
offices in Jersey, Copenhagen, Frankfurt, London, Helsinki, Oslo and Stockholm. In November 2009,
Wall Street Journal, together with Dow Jones and Private Equity News/Financial News, published a
list of the world’s top 10 private equity firms, where firm E ranks 2nd place based on performance.
The list is based on academic research providing a view of a private equity firm’s performance
relative to its peers during 1996-2005.
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Firm F manages a group of private equity funds focusing on investments in lower mid-market buyout
and later-stage expansion capital transactions in the Nordic region. Firm F was founded in 1994.
Since then, they have invested in more than 50 Nordic mid-market companies and successfully
realized some 40 of these investments, becoming the undisputed leader in its market segment. Firm
F invests in companies where they can serve as a catalyst for change and thereby transforming these
companies into Nordic, European or global market leaders by providing for genuine and sustainable
improvements within operations and strategic positioning. Since 1994, firm F has managed 6 funds
with total commitments exceeding €1 billion, delivering superior returns to its investors. The funds
are backed by well-reputed Nordic and international institutions including public and private pension
funds, insurance companies, endowment funds and funds-of-funds. Overall, the Nordic region
represents 20%, Europe 60%, the US 20% of investments into firm F’s funds. Some 30 institutions
from 10 countries make up the investor base. Firm F has a staff of 10 investment professionals with a
broad range of industrial and financial experience. Size of investments is €5-50 million in equity
investment per transaction, including follow-on investments.
Firm G is a leading Northern European mid-market buy-out firm with a unique regional footprint.
They lead buy-outs within the €50-500 million deal range in the consumer, industrial and services
sector. The firm target opportunities for majority stakes in profitable, cash-generative companies
headquartered in the Netherlands, Nordic region and the UK. Firm G currently has €1.66 billion of
total funds under management. Their transactions are a direct result of their long term strategy
based on local presence together with regional sector expertise and intelligent reading of the market.
The investment strategy of their buyout teams are firmly based on local knowledge and a committed
partnership with management. Firm G has a team of 25 investment professionals operating from 3
offices in Amsterdam, London and Stockholm. They have a wealth of experience in closing and
managing successful deals in the Northern European region. Their network of sector specialists can
advise them when originating deals and their trusted external industry specialists help them realize
areas of potential value creation and assist management to deliver on the agreed growth strategy.
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4.2 Interview Findings
Even though the seven interviews where of a semi-structured character they all pointed in the same
direction. The answers to the questions formed in the interview outline, seen in appendix IV, gave a
similar picture from all of the respondents. Small differences in their answers where noted. However
these differences seem to reflect the firm’s size, investment profile and industry focus rather than a
radical view on the buyout market today. In order to keep the respondents anonymous, their answer
to each question is not presented in the thesis. Instead a summary of the interviews is presented
below.
4.2.1 Number of Acquisitions during the Last Two Years

A majority of the firms has done fewer acquisitions and less exits during the last two years. Main
reasons for this is said to be that the current market condition has made it hard for seller and buyers
to agree on reasonable price levels. The current downturn has also led presumptive target
companies to focus on other things than selloffs. The higher cost of debt and the unwillingness from
banks to lend money has played a secondary role in the decrease of buyouts. Even though it has
affected the number of transactions done during the last two years it cannot be claimed to be the
main reason for the decrease. However, PE firms have been affected to a higher extent by the
increased cost of debt compared to their competitors in a bidding situation, the industrial buyers. PE
firms have in general a bit weaker competitive position compared to industrial buyers due to the fact
that PE firms often need to lend more money than the industrial buyers. The financial turbulence has
also forced some of the PE firms to work a lot with their current portfolio companies in order to fulfill
the covenant demands from lenders. Therefore they have not been able to focus on new acquisitions
to the same extent as before. As indicated above, the far most important reason for the decrease in
transactions is said to be the lack of sellers. This is particularly evident in the answer from one of the
respondents. “When the economy fell off, all sellers disappeared and pricing uncertainty emerged.
These factors are far more important than the cost and availability of debt.” One firm also claims that
fund technical aspects have been a reason for them to decrease the number of investments. “Our
funds are fully invested, so we did not have any room for additional investments.”
Even though the majority of respondents claimed that their buyout activity has stagnated, there
were some firms that had done surprisingly many deals during the last year. This is explained as an
expression of each opportunity rather than a reflection of the current market condition. Here
distressed companies is said to be attractive buyout candidates due to their low market values.
Another firm answered that they have done several acquisitions during the previous years because
their analysis showed on possibilities to buy companies to lower multiples during the downturn. This
together with the fact that they just started a new fund made them believe that is was a good time
to invest. However the same respondent underpins that sellers still value their companies at too high
multiples, therefore you need to dig deeper into the market in order to find attractive investments.
Also, the fact that the same firm invests in smaller companies than their peer’s has made them more
insensitive to the cost of debt and ability to raise large amounts of debt.
17
4.2.2 Impact on EV’s Due to the Downturn
The question regarding the recent downturns impact on enterprise values had similar answers to the
previous question.
“There were no companies for sale during the downturn. No one wanted to sell when their
companies where low valued. Sellers still had a high price that did not reflect the market. Buyers
were not willing to pay more than the market value of the companies. Therefore no deals were
done.” Other respondents stated the same thing when they said. “It is true to some extent that the
economical slump lowered the EV’s and provided for attractive entry multiples but in most cases
sellers still value their companies as before the downturn.” As revenues still have not reached the
same levels as before the slump, current multiples tend to be quite unattractive. Also if prices
actually dropped willingness among owners to sell decreased. Again distressed companies could be
of interest due to the fact that they might have to sell at a low multiple. There will always be an
arbitrage if one is able to buy a cyclical company when it has low earnings and is low valued, if it will
come back to higher earnings during a reasonable time frame.
4.2.3 Premiums
All of the respondents agreed on the fact that buyout premiums are highly depending on the actual
target and how you calculate the premium. Some suggested that it is natural to calculate how large
premium the LBO model can motivate. In most buyouts from the stock market there is no bidding
procedure. Instead it is more common for a presumptive buyer to place a bid and hope for accept.
Premiums depend on the owner structure of the target company. As small shareholders do not make
any threat to the deal price, the important thing is to agree on the price with the largest
shareholders. Worst case scenario is if owners with more than 10% of the shares do not accept the
bid. Such owners, for instance aggressive hedge funds sitting on these kinds of corner positions could
hinder a sale. A situation like that could force the buyer to increase the bid. In a bidding scenario the
premium of course depends on other bidders. Today, the market has a tendency not to appreciate
bids from PE firms. In general, if a PE firm and an industrial buyer places bids on the same target,
owners want to have a bit more in order to go with the PE firm. Here one respondent says that the
PE industry needs to be better at communicating their business model in order for target owners to
gain increased confidence in the PE funds as owners.
The interviews indicated that a reasonable premium assumption could be somewhere between 20-
30% even though one respondent explained how this number in reality could range between 10-
100%. Premiums are also highly dependable on the major stock holder’s in-price and the
development of the stock. If the valuation of the company is low due to temporary causes such as
low earnings during a downturn, premiums tend to be higher and vice versa. Therefore in a
decreasing stock market premiums are significantly higher, probably around 40-60%. If a stock is
traded close to all-time high or over the last three years average lower premiums can be motivated.
18
4.2.4 Holding Periods
The study showed that the typical holding period for PE firms today is between 3-7 years. Ten years
ago holding periods where a bit shorter, typically 3-5 years. As the PE industry started to emerge in
the Nordic region during the 90ies, it was possible to buy cheap and do small changes to the portfolio
holdings before you sold them off for a higher price. These multiple arbitrage situations are scarce
today. Nowadays it is much harder to buy cheap. Therefore the holding periods tend to be a bit
longer. In the current market, a PE firm needs to create value for the portfolio company in order to
sell it at a higher price. This is one of the explanations for the longer holding periods seen today. A
major part of the respondents stated that they had postponed exists during the last two years due to
the lack of buyers on reasonable price levels. In such cases, if it is clear that the company has a
steady continuing growth, it could be good to prolong the holding period.
All of the interviewed firms preferred a shorter holding period over a longer one, as long as their
demands on IRR and cash return were fulfilled. Most of the funds have an option to hold their
investments longer than 7 years, sometimes up to 10 years if the market condition hinders them
from making a profitable exit before. However, in LBO calculations, PE firms often apply a 5 years
holding period in order to compare different cases to each other. Branch standard applied in
calculations were said to be 3-5years.
4.2.5 Exit Strategies

When deciding upon exit strategies, all of the respondents work with “dual track” schemes in order
to evaluate the best possible exit strategy. This is often done before the acquisition. In general the PE
firm has more than one possible exit strategy. Suitable exit strategies differ from time to time. Here,
trends in the economy often decide what strategy is best for the moment.
Historically there have been a lot of financial sales to other PE firms. Portfolio companies were
bought from smaller actors and sold onto bigger players. This was how it worked before the
downturn and it was partly explained by the fact that PE firms could increase their loans steadily and
therefore pay higher prices. This led to steadily increasing prices in the past. At the same time
industrial buyers had a hard time motivating the high prices on companies. In the more recent past,
during 2009, there have been many industrial exits. This is explained by the fact that industrial
buyers today has a greater understanding for how value is created in the targets and therefore can
compete with bids from PE actors. Industrial buyers also have a lot of capital and are not that
dependant on the credit market conditions. This has given them an advantage during the downturn.
Most respondents prefer when other actors, both industrial and financial, approaches them with an
offer. This can in certain cases avoid the negative development in sales price that often occurs if an
investment bank tries to push a company onto the market without having a pronounced buyer
present.
Some companies are better suited for an IPO than others. Some are too small. For a company to fit
on the stock market it needs to be of a certain size and somewhat non-volatile in order to deliver
predictable dividends to shareholders. Stable companies are easier to sell at an attractive price level
on the stock market. Respondents state that IPO’s are a stronger exit alternative today than a year
ago. However, in the case of an IPO timing is often of great importance. In many cases industrial
buyers have synergy effects from the acquisition of a company. Therefore they can pay a high
premium. This gives industrial- or financial-sales a slight benefit compared to IPO’s where the seller
19
receives market price for their company. Another disadvantage of the IPO is that a seller cannot exit
100% of the company at once. Instead they have to keep a certain amount of shares in the company
for some additional time in order to create confidence among the new shareholders. The study
highlights that the key to exit your holdings with a significant profit is to provide well positioned and
professionally managed companies to the market at the right time. Deciding factors for choosing an
exit strategy are valuation and smoothness of the process. As an IPO often means a smaller premium
and costs a lot of time and money, most of the interviewed firms prefer an industrial- or financial-
sale in the form of a recap.
4.2.6 Leverage Levels

During the eighties, but also more recently in 2007 and beginning of 2008, LBO’s with leverage levels
up to 80% where not uncommon. The recent financial downturn has lowered the debt/equity ratios
significantly. All of the asked firms were of the same opinion when they said that deals today
typically comprises of 50% debt and 50% equity. However, the number differs a bit from deal to deal.
Here the financials and character of the target decides how much you can pull from the debt market.
A stable business can have a debt/equity ratio up to 60% today. A high EBITDA makes it possible to
have more debt and less equity in the capital structure. Today, banks will lend you up to 3-4X EBITDA
in senior debt depending on stability and size of the target. In a more complex debt structure it
should be possible to add 1X EBITDA with the use of mezzanine or other subordinated debt. This
makes 5X EBITDA the maximum amount of net-debt available for an LBO in the current market
according to the study.
When asked about increasing leverage levels in the future, the consensus where that the debt/equity
ratios probably will reach the high levels seen during 2007 again. However, it will take a very long
time before that happens.
One respondent comments “We will probably see those levels again but it will take a long time. A
year ago it was almost impossible to get finance from banks for these kinds of deals. Margins and set
up fees where extremely high. The strengthening of the market has been rather fast during the last
year, so today, the market looks much better than it did a year ago. Levels seen during 2006-2007
were too high. It was too easy and cheap to borrow money back then.”
Another respondent state, “I don’t believe that we will see debt/equity ratios at 80% in a close
future. This is a too high leverage level that can lead to bankruptcy.”
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4.2.7 Value Creating Factors in an LBO
The interviews revealed that the most value creating factor in an LBO is not the financial transaction
itself. Optimizing the capital structure and receiving a financial leverage from the tax shield accounts
for around 20% of the value creation. Approximately 30% comes from multiple expansion and the
rest, 50%, from operational changes, so called soft values.
One of the interviewed companies described the value creation process as following.
“We will create an optimal capital structure for the portfolio company. We seek to improve the
company’s competitiveness and profitability by refocusing business unit strategies, operational
enhancements to improve margins, balance sheet management and efficient use of capital. We will
also pursue add-on acquisitions and divestments, focus on core activities, divest non-core operations
and build critical mass to play a leading role in the industry.”
All of the respondents were focused on EBITDA growth. Here management plays an important role in
the future development of the portfolio company. Aligning management interests with the PE firm’s
interests is essential in making a profitable deal. Most of the participants in the study look at “best
practice” actors in the industry in order to benchmark their portfolio companies and try to develop
them in the same direction. This often means cutting costs and having a strategic plan for growing
market shares etc. Here the financial operations such as capital structure plays a secondary role in
the increase of EV/EBITDA multiples. Private equity is good at shrinking the balance sheets by cutting
costs. The capital freed by these actions has traditionally not been used for amortizations of debt.
Instead it has been used for growing the company by acquisitions. This increases the revenues for the
company. By doing so, you can make a recap after a couple of years and continue to grow the
company without investing more capital.
Another firm described the value creating process like this.
“We act as the catalyst in realizing long-term profit enhancement. Setting mutual long-term goals
with portfolio company management is a critical factor in successfully creating value. This might
include actions that require several years to come to fruition such as strategic add-on acquisitions,
aggressive organic growth or establishing an international sales organization. Key elements in a
corporate agenda include basic approach to secure competitiveness by reducing complexity,
streamlining processes, reducing cost levels and ensuring an appropriate financial structure. Growth
and development are encouraged by expansion into new markets, investment in product
development and other organic growth initiatives. Combined with resources provided by a unique
network of external advisors we can quickly analyze complex investments or strategic situations,
support rapid decision making with respect to potential transactions and internal change at the
portfolio company level. Our investments are often industry-consolidating buyouts in which two or
more related businesses are acquired and combined into a new, stronger entity.”
21
4.2.8 IRR & Cash Return
Even though demand on return from investments varies with the risk associated with each deal. The
respondents gave similar answers to what return they need in order to take on an investment. The
least acceptable IRR is between 20-30% after 4-5 years. Most of the firms answered that a calculated
IRR of 20% is the lowest acceptable figure. Some said that the calculated IRR should be over 30% for
them to consider the deal. IRR is an important measure for all of the respondents. However, cash
return is of greater importance for the PE firms. This became evident as one of the firms said. “You
cannot eat an IRR.” This statement highlights the fact that being able to double your money is more
important than showing a high IRR. Even though the measures has a certain covariance, showing a
high cash multiple is very important. The firms revealed that a cash multiple of 2-3X is the lower limit
for their investments. In their calculations, PE firms typically has a cash return of 4X but in attractive
cases they can have numbers up to 6X in cash return. All firms needed to see that the demands on
return were fulfilled within 4-5 years in their valuation model. In general a PE investor expects a
return on 5% over the stock market.
“For us, a good investment can have a cash multiple of 6X and an IRR of 70% when exiting after 5
years.”
4.2.9 Characteristics of a Suitable LBO Target

It became evident that the ability to estimate the company’s future development is a key issue when
finding a suitable LBO target. Here PE firms try to find companies with a large prognosticated organic
growth. Therefore non-cyclical companies should act as a theoretical group for selection. If a
company is cyclical, the investor needs to understand how the cycle behaves in order to make a good
assumption of future profits. This is possible to do but in general PE firms prefer non-volatile
companies with predictable and stable cash flows. Other factors that the respondents look at are
profit margin and CAPEX. CAPEX is important, if your target needs big investments in order to grow, it
is not such an interesting investment for the PE firm. Low entry multiples, EV/EBITDA, is needed in
order to exit the holdings with a profit. Worst case scenario is if the EV/EBITDA multiple drops during
the holding period. This is referred to as a multiple contraction and should by all means be avoided.
Instead sponsors want to see the multiples grow up to the point of an exit. A multiple arbitrage
boosts the PE firms return. Therefore companies that trade at low multiples are potential targets.
Here distressed companies could be worth looking into as those often have low earnings and
therefore low EV’s.
Specific key ratios tracked in the PE industry are, EV/EBITDA, EV/EBITA, EV/Sales, EV/Cash flow and
(EV-CAPEX)/Cash flow.
“A good deal has an EV/EBITDA entry multiple between 6X-10X.”
“We avoid companies with EV/Sales above 2X.”
“EV/Cash flow should not be more than 10X.”
The key ratios are often used as a sanity check of the target. If key ratios are ok, soft factors such as
industry, management, business model, market position etc. are often the ones deciding whether to
take on the investment or not.
22
Taking the above characteristics into consideration non-cyclical, stable industries such as healthcare
are often good at producing LBO candidates. CAPEX light industries such as the service sector where
expenditures typically are small and cash flows often large should also provide a solid ground for
finding suitable targets. When looking for growing sectors, public outsourcing is such a sector where
there has been a lot of LBO’s recently. An idea is to find sectors exposed to underlying positive
emerging trends. One of those could be the fast food industry in Sweden even though it is not
traditionally CAPEX light. As growth is important, high growths often mean high EV’s. Therefore it can
be hard for PE firms to compete with industrial actors and IPO’s over companies with extremely
strong growth rates.
4.2.10 Valuation Models

In order to evaluate LBO’s all of the respondents used their own LBO valuation model. Calculations
are made in-house and most of the efforts consist of deriving reasonable input variables. Comparable
companies and comparable transactions models are used in order to derive input such as reasonable
entry and exit multiples to the LBO model. Some of the interviewed firms used investment banks as
helpers in their work with looking at peers. No one used the DCF valuation model to any greater
extent. Most firms never used the DCF model as they said its output is too sensitive to changes in the
perpetuity growth rate. Those firms that actually used the DCF model did it only occasionally if data
on peers were not available.
“An LBO model has a practical approach and reflects reality as opposed to the DCF model which is
strictly theoretical. We do not use the DCF model in our daily work. The LBO model tells us how much
money we will make on the deal. The DCF model does not.”
No one of the respondents wanted to share their LBO models with the author of this thesis as these
calculations were highly confidential. In their LBO models, all of the firms in the survey use a couple
of scenarios. In order to evaluate the transaction to its fullest extent they typically use a base case, a
management case, an ambition case and a bank case. The base case is used in order for the PE firm
to evaluate the deal. The management case is based on numbers given from the management of the
portfolio company and the ambition case is used as a best case scenario. The bank case has a
somewhat pessimistic setup of inputs. Therefore it gives a lower result. Due to this, the bank case is
used when presenting the deal to the lending bank. This assures that the covenants set up by the
bank will be somewhat low and therefore possible to adhere with.
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4.2.11 Exit Multiple
The exit multiple is an essential part of the LBO model as it determines the value of the target at the
time of an exit. All of the interviewed PE firms used the value of the entry multiple as exit multiple in
their calculations. Off course all investors want to sell their portfolio holdings at the highest possible
multiple. However, this is not accounted for in the model and profits above the entry multiple is
considered a bonus. As described in chapter 4.2.9 a multiple arbitrage is preferred while a multiple
contraction is often severe for the profit of the LBO. In order to get an understanding for what
reasonable entry/exit multiples would be, comparable companies and comparable transactions
models are used. Another useful approach is to look at the targets historical multiples in order to get
an indication of attractive levels.
“In an LBO model we use the same entry multiple as exit multiple, unless you can motivate why you
should increase the multiple during the holding period. One such case could be if you buy a cyclical
company when it is extremely low valued.”
4.2.12 Tracking of Financial Statements

Most firms track the financial statements of their targets as long back as possible. In reality the
recent 3-5 years is of most interest but tracking longer back in time can give a good feel for the
company’s cyclicality. If large structural changes have been made in the target company, financial
statements before those changes are of lesser importance as they do not reflect the current
company that good. The same argument holds for the comparable companies and comparable
transactions models. Here, only recent figures and transactions are of interest. Old figures on comps
do not reflect the current market and should therefore not be used for valuation purpose.
4.2.13 Due Diligence

The due diligence is a complicated process where every aspect of the target company is evaluated in
order to understand how the company works and what risks are associated with the investment.
Financial-, tax-, legal-, insurance-, environmental-, management- and commercial-due diligence are
often done before a transaction. The financial D.D. checks the financial data such as balance sheets
and income statements. Legal D.D checks contracts, patents etc. An environmental D.D looks for risks
associated with environmental issues. As lawsuits for polluting the environment often are expensive,
this part of the D.D can sometimes be important. A complete D.D is seldom done in-house. Here
most firms contract consultants such as McKinsey, Bain or BCG etc. Sometimes PE firms have the
competence to carry out certain parts of the D.D while others are outsourced. A D.D normally takes
2-3 months but can be done in 4 weeks if needed. Due to the fact that the D.D is a somewhat costly
process, a “letter of intent” is written before the PE firm starts the D.D. A letter of intent gives the PE
firm exclusive right to buy the target during a specific time frame. If the result of the D.D is ok, a
“purchase agreement” is written and the deal is closed.
“We spend a lot of money on management consultants. This is done in order to understand the
market. Getting help from the outside is especially interesting when acting on foreign markets.”
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4.2.14 Debt Instances
The question regarding debt instances aimed to create a better understanding for the different debt
instruments used in an LBO on the Swedish market today. The answers revealed a somewhat simpler
debt structure than the one prepared in the created LBO model. Due to a non existing market for
high-yield bonds in Sweden, this debt instrument is seldom used in a transaction on the Swedish
market. Also covenant light loans such as 2nd lien are rare. Similar, using mezzanine as a part of the
financing is not done to any bigger extent according to respondents. However mezzanine can be used
in order to increase the leverage level. A common covenant from banks is not to provide debt capital
over 3,5X EBITDA. Here mezzanine can be used in order to add 1X EBITDA on top of that. This makes
the maximum debt level 4,5X EBITDA with the use of mezzanine. As always, this figure is highly
transaction specific and varies with the associated risk of the target company and the current
condition of the credit market. In addition to the debt/EBITDA multiple banks today are looking at
the debt/equity ratio when deciding on the size of debt that they provide. Given the current market,
banks are unwilling to finance deals with more than 50% debt.
The interviews gave a clear picture of the regular debt structure and interest rate levels in an LBO
today. There is always a credit line present. This is used to finance peaks in CAPEX and net working
capital. Here a revolving credit facility is common. Typical commitment fee on the revolver is 1%.
Margin on the revolver is approximately 3.5%. Arrangement fee on total debt is around 4% and
margins for senior debt are typically 3%. Senior debt used in transactions are often term loans in the
form of tranche A, B and C. Tranche A margin is 2.5%, tranche B margin 3.0% and tranche C margin
3.5%. Repayment plans of term loans vary from tranche to tranche but usual repayment plans are
straight amortization and bullet repayment. The common base rate used is STIBOR but is it not
uncommon to use SWAP instruments in order to hedge the interest rate risk. Here market rates of
SWAP´s are used. In the case of mezzanine financing a margin of 15% with 50% cash contribution is
reasonable today.
4.2.15 Cash Reserve

If there is a large cash reserve within a target company, it could be used to repay as much as possible
of the loans during the first year of the holding period. However, a normal scenario is to use a bridge
loan facility as part of the debt structure. The bridge loan amounts to the free cash of the firm minus
minimum cash level and is held for a short time until the PE firm has acquired control of the target.
After that the bridge loan is fully repaid with the free cash of the firm. This construction keeps term
loans as low as possible and decreases the interest rate costs of the LBO. Another smart solution is to
pay out the cash as dividends before the acquisition of the target. This lowers the EV of the target
and by doing so the PE firm avoids paying a premium on the cash holdings of the company.
In reality, it is common to keep the free cash of the target at a minimum level during the holding
period. The minimum cash level is used as a safety for temporary peaks in the net working capital. It
is also necessary to keep a certain level of cash within the firm not to distract the management. On
the other side, every investor should aim at keeping the cash level as small as possible. Otherwise it
is a waste of financial resources. Minimum cash level used in the LBO valuation model is highly
depending on the size of net working capital but a reasonable min cash level could be 5% of sales.
Some of the respondents claimed that they did not use a min cash level in their LBO model due to its
small impact on the result.
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4.2.16 Future Outlook on the LBO Market
All respondents were convinced that the activity on the LBO market will increase during the next
years. Reasons for this are increasing willingness from the banks to lend money. Current multiples
are attractive as they are below historical levels. PE firms have a lot of capital waiting to be invested
and many portfolio companies that they want to exit within the next years. Many industrial actors
have been waiting with the restructuring of their companies. Also, industrial buyers will have more
capital when the economy grows. Growing revenues are already in-priced at the stock market but
not in the PE setting. This makes PE an opportunity for investors seeking an upside to their portfolio.
“In the future we will see higher demands on PE funds that want to continue being successful. During
2005-2007 it has been easy to make a profit on investments. Any firm could buy a company with
borrowed capital and wait for the multiples to increase. That kind of behavior will not be successful
during the next years. In the future you need to have an ability to actively grow the company instead
of just being a passive owner. This will increase the pressure on PE firms and investors will abandon
those PE firms that they do not think will be able to create value. This means a tougher climate on
the PE market in the future.”
“It will beyond all doubt be an attractive market to act on in the future.”
“Right now is an attractive time to buy.”
“Buy, buy and buy!”
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4.3 Characteristics of a Strong LBO Candidate
The study conducted on Swedish PE firms revealed a set of company characteristics essential for
choosing a suitable LBO target. These are.
 Strong and predictable cash flows.

 Leading and defensible market position.
 Realizable growth opportunities.
 Efficiency enhancement opportunities.
 CAPEX light, small initial investments.
 Strong asset base.
 Low entry multiples.
 Competent management whose objectives are aligned with the strategy of the PE firm.
 Moderate leverage level.
 Strong owner structure.
 Exit should be possible after the holding period.
It is necessary for a suitable LBO candidate to generate strong and predictable cash flows. This is due
to the large part of debt in the capital structure of the post-LBO firm. Strong cash flow is needed in
order to fulfill bank covenants while paying interest, fees and amortization of the debt. Strong cash
flows are often provided by mature companies with a large existing customer base, proven business
model and well known brand name. In order for a company to have a strong stable cash flow they
often operate in a non-volatile market or a non-cyclical industry. If the target is a cyclical company it
is extremely important to understand the business cycle in order to predict future cash flows. Also,
understanding the cycle is essential for entering the investment when it is low valued due to low
earnings.
The target should have a leading and defensible market position meaning that it should be hard for
competitors to take large market shares from the company. This is often the case in industries were
extensive R&D, investments, technology or patents are needed in order to enter the market. Another
entry barrier is brand name. Being a well known and respected brand often means a larger market
share and therefore stronger sales figures than the competitors. Companies with strong market
position and brand name are often able to generate stronger cash flows with lesser CAPEX’s than
targets with a weaker brand and position. The point regarding market position is very much related
to strong cash flows discussed above.
Realizable growth opportunities ensure that it is possible for the company to grow during the holding
period. Here organic growth such as projected sales growth from estimates is important. Also
acquisition driven growth should be taken into consideration. In many cases synergy effects could be
achieved from mergers with new companies or other portfolio companies held by the PE firm. In
order to find growth opportunities it should be useful to look at underlying emerging trends. Strong
growth means an increased EBITDA which makes it possible for the company to take on more debt
and still fulfill the covenants. Bigger companies should also in theory benefit from economies of scale
and therefore get a better profit. Also if growth is significant, there is a possibility that there will be a
multiple arbitrage when exiting the holdings.
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PE firms try to create value in their portfolio companies by improving operational efficiencies and
cutting costs. In order to realize this there has to be room for efficiency enhancement in the target
company. Cutting costs is often done by lowering overhead costs, reducing personnel, streamlining
production, shortening the supply chain or implementing new management information systems.
When engaging in operational efficiency improvements, PE firms often look at best practice
companies in order to evaluate improvement possibilities in their holdings. If an LBO target has no
room for operational improvements or cost cutting measures it will be hard for the PE firm to add
value to the company during the holding period. Therefore it is essential that the target has a
potential for efficiency enhancement.
Many of the interviewed PE firms mentioned how important it was for an LBO target to be CAPEX
light. Being CAPEX light means that the company has low capital expenditures. All else being equal,
low CAPEX requirements enhance a company’s cash flow generation capabilities and therefore
increase the debt level which the company can bear. As a result, the best LBO candidates tend to
have limited capital investment needs. However, a company with substantial CAPEX requirements
may still present an attractive investment opportunity if it has a strong growth profile, high profit
margins and the business strategy is validated during due diligence. Also, companies that normally
have high CAPEX requirements could be interesting if they are fully invested at the time of the
buyout. For instance a manufacturing company that traditionally has high CAPEX’s could be an
interesting LBO candidate if their plant & equipment is up to date and do not need an upgrade during
the next years. In general it is important that the LBO candidate do not need a large initial
investment in order to be profitable.
Having a strong asset base is essential for raising debt in the leveraged loan market. As the targets
assets acts as collateral for their loans, assets are immediately affecting the achievable leverage level
of the post-LBO firm. A strong asset base also indicates high entry barriers into the targets market
because of the substantial capital investment required. This assures that the targets market position
can be defended against competitors. See discussion regarding defensible market position above.
Being able to enter the investment at a low multiple is an important criterion for a successful LBO. In
order to allow for a smooth and timely exit procedure the target must be reasonably priced.
Investing in companies with low entry multiples decreases the probability of a multiple contraction
during the holding period. It also increases the chance of a multiple arbitrage which often means
superior return to investors. Companies that trade at low multiples are potential targets. Here,
distressed companies could be worth looking into as those often have low earnings and therefore
low EV’s. Important entry multiples are EV/EBITDA, EV/EBITA, EV/Sales, EV/Cash flow and (EV-
CAPEX)/Cash flow. Suggested levels on entry multiples are EV/EBITDA below 10X, EV/Sales below 2X
and EV/Cash flow below 10X. The key ratios provide as a sanity check of the target. If key ratios are
ok, soft factors such as industry, management, business model, market position etc. are often the
ones deciding whether to take on the investment or not.
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Having a competent management team of the portfolio company whose objectives are aligned with
the strategy of the PE firm is important in order to develop the target in the right direction during the
holding period. If the management of the company fails in delivering well enough results, the PE firm
can replace them with executives expected to do a better job. Often as a PE firm steps in as the new
owner of a company they exchange some of the previous board members for professionals that they
think will steer the company in the right direction. It is also common for the PE firm to appoint
candidates to certain management positions in order to assure that the company is run in a way that
adheres to their strategy. The high levels of debt in the financial structure of portfolio companies
after an LBO transaction places greater demands on the management to operate the company more
efficiently. Because free cash flow is committed to service debt, management’s ability to use
available funds appropriate is crucial. Here management incentives such as ownership stakes are
often used in order to align management’s interests with those of the PE firm.
The target should have a moderate leverage level in order to be a suitable LBO candidate. As PE firms
use increased leverage as a tool for gearing the company through the LBO there must be room for
increased debt in the targets financial structure. One part of the value creating process in an LBO is
to create an optimal capital structure of the target and thereby minimizing tax payments. Companies
with already large tax-shields will not see the same increase in net income due to the LBO. Therefore
companies with high debt/equity ratios are not the best candidates for an LBO.
In order to acquire a company for a reasonable price the owner structure of the target plays an
important role. A suitable LBO candidate should have a strong owner structure with few major stock
holders. As owners with less than 10% of the shares cannot affect the premium level of the deal,
focus should be on getting an acceptance on the bid price from majority owners. Being able to
discuss the premium with few strong shareholders increases the possibility to achieve an agreement
at a lower cost. A strong owner structure also counteracts the chance that actors with a corner
position in the company declines the bid from the PE firm.
The last point to take into consideration, when finding a suitable LBO target is the possible exit
strategies at the end of the holding period. Some companies are too small for an IPO. Others might
just not be appreciated by the stock market. Current market conditions can hinder certain exit
alternatives as well as premiering others. Such factors are often hard to now on forehand. However,
before deciding on a target company a reflection upon possible exit strategies are necessary. Here
investments with several feasible scenarios are in general, preferred before alternatives with a single
possible exit strategy.
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5 The LBO Valuation Model
In real life, professional investors use their own valuation models in order to estimate expected
returns and in the end decide whether to take on a deal or not. In the world of finance these models
are often regarded as “hard currency” and reflect the core competence of the investment firm. The
models are essential tools for acting on the market and in many cases the differences in valuation
approach explain why some investors are more successful than others. Because of this valuation
models are treated as corporate secrets and not public information. The following arguments explain
why it is hard for an “outsider” to get a hold of accurate financial models used in the industry today.
However, it should be stated that the fundamentals in the different models are the same. When it
comes to LBO valuation it is all about deriving “free cash flow” available for repaying debt. As
calculated free cash flow is used to repay debt, the value of equity is increasing. This increase is
calculated as IRR and cash return which both is measures of profitability of the LBO. The complete
LBO valuation model is attached in appendix I. For input assumptions used in the model see chapter
6, input & assumptions.
5.1 Equity Purchase Price & Enterprise Value

When buying out a public target equity purchase price is calculated as the product of offer price per
share and fully diluted shares outstanding. Offer price per share reflects the current market price of
the stock. In addition to this a premium or a so called sweetener is paid on top of the offer price to
assure that the stockholders accept the bid. The premium varies from deal to deal but historical
levels have been somewhere around 10-20% (Giddy 2009). Fully diluted shares outstanding is the
total number of shares that would be outstanding if all possible sources of conversion such as
options, warrants and convertible securities were exercised. In the model offer price per share is set
to 67.00 SEK.
Björn Borg offers two incentive schemes based on warrants in the company. See chapter 6, input &
assumptions for details on those. Figure 4 shows the calculation of in-the-money shares and
proceeds from the exercise of warrants in the incentive schemes.
Figure 4: New shares from in-the-money warrants and proceeds from the exercise of warrants.
The offer price per share is greater than the exercise price for tranche 2 warrants. This means that
the total number of in-the-money shares from the incentive schemes are 1 250 000. At the
initialization of the LBO, the proceeds from the sale of these shares are used to buy back shares from
the market. Proceeds from the sale of shares in each tranche are calculated as exercise price
30
multiplied with in-the-money shares. Total proceeds from the sales of in-the-money shares are the
sum of proceeds from each tranche.
Figure 5: Calculation of fully diluted shares outstanding.
Number of basic shares outstanding is taken from the yearly report (Björn Borg AB 2010) and
amounts to 25 148 384. Shares from in-the-money options were calculated above. In order to arrive
at the number of shares repurchased, total proceeds from the sales of in-the-money shares are
divided by offer price per share. Figure 5 shows how fully diluted shares outstanding are calculated
as basic shares outstanding plus, shares from in-the-money options less, shares repurchased. As
there are no other convertible securities in Björn Borg, fully diluted shares outstanding equals
25 487 190.
Figure 6: Calculation of equity purchase price and enterprise value.
Figure 6 is showing the equity purchase price and enterprise value. In order to calculate enterprise
value, cash and cash equivalents is subtracted from the sum of equity purchase price, total debt,
preferred securities and non-controlling interest.
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5.2 Income Statement
Appendix I show the complete income statement calculated in the LBO valuation model. The income
statement consists of an historical period and a projection period. Numbers in the historical period
are taken from the targets historically reported financial data (Björn Borg AB 2009) and (Björn Borg
AB 2010). Projected sales growth during the holding period is depending on the operating scenario.
See chapter 6 for used scenarios. Prognosticated figures on cost of goods sold, SG&A and
depreciation & amortization is calculated from their historical percentage levels of sales.
LTM in the historical period stands for “Last Twelve Months” and is normally the calculated last
year’s financial numbers on the day of the calculation. In order to simplify calculations, the model is
using the annual report of 2009 as the LTM period. This means that the calculations are assumed to
be done on the 1st of January 2010. The Pro forma column in the income statement is adjusted to
reflect an approximation of the targets current situation according to until actual date of calculations
released financial data.
The projection period used spans from one to ten years. This means that an exit can be done
somewhere in the period ranging from one, up to ten years with the interval of one year. Forecasts
of financial data are rarely available for more than five years ahead. Due to this all forecasted
numbers in year five are assumed to remain unchanged until year ten.
Figure 7: Part of income statement.
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The dark fields in figure 7 marks cells for input data. The other cells show results of calculations.
Historical data for sales, cost of goods sold, SG&A and depreciation & amortization are taken from
the targets financial statements. The spreadsheet calculates sales growth, gross profit, EBITDA12,
EBIT13 etc. Figures for the projection period are calculated from the income statement assumptions,
shown in the bottom of the income statement in appendix I. Assumptions such as sales growth, cost
of goods sold, SG&A etc. are calculated from historical levels of sales as described above. In the
income statement assumptions, interest income and tax rate is stated. Interest income is the interest
rate received on capital invested by the company. Tax rate is the Swedish corporate tax rate.
The lower part of the income statement reflects interest expenses from loans taken in order to
finance the buyout. This is described in more detail under section 5.5 debt schedule. Net interest
expense is worth extra notice as this number is the tax shield subtracted from EBIT before the tax
expense is calculated. The tax shield creates leverage by decreasing taxable income due to the high
levels of debt in the targets capital structure. The tax shield is essential in an LBO and gives
companies with high debt/equity ratios the benefit of a lower tax expense.
Another key figure in the income statement that should be watched closely is EBITDA as it gives a
first indication of the targets ability to service debt. Further, net income is important as it is used in
the cash flow statement in order to arrive at the free cash flow or the ending cash balance of the
firm.
5.3 Balance Sheet

Appendix I show the complete balance sheet calculated in the LBO valuation model. The balance
sheet matches total assets with total liabilities and equity. In order for the sheet to balance total
assets should always be equal to total liabilities and equity. This is assured by the balance check at
the end of the sheet. When the balance check is zero, total assets are equal to total liabilities and
equity. Another important aspect of the balance sheet is the net working capital needed by the
target each year. The change in net working capital is used in the cash flow statement in order to
arrive at the free cash flow or ending cash balance of the firm.
In order to arrive at the pro forma balance for 2010, certain adjustments have to be done from the
opening balance of 2010. These adjustments are due to the restructuring of the target company
during the LBO process. The largest adjustments are changes in the debt structure, shareholders
equity and the creation of goodwill.
12
EBITDA is Earnings Before Interest, Taxes, Depreciation and Amortization.
13
EBIT is Earnings Before Interest & Tax. It is sometimes referred to as “operating profit” or “operating
income”.
33
Figure 8: Adjustments to the balance sheet due to the financial restructuring of the target.
The LBO creates an increase in goodwill and intangible assets for the target company14.The added
goodwill value is calculated as equity purchase price plus premium minus existing book value of
equity. The created goodwill is added onto the existing goodwill in order to arrive at the new
goodwill for the company. For Björn Borg, goodwill of 1 588.3 MSEK is created due to the LBO. This
number assumes a premium of 20%. Other asset that is created from the restructuring of the
company is deferred financing fees. These fees are added to the firm’s assets in the pro forma
column.
The debt structure of the post-LBO firm is completely different to the pre-LBO firm. In the balance
sheet, adjustments to the debt structure are visible. New debt is added in the form of term loans,
mezzanine and high-yield bonds depending on the used financing structure15. While new debt is
issued, the old debt is paid off. Björn Borg has no existing utilized credit facilities. However, non-
14
If equity purchase price is less than existing book value no goodwill is created. However, this is not a normal
scenario in an LBO.
15
This debt structure is just an example of how new debt can be issued. In an LBO analysis several debt
structures are tested in order to find the most suitable debt structure for the target.
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current liabilities include a reported liability to the seller of the Björn Borg trademark totaling to 40.9
MSEK. This debt together with deferred tax amounting to 40.0 MSEK is paid off in the LBO. As seen in
figure 8 these liabilities are zero in the pro forma column, this means that they are fully paid off. Also
in the LBO, the pre-LBO shareholders equity is replaced with the newly issued equity of 1614.8 MSEK.
This means that shareholders equity in the post-LBO firm equals to 1614.8 MSEK.
5.4 Cash Flow Statement

Appendix I show the complete cash flow statement calculated in the LBO valuation model. The cash
flow statement describes the projected cash flows for the company during the holding period. It
describes how cash is used by the firm on a year-to-year basis. The company’s cash flow is used for
net working capital, investing activities such as capital expenditures known as CAPEX16 and essentially
financing activities which is repayment of debt. Often in an LBO transaction, management wants to
keep the ending cash balance of the firm at a minimum level each year. The minimum cash level acts
as a safeguard against unforeseen expenditures. In the constructed model, a function called “cash
balance” uses cash from the balance sheet to repay debt. When cash balance is switched off, cash
from balance sheet is not used to repay debt. Instead it is left untouched in the balance sheet. The
cash balance function also allows for keeping a minimum ending cash balance each year even though
the cash from the balance sheet is used for amortization. By enabling cash balance and entering a
minimum cash level in the debt schedule, cash from the balance sheet minus min level of cash will be
added to cash available for optional debt repayment. This assures that the ending cash balance of
the cash flow statement will be kept above the min cash level each year even though cash from the
balance sheet is utilized for paying down debt.
Figure 9: Calculations of cash flow from operating activities.
16
CAPEX is funds used by the company to acquire or upgrade physical assets such as property, industrial
buildings and equipment.
35
The cash flow statement works its way down to ending cash balance each year during the projection
period in the following way. First, cash flow from operating activities is calculated as shown in figure
9. Starting with net income, depreciation and amortization is added back. This is just an accounting
principle in order to arrive at the actual cash flow into the firm. Amortization of financing fees is also
a non-cash expense that is added back to the net income in the post-LBO cash flow statement. After
that, changes in the net working capital NWC are presented. Here it is important to recognize if the
change in NWC is expressed as a positive (decrease in NWC) or negative (increase in NWC) number.
An increase in accounts receivable is expressed as a negative number in the cash flow statement.
This is due to the fact that an increase in accounts receivable means the spending of cash which will
increase the NWC. The same logic goes for inventories, prepaid and other current assets. Similar an
increase in accounts payable, accrued liabilities or other current liabilities is a source of cash and
gives a decrease in NWC. Therefore an increase in accounts payable, accrued liabilities or other
current liabilities is presented as a positive number. The sum of all changes in the working capital
items gives an increase in NWC of 1.2 MSEK in year 1. In order to arrive at cash flow from operating
activities the increase in NWC is subtracted from the sum of operating activities.
Figure 10: Calculations of ending cash balance.
36
After the calculation of cash flow from operating activities, cash flow from investing and financing
activities are calculated. This is done in order to find the ending cash balance. Investing activities
consists of CAPEX as described above. To estimate yearly CAPEX during the projection period an
assumption of CAPEX as a percentage of sales is calculated from financial statements. Financing
activities are repayment of loans issued for the LBO. These repayments are only amortizations as the
net interest expense is already included in the net income. Under financing activities posts for
dividends and equity issuance/repurchase are also found. In the calculated scenario, both those
posts are set to zero. This is a fair assumption given the fact that credit issuers often places demands
on a non dividends policy in order to secure the repayment of their loans. At the end of the cash flow
statement ending cash balance is calculated. If no minimum cash balance is set in the debt schedule
and cash balance plus cash flow sweep is active, ending cash balance will be zero as long as the firm
has unpaid debt. In such a case all of the free cash in the firm will be used for repayment of debt. If
cash flow sweep is not active, only the mandatory fees including interest rates connected to the
loans will be paid.
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5.5 Debt Schedule
Appendix I show the complete debt schedule of the LBO valuation model. The debt schedule
describes the different issuances of debt that the target firm has done in order to finance the LBO. It
typically consists of a revolving credit facility, term loan facilities, mezzanine debt and the issuance of
corporate bonds.
In the developed LBO valuation model a SWAP rate of 10 years is used in order to hedge the debt
from fluctuations in STIBOR. Another benefit from using a SWAP instrument instead of STIBOR is that
no assumptions of the future STIBOR curve has to be made. This further increases the accuracy of the
model. For spreads, terms, coupons, fees and other vital information associated with each debt
instance see chapter 6 input & assumptions.
Figure 11: Calculations of cash available for optional debt repayment.
Figure 11 shows the SWAP rate used in the calculations and the cash available for optional debt
repayment year 1 and 2. The 10 year swap rate is taken from (SEB 2010) in order to capture the
current market conditions.
In the beginning of the debt schedule, cash available for debt repayment is calculated. This is done by
subtracting cash flow from investing activities (a negative post) from cash flow from operating
activities. After that, total mandatory repayments are subtracted from the post cash available for
debt repayment. Notice how interest rates as well as the commitment fee on unused revolver are
accounted for when arriving at cash available for debt repayment. As interest rates and fees are paid
before tax, they are already deducted in the net income and therefore also in the cash flow from
operating activities. Total mandatory repayments are the sum of all mandatory debt repayments
excluding interest rates and fee on unused revolver. Mandatory debt repayments are done on debt
instances such as the term loan facilities. Making mandatory repayments is a demand from the credit
provider in order for them to supply financing.
38
After subtracting total mandatory repayments, cash from balance sheet minus min cash is added
before arriving at cash available for optional debt repayment. The min cash cell can be changed in
order to secure a suitable minimum ending cash balance of the target. Cash from balance sheet is the
amount of cash and cash equivalents stated in the pro forma column of the income statement. If
there is any cash in the post-LBO firm this capital can be used for debt repayments during the
projection period. However, in many LBO’s the cash available in the firm is used to finance the
buyout. In those cases a bridge loan facility or similar could be used. Doing so will decrease the
amount of debt needed to complete the transaction and can in some cases give more positive key
figures when presenting a deal to investors. This is a somewhat risky approach due to the fact that it
leaves the post-LBO firm with a low ending cash balance therefore it will be more exposed to
financial distress. The previous argument explains why the constructed model in this thesis does not
use the cash available in the firm as a source of funding for the LBO.
When calculation of cash available for debt repayment is done, each credit facility is calculated on its
own.
Interest rates are calculated as SWAP rate plus spread. An option cell in the transaction summary
makes it possible to calculate interest expense in two ways. If the “toggle bit” is set to 1, the average
interest method is used. If toggle is 0, interest expense is calculated as interest rate multiplied with
ending balance. This is a simplified way to calculate interest expense and does not reflect reality as
good as the average interest calculation. Due to the fact that interest is paid continuously during the
year17, the average interest method is a more accurate way to calculate interest expense.
𝐵𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔 𝐵𝑎𝑙𝑎𝑛𝑐𝑒 + 𝐸𝑛𝑑𝑖𝑛𝑔 𝐵𝑎𝑙𝑎𝑛𝑐𝑒

𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑥𝑝𝑒𝑛𝑠𝑒 = 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑅𝑎𝑡𝑒 ×
2
In the average interest method, average interest expense is calculated as interest rate multiplied
with the mean value of beginning- and ending-balance.
𝐵𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔 𝐵𝑎𝑙𝑎𝑛𝑐𝑒 + 𝐸𝑛𝑑𝑖𝑛𝑔 𝐵𝑎𝑙𝑎𝑛𝑐𝑒

𝐶𝑜𝑚𝑚𝑖𝑡𝑚𝑒𝑛𝑡 𝐹𝑒𝑒 = 𝐹𝑒𝑒 𝑜𝑛 𝑈𝑛𝑢𝑠𝑒𝑑 𝑃𝑜𝑟𝑡𝑖𝑜𝑛 × 𝑆𝑖𝑧𝑒 −
2
Further, commitment fee on unused revolver is calculated as stated above.
Credits are repaid during the projection period as shown in the debt schedule. Ending balance each
year equals beginning balance next year and yearly repayments are derived from cash available for
optional debt repayment. As available cash is used up, optional repayment of the loans are
prioritized according to their seniority over each other. In the constructed LBO model, junior loans
are amortized after more senior credits. Repayment schedules differ between the loans. The revolver
can be borrowed and repaid freely until its maturity. However, it is usually undrawn at maturity.
Term loan A has a repayment schedule with fixed amortization rates each year until its closing, while
TLB and TLC has a percentage of their size as annual amortization with a bullet18 at maturity. As
described above, when repaying debt, TLA is prioritized over TLB, TLB is prioritized over TLC and TLC
is prioritized over 2nd lien etc.
17
In a real life scenario, interest rates is paid monthly not yearly as the simplified interest calculation method
assumes.
18
A bullet repayment or “bullet” is a single payment of the entire existing loan amount, which is paid at
maturity.
39
As seen under financing structures in assumptions page 3 of the LBO valuation model, appendix I, the
revolver is not used as a funding of the LBO. Instead the revolving line of credit acts as a backup for
ongoing liquidity as well as support for seasonal working capital needs. This is done with so called
revolver draws. In the constructed model no revolver draws are utilized as it is hard to prognosticate
future working capital fluctuations without having a detailed insight into the targets business.
In the created valuation model existing term loans are fully paid back with the pro forma
adjustments in the balance sheet. Therefore no payments are stated under the existing term loan
facility. However the model allows for existing term loans from the pre-LBO firm.
Amortization of 2nd lien debt is prioritized after TLC and repayments are calculated in the same way
as with TLB and TLC.
As mezzanine is a flexible debt instrument its repayment plan depends on how it is negotiated. In the
constructed model interest on mezzanine is paid yearly while optional amortization is free during the
term. However, the loan must be fully funded at its closing.
Issuance of High-Yield bonds is paid off as a coupon each year19 until maturity. At maturity the
principal is paid back. As bonds are a regulated financial instrument, coupons and principal has to be
paid on time. In the case of financial distress, senior notes are prioritized over senior subordinated
notes.
19
In practice, bonds generally pay interest on a semiannual basis.
40
5.6 Returns Analysis
Appendix I show the complete returns analysis from the LBO valuation model. The returns analysis
contains calculated return of the LBO. It reveals key figures such as enterprise- and equity-value for
each year during the projection period. From the equity value, cash return and IRR are calculated and
forms the output of the model.
In order to derive enterprise value at exit, the exit EBITDA multiple is used. In contrast to other
multiples such as the P/E ratio, an exit EBITDA multiple looks at the firm’s value from a potential
acquirer’s perspective as it takes debt into account. The exit EBITDA multiple is calculated as below.
𝐸𝑛𝑡𝑒𝑟𝑝𝑟𝑖𝑠𝑒 𝑉𝑎𝑙𝑢𝑒 𝑎𝑡 𝐸𝑥𝑖𝑡

𝐸𝑥𝑖𝑡 𝐸𝐵𝐼𝑇𝐷𝐴 𝑚𝑢𝑙𝑡𝑖𝑝𝑙𝑒 =
𝐸𝐵𝐼𝑇𝐷𝐴 𝑎𝑡 𝐸𝑥𝑖𝑡
The returns analysis starts with derived EBITDA for each year during the projection period. It then
shows enterprise value each year. Given the formula above, enterprise value each year is calculated
as the exit EBITDA multiple multiplied with EBITDA for the year. After that, total debt less cash and
cash equivalents are subtracted from the enterprise value in order to arrive at equity value.
Cash return is calculated as equity value divided by initial equity investment.
Last key figure to be calculated is IRR. The IRR can be translated to the growth rate of sponsor
invested capital in the LBO. IRR together with cash return are essential measures of the transactions
profitability. In order to attract source of funds, projected IRR and cash return must at least equal to
investors demands on return.
41
6 Input & Assumptions
6.1 Historical Income Statements

The complete income statement from the LBO model is attached in appendix I. Numbers for the
historical period in the income statement are taken from Björn Borg´s year end reports. Drafts from
these reports are attached in appendix V.
Figure 12: Historical financial data in the income statement.
Sales and cost of goods sold figures are taken directly from the annual reports. The Selling, general &
administrative post is calculated as the sum of distribution-, administrative- and development-
expenses. As the figures for distribution-, administrative- and development- expenses in the annual
income statement are adjusted for depreciation & amortization, depreciation & amortization has to
be added back in order to arrive at the pre depreciation & amortization SG&A expense. Figures for
this are taken from note 9 in the annual reports. Total depreciation & amortization for each year in
the historical period is also given from note 9. Figures 13 and 14 show the exact numbers. As Björn
Borg has no other expense, income or amortization, these fields are left blank in the model.
42
Figure 13: Depreciation & amortization on SG&A expenses for 2007 and 2008.
Source: (Björn Borg AB 2009)
Figure 14: Depreciation & amortization on SG&A expenses for 2008 and 2009.
6.2 Income Statement Assumptions

In the 2009 annual report (Björn Borg AB 2010), the board of directors has established financial
objectives for the period of 2010-2014. Among the objectives are an average annual organic growth
of at least 10% and an average annual operating margin of at least 20%. CAPEX for the same period is
estimated annually at 2-5% of net sales depending on whether any new Björn Borg stores are
opened. The growth rate objective for the period 2010-2014 is significant lower than the objective
from the 2008 annual report where the board had a goal of at least 20% annual sales growth rate
(Björn Borg AB 2009). The big difference should be explained by the financial downturn and the
general state of the economy. Consumption during the recent turbulence has been extremely low.
This is reflected in the more modest growth objectives in the latest report. However, as late 2009
and Q1 in 2010 indicates that the economy regains strength it could be that a 10% sales growth is a
bit low. Also as an LBO means that Björn Borg will have a new and more growth focused owner in the
form of a PE firm, it is natural to assume that the actual growth rate during the holding period will be
closer to 20%. As Björn Borg is a CAPEX light company it should be possible to increase sales with
limited operating risk and capital investment. Here the franchise model already adopted by the
company should facilitate a strong and stable growth during the next years.
The above arguments explain the sales growth used for each case in the LBO model. The base case
account for 15% annual sales growth as it is between 10-20%. Management case is somewhat more
optimistic and assumes a growth of 20%. The ambition case which is also the best case scenario
calculates with a 25% sales growth. In order to ensure that the target can fulfill demands on
covenants from debt lenders even if the growth are lower than expected, the bank case presented to
debt providers has a growth of 10%.
43
Cost of goods sold has during the last three years been between 46-49% of sales. Therefore it is
reasonable to assume that production costs in the future will be somewhere close to these figures.
As cost of goods sold vary with exchange rates, trade barriers, material- and labor- costs it can be
hard for Björn Borg to affect these numbers. Therefore the variations in cost of goods sold are quite
small between the different scenarios used in the LBO model. However, in theory it should be
possible to shrink the costs by negotiating contracts with suppliers, enhance procurement and buy
larger quantities. The base case assumes a slight improvement in cost of goods sold as it amounts to
46% of sales. In the management case the number is 43%. The ambition case assumes that the PE
firm is able to decrease cost of goods sold down to 40% of sales as a result of cost effective
measures. In the bank case cost of goods sold are assumed to be 49%, this figure means that no cost
improving activities are implemented.
Historically, selling general and administrative expenses for Björn Borg has been between 24-28% of
sales. This post consist of distribution- administrative- and development- costs. In order to decrease
those expenses, the PE firm is assumed to create a more efficient chain of logistics and cut
development costs. Off course there is a tradeoff between decreasing development costs and strong
growth. But in Björn Borg, it should be some room for expense reduction and in the same time
keeping the prognosticated growth. The following SG&A scenarios are used in the calculations, base
case 24%, management case 22%, ambition case 20% and bank case 26%.
Depreciation & amortization has been between 0.8-1.4% last three years. As depreciation &
amortization is done on SG&A and SG&A has been reduced in all cases except the bank case.
Depreciation & amortization has to be reduced in three of the scenarios. The assumed Depreciation
& amortization levels are base case 0.8%, management case 0.6%, ambition case 0.4% and bank case
1.4%.
The interest income is reflected by the general state of the bond market and the interest rates on
bank accounts. Therefore this number is the same in the base, management and ambition case. In
the bank case the interest income is set a bit lower as a safety margin for decreasing interest rates.
Interest income in the base, management and ambition case is assumed to be 1%. Interest income in
the bank case is set to 0.8%.
The tax rate used in the LBO model is the Swedish corporate tax rate which amounts to 26.3%
(Skatteverket 2010).
44
6.3 Opening 2009, In the Balance Sheet
The balance sheet from the LBO model is attached in appendix I. Inputs to the balance sheet in the
column “opening 2009” are taken from the 2009 annual report (Björn Borg AB 2010). Opening 2009
Cash and cash equivalents in the balance sheet are cash and bank balances in the annual report and
amounts to 296.484 MSEK. Accounts receivable are 38.032 MSEK. Inventories translate to trading
book, trading book is 26.455 MSEK. Prepaid and other current assets are the sum of tax assets, other
current receivables and prepaid expenses & accrued income. This makes prepaid and other current
assets = 7.370+3.227+17.090 = 27.687 MSEK. Property, plant and equipment have its own post in the
annual report and are declared to 11.150 MSEK. Goodwill and intangible assets are goodwill,
trademarks and other intangible assets added together. This makes goodwill and intangible assets
13.944+187.532+3.437 = 204.913 MSEK. As Björn Borg has no other assets or deferred financing fees
these fields are left blank.
Accounts payable are 15.480 MSEK. Accrued liabilities are accounted for as accrued expenses and
deferred income. Accrued liabilities are therefore 33.387 MSEK. Other current liabilities amount to
13.997 MSEK.
Björn Borg has pre-LBO debt in the form of deferred tax liabilities and non-current liabilities due to
purchase of the Björn Borg trademark. Deferred tax liabilities are 40.011 MSEK and non-current
liabilities are presented as 40.889 in the annual report. This makes the total amount of debt repaid in
the LBO, 80.900 MSEK.
Shareholders’ equity in the pre-LBO firm is 460.842 MSEK and is declared as the sum of share capital,
other paid-in capital, reserves and retained earnings. Minority interests or non-controlling interests
are accounted for 0.114 MSEK in the annual report. This makes total shareholder’s equity in the pre-
LBO firm 460.956 MSEK.
6.4 Balance Sheet Assumptions

The balance sheet assumptions are visible in appendix I.
Figure 15: Historical levels compared to sales.
45
Figure 15 show historical levels on balance sheet inputs compared to sales. In order to decide on
reasonable balance sheet input assumptions historical levels are used as a guideline. In reality, the PE
firm would take a deeper look into the financial statements of the target and look for possibilities to
shrink the net working capital. After a thorough review of the data they would be able to derive input
assumptions backed up by their assessments. In this thesis, input assumptions are formed from
looking at previous levels compared to sales. This is a simplification. However, for the purpose of this
thesis these assumptions are sufficient.
In the base case the 3 year mean value is used for all of the balance sheet inputs. This makes
accounts receivable 11.7%, inventories 5.5%, prepaid & other current receivables 4.5%, accounts
payable 5.4%, accrued liabilities 5.9% and other current liabilities 5.2%.
The management case has a more opportunistic view and assumes a certain decrease in the net
working capital. Here accounts receivable are expected to be 10%, inventories 5.3%, prepaid & other
current receivables 4.3%, accounts payable 5.7%, accrued liabilities 6% and other current liabilities
5.5%.
In the ambition case net working capital is expected to shrink substantially. This makes accounts
receivable 9%, inventories 5.1%, prepaid & other current receivables 4%, accounts payable 6%,
accrued liabilities 6.2% and other current liabilities 5.8%.
In order to create a more negative scenario the bank case figures are accounts receivable 15.2%,
inventories 6.4%, prepaid & other current receivables 5.3%, accounts payable 3%, accrued liabilities
5.4% and other current liabilities 2.7%. This case reflects a larger net working capital than the others.
6.5 Cash Flow Statement Assumptions

In the 2009 annual report (Björn Borg AB 2009), Björn Borg’s financial goals for the period 2010-2014
states that the capital expenditures are estimated annually at 2-5% of net sales. This figure depends
to a great extent on the number of stores opened during the year. In order for the company to grow
it is assumed that the number of stores are increasing and thereby increasing CAPEX. However parts
of a stable growth could be achieved by the help of franchise stores and increased revenues from
licensed products. These areas do not affect the CAPEX of the group. Therefore a stable growth
should be realizable without large increases in CAPEX. Also, the PE firm is assumed to shrink CAPEX
with a certain amount as part of their value adding activities. Historically, CAPEX have ranged from
0.3-3.1% of sales during 2007-2008. Input for CAPEX in the LBO model are base case 3%,
management case 4%, ambition case 5% and bank case 3%.
46
6.6 Financing Structures, Margins and Base-Rate
The financing structures used in the LBO model are derived from the study on Swedish PE firms. The
interviews revealed that PE firms, active on the Nordic market today, uses a revolving credit facility,
term loans and sometimes mezzanine in order to finance their LBO’s. Therefore the financing
structures in the LBO model are combinations of a revolving credit facility, term loan A facility, term
loan B facility, term loan C facility and mezzanine. Structure 3 and 4 also includes high-yield bonds,
reasons for this are explained below. Commitment fee on unused portion of revolver as well as terms
and margins on the debt instances are also derived from the study. Each financing structure is unique
in order to evaluate different debt structures impact on the return. The model allows for 5 different
structures but only 4 are used as this is enough to evaluate the Björn Borg case.
Revolving credit facility has a term of 10 years, a margin on 2.50% and commitment fee on unused
portion is 0.50%.
Term loan A has a term of 5 years, margin on 2.50% and straight amortization until maturity.
Term loan B has a term of 6 years, margin on 2.65%, mandatory repayment of 1.00% per annum and
bullet at maturity.
Term loan C has a term of 7 years, margin on 2.80%, mandatory repayment of 1.00% per annum and
bullet at maturity.
Mezzanine has a term of 10 years and a margin on 15%. Interest is paid as 100% cash contribution. As
mezzanine is an over the counter instrument with transaction specific repayment agreements, this
payback plan is realizable. However, often mezzanine interest is paid as one part cash contribution
with the rest paid as a payment in kind. Payment in kind is referred to as PIK. PIK means that the
interest is accumulating during the holding period and is paid off at the end of maturity. A normal
scenario is to have interest payments as 50% cash contribution and 50% PIK.
Björn Borg has no existing term loans and as deferred tax liabilities together with liabilities from the
purchase of the Björn Borg trademark is repaid in the LBO, no existing term loan is used in the
financing structures. Even though 2nd lien and high-yield bonds are not used as a part of the financing
structure of a mid cap LBO in Sweden today, the issuance of high-yield bonds are used in financing
structures 3 and 4. This is done in order to investigate the impact on return from a higher leverage
level. Another reason for including bonds in the structure is that some of the interviews revealed that
a use of high-yield bonds on the Swedish mid-market will emerge in the future.
High-yield bonds are assumed to have a maturity of 10 years and give the investors a yearly coupon
of 20%.
47
The base rate used in calculations is a 10 year swap instrument from SEB. Figure 16 show swap rates
with different maturities. The 10 year swap rate used in the LBO model is 3.16%.
Figure 16: Swap rates in SEK.
Source: (SEB 2010)
All of the used financing structures have a revolving credit facility size of 65 MSEK. The revolver acts
as a safety for increase in working capital needs. As the bank case has the largest working capital. A
revolver of 65 MSEK should be sufficient as it approximates 50% of the projected working capital
needs in year 5 of the bank case. It should be stated that 65 MSEK in revolver size could be a bit high
for the other cases but as the commitment fee on unused revolver is such a small part of the yearly
costs. It does not affect the result considerably.
Financing structure 1 assumes a revolver size of 65 MSEK, term loan tranche A of 420 MSEK and
Mezzanine debt of 120 MSEK. This is the most probable debt structure in an LBO of Björn Borg today
as banks seldom lend over 3.5X EBITDA in senior debt. Mezzanine is added in order to increase the
total debt to 4.5X EBITDA. These covenants are reasonable given the result from the study
conducted.
Financing structure 2 assumes a revolver size of 65 MSEK, term loan tranche A of 420 MSEK, term
loan tranche B of 60 MSEK, term loan tranche C of 60 MSEK and Mezzanine debt of 120 MSEK. This
structure has higher senior-debt/EBITDA multiple than structure 1. In order to achieve this trance B
and C instances are placed on top of tranche A. This is a reasonable debt structure given the fact that
tranche B and C has a higher margin than tranche A. Structure 2 increases the realizable accumulated
senior-debt/EBITDA multiple to 4.5X. Total-debt/EBITDA multiple in structure 2 is 5.5X.
loan tranche B of 60 MSEK, term loan tranche C of 60 MSEK, mezzanine debt of 120 MSEK and high-
yield bonds of 120 MSEK. This structure further increases the leverage level of the target with 1X
EBITDA compared to structure 2, by adding 1X EBITDA in high-yield bonds. Structure 3 has a total-
debt/EBITDA multiple of 6.5X. This scenario is not probable due to the fact that high-yield is not used
as a part of the financing structure in an LBO in Sweden. Also, a total-debt/EBITA multiple of 6.5X
would be hard to realize due to the inherent uncertainty in the prognosticated growth rate.
48
However, structure 3 has a value for this thesis as it investigates the higher leverage levels impact on
IRR and cash return.
loan tranche B of 60 MSEK, term loan tranche C of 60 MSEK, mezzanine debt of 240 MSEK and high-
yield bonds of 240 MSEK. It makes the total-debt/EBITDA multiple 8.5X and is therefore not
realizable in practice. This case is used for academic purpose and reveals how return of the LBO
would be if it was possible to increase debt/equity ratio close to 50%.
6.7 Financing Fees and Other Expenses

In a monthly loan market update from May 201020, debt capital markets at a leading investment bank
in the Nordic region reveals that arrangement fees of leveraged loans are between 4-4.5%. This
information gives the following financing fees used in the LBO model. Revolving credit facility
financing fee 4.0%, term loan A financing fee 4.0%, term loan B financing fee 4.0%, term loan C
financing fee 4.0%, mezzanine financing fee 4.5% and high-yield bonds financing fee 4.5%. 2nd lien-,
senior bridge facility-, senior subordinated bridge facility-financing fees and other financing fees &
expenses are left blank as there are no such fees in the Björn Borg case.
Besides the financing fees there are other costs associated with the LBO. The post “other fees and
expenses” are payments for services such as M&A advisory, legal, accounting and consulting. These
fees are estimated to 15 MSEK. Also an administrative agent fee is paid annually to the bank that
monitors the credit facilities including the tracking of lenders, handling of interest payments,
principal payments and associated back-office administrative functions. The administrative agent fee
is set to 1 MSEK annually.
20
Due to the confidential character of this information no further reference can be made.
49
6.8 Equity Purchase Price and Premium
Figure 17 show Björn Borg’s share price from the 12th of May 2009 to the 12th of May 2010. As the
calculation assumes that the LBO is done on the 1st of January 2010, the share price of 67.00 SEK
(Avanza 2010) at that time is used as the offer price per share.
th th
Figure 17: Björn Borg share price in SEK between 12 of May 2009 – 12 of May 2010.
Source: (Avanza 2010)
Basic shares outstanding at the end of 2009 are 25 148 384 (Björn Borg AB 2010). Figure 18 show
outstanding warrants at the end of 2009. In warrant scheme 2008:1 the outstanding warrants carry
the right to subscribe for 155 300 shares for 74.60 SEK per share. Warrant scheme 2008:2 has
1 250 000 outstanding warrants which translates to the right to subscribe for 1 250 000 shares for
48.84 SEK per share. With an offer price per share of 67.00 SEK only warrants in scheme 2008:2 are
exercised. This makes the total number of in-the-money shares from warrants 1 250 000, proceeds
from these shares are 61.050 MSEK. Net new shares from warrants are calculated to 338 806. As
there are no shares from convertible securities, fully diluted shares outstanding are basic shares
outstanding plus net new shares from warrants. Fully diluted shares outstanding amount to
25 487 190. With an offer price per share of 67.00 SEK equity purchase price is 1 707.6 MSEK.
Figure 18: Outstanding warrants at the end of 2009.
50
According to the interviewed PE firms, premiums today are in general 20-30% of the share price.
When looking at Björn Borg’s share price in the past, it is clear that 67.00 SEK is not close to its all-
time high over the last three years average, nor is the company’s earnings low compared to historical
levels. This indicates that the bidding premium should be on a somewhat normal level. Therefore it
should not be necessary with an exceptional bidding premium in order to acquire Björn Borg. Hence,
a premium of 20% is used in the valuation model. As figure 19 reveals, 86 shareholders own 81.5% of
the company. This strong owner structure with few major stock holders makes it essential to reach
accept from the big investors. None of the smaller owners has a corner position on its own.
Therefore, if the major players agree on the bid price it is very likely that the deal goes through.
A premium of 20% gives the Björn Borg shareholders 80.4 SEK for each share. This makes the total
call premium 341.5 MSEK.
Figure 19: Shareholder structure.
6.9 Exit Multiple

The study on Swedish PE firms revealed that all of the respondents used the entry multiple as exit
multiple in their LBO models. As Björn Borg is not valued at an extremely low EV/EBITDA entry
multiple, this is a reasonable assumption. Therefore the exit EBITDA multiple in the calculations is set
to the same level as the entry EBITDA multiple. The exit EBITDA multiple is 12.5X.
51
7 Analysis
7.1 Björn Borg’s Suitability for an LBO

Björn Borg is a Swedish company that owns and develops the Björn Borg brand. Fashion underwear is
their core business and largest product area. They also offer adjacent products as well as footwear,
bags, fragrances and eyewear. Björn Borg is currently represented in nearly 20 markets, the largest of
which are the Netherlands and Sweden.
Figure 20: Björn Borg 2009 percentage of brand sales per country and product area.
The following text is taken from the company’s latest annual report (Björn Borg AB 2010). The Björn
Borg brand was established in the Swedish fashion market in the first half of the 1990s. Continuity
has helped the brand to carve out a strong position in its established markets, particularly for its
largest product group, underwear. In the last four years Björn Borg has expanded to several new
markets, where the brand is in a start-up phase. The brand is recognized for quality products and
distinctive and innovative design. Their patterns and colors stand out, and a large variety of models
creates an exciting product range. Björn Borg is seen as a liberated Swedish brand of fashion
underwear, which is underscored by their motto: Playful, Vibrant, and Daring. A passion for
underwear and the courage to challenge the industry is clearly evident in their marketing
communications and product development. Björn Borg’s vision is to be The World Champion of
Fashion Underwear.
In 2009 Björn Borg signed agreements to launch its products in four new markets – Italy, Greece,
Portugal and Chile – through outside distributors (Björn Borg AB 2010).
In the U.S. market the aim is to find an outside partner to further develop operations (Björn Borg AB
2010).
During the holiday 2009 shopping season Björn Borg offered a sneak preview in Sweden of a
collection of boys’ underwear. Björn Borg is confident that a specially designed kid’s line for both girls
and boys will serve as an excellent complement to its other categories and create opportunities for
growth in both new and established markets (Björn Borg AB 2010).
52
7.1.1 Strong and Predictable Cash Flows
Björn Borg’s historical financial data from 2002 to 2009 (Dagens Industri 2010) shows a significant
year-over-year increase in the net income from 2002 to 2007. Starting at approximately 5 MSEK in
2002, net income increases up to 102 MSEK at the end of 2007. During 2008 and 2009 net income
has a small drop which makes it around 81 MSEK at the end of 2009. The small loss in net income
during the last two years could be explained by the general state of the economy where lower
general consumption patterns in the retail industry led to a decrease in sales among most of the
fashion companies. The growth trend from 2002 to 2009 reveals that Björn Borg’s net income has
gone from 5 to 81 MSEK in 7 years with a stable net income each year. As net income is the input for
deriving free cash flow of the firm. These figures could be translated into the historical cash flows of
Björn Borg. Figure 21 show that Björn Borg has strong and predictable cash flows and gives a first
indication that the company could be a suitable LBO target.
Figure 21: 2002-2009 net income of Björn Borg.
Source: (Dagens Industri 2010)
7.1.2 Leading and Defensible Market Position

As stated in Björn Borg’s latest annual report the brand is recognized for quality products with
distinctive and innovative design. They have a strong market position in established markets with
their current line of fashion underwear. Through innovative design and aggressive marketing it
should be possible for the company to maintain its leading market position and stay ahead of their
competitors. However, their business model contains a fashion risk component. It is always hard to
prognosticate the success of future products. Therefore, diversification of risk through expanding
other product areas and establishing new markets are important in order to assure a strong market
position in the future. Entry barriers for competitors are somewhat small as no heavy investments
are needed in order to launch a competing brand. Here, marketing and brand name are the two most
distinguished features that need to be administered in order to defend the current market position.
Assuming the new owner of the company is able to conserve the strong brand name and leading
market position in its niche, Björn Borg is a suitable LBO candidate in regards to its leading defensible
market position.
53
7.1.3 Realizable Growth Opportunities
The base case in the LBO valuation model assumes a yearly sales growth of 15%. This should be
realizable as Björn Borg plan to enter several new markets. Signed agreements to launch Björn Borg
products in, Italy, Greece, Portugal and Chile indicates an expansion throughout the next years.
Ambitions to penetrate the large U.S market further underpin the growth opportunity for the
company. An emerging trend that should be possible to benefit from is the current development in
China. Most high-end fashion brands are already present in China and as people living there are
eager to adapt to European fashion such a huge market could be a presumptive expansion possibility
in the future. New products in pipeline such as the kid’s collection together with a constantly
changing product range also argue for realizable growth opportunities. Expected growth for Björn
Borg is quite high and the above arguments provide an explanation to how growth targets should be
realized. Therefore, realizable growth opportunities indicate that Björn Borg could be a suitable LBO
candidate.
7.1.4 Efficiency Enhancement Opportunities

It is hard to pinpoint exact efficiency enhancement opportunities without extensive knowledge about
the company’s day-to-day operations. In general for retail companies, focus should be on cost cutting
activities such as negotiating supplier contracts, decreasing CAPEX and streamlining production.
However, in the case of Björn Borg, prognosticated CAPEX levels are already extremely low and most
of the production is outsourced. As overhead cost such as salaries are hard to influence one
alternative is to decrease the headcount in the organization. This is a dangerous approach that could
affect the ability to achieve growth targets. Therefore it is not recommended, unless the organization
has an excess in labor. Instead an increase in franchise stores could be the solution, as these stores
provides a source of revenue while not increasing the company’s costs to the same extent as wholly
owned boutiques do. Also, there should be some room for Björn Borg to lower their cost of goods
sold as historical seen levels are quite high at almost 50% of sales. By negotiating supplier contracts
and buying larger quantities it should be reasonable to lower COGS in order to enhance the efficiency
of the firm. Looking at efficiency enhancement opportunities on its own provide no clear indication
that Björn Borg is suitable for an LBO. But in a broader context, efficiency enhancement
opportunities should be enough for the firm to deliver expected return in such a transaction.
7.1.5 CAPEX Light, Small Initial Investments

Traditionally, companies in the fashion industry are very CAPEX light as they have no expensive
production plants or other type of advanced technical equipment. Björn Borg is no exception. CAPEX
goal in the pre-LBO firm is 2-5% of net sales (Björn Borg AB 2010) and the range 3-5% is used as an
input to the LBO valuation model. These are very small capital expenditures compared to industrial
companies and companies with massive investments in R&D, such as technology and medical
companies. In the case of Björn Borg, CAPEX should be used for opening new stores, designing new
collections and marketing research. Further, no large initial investments are needed in order to
realize an expansion of the company. As such, when looking at CAPEX, Björn Borg is a suitable LBO
candidate.
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7.1.6 Strong Asset Base
The same arguments that made Björn Borg a good LBO candidate due to its small capital
expenditures makes it somewhat worse when looking at its asset base. Björn Borg has no expensive
plants or equipment. In fact, most of its non-current assets are goodwill, which off course cannot be
used as collateral for debt. This makes Björn Borg less suitable for an LBO judging by its asset base. In
reality, their ability to raise debt capital is more dependent on debt/EBITDA covenants than their
liquid assets. It could be that the weak asset base slightly raises the companies cost of debt.
However, Björn Borg’s lack of a strong asset base should not make them an inappropriate LBO target.
7.1.7 Low Entry Multiples

Deriving entry multiples based on 2009 year-end result and share price, gives Björn Borg an
EV/EBITDA of 12.5X, EV/Sales of 2.9X and an EV/Cash flow of astonishing 31X. The EV/EBITDA of
12.5X is above guidelines from the study on Swedish PE firms, saying that EV/EBITDA should be
below 10.0X in order for the target to be an attractive investment. EV/Sales of 2.9X are also above
the recommended maximum multiple of 2.0X. Even though these multiples are both above what is
seen as fairly priced in the PE industry today, it is not much and should therefore not exclude the
idea that Björn Borg could be suitable for an LBO. When looking at the EV/Cash flow multiple it is far
above the maximum recommended level of 10X. This gives a signal that the company is too
expensive for an LBO and might not be able to meet demands on return within a reasonable holding
period. However, when taking a closer look at the numbers it became evident that the wrong cash
flow was used. In order to arrive at an EV/Cash flow of 31X, total cash flow for the year was used.
This is not correct due to the fact that cash flow for the year in the year-end report consists of
investing activities and financing activities. As investing activities is acquisition of tangible non-
current assets and financing activities are new share issues and dividend, these negative cash flows
should not be included in the cash flow used for calculating the entry multiple. Instead, cash flow
from operating activities should be used. This is due to the fact that non-current investments, new
share issues and dividends are not part of the post-LBO firm’s cash flow. When using cash flow from
operating activities as a base for calculating EV/Cash flow, the entry multiple drops to 18X. This is still
too high and gives a hint that Björn Borg could be an unsuitable LBO candidate.
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7.1.8 Competent Management
The senior management of Björn Borg has extensive experience from the fashion industry. The
current president Arthur Engel has a background as president of Gant and Leo Burnett. During his
time at Gant, Mr. Engel was part of the 2006 IPO (SEB Enskilda & ABG Sundal Collier 2006) where the
company went from private to public. During 2008, when Arthur joined Björn Borg, Gant was the
target of an LBO (GANT 2008) and brought back to the private equity setting. It could therefore be
assumed that the current president of Björn Borg is a suitable leader of Björn Borg through the
holding period. His previous experience from working for PE owners should demonstrate the
possibility to align Björn Borg’s future management strategy with the interests of the PE firm.
Further, Björn Borg’s product manager Malin Wåhlstedt has a background as section manager for
H&M underwear. Their vice president and international sales director, Henrik Fischer is a former
president of Polarn o. Pyret. This should benefit Björn Borg in their expansion into kids’ underwear.
Also, the creative director Magnus Ehrland has been working as design director for J. Lindeberg and
menswear designer at Diesel, Italy. In addition to this, other members of the senior management
team has a proven track record in leading positions at well known companies such as Axfood AB,
Öhrlings PWC and H&M. Therefore, Björn Borg’s current management team has to be considered as
highly competent and should provide for a successful expansion of the company in the future.
7.1.9 Moderate Leverage Level

Björn Borg’s current low debt gives the company a debt/equity ratio of 0.18X. This is a moderate
leverage level that gives room for increased debt in the capital structure of the post-LBO firm.
7.1.10 Strong Owner Structure

As shown in figure 19 it is evident that Björn Borg has a strong owner structure. None of the smaller
shareholders has a corner position in the company and should therefore not be able to affect the
premium of the deal. This makes Björn Borg a suitable LBO candidate in regards to the owner
structure.
7.1.11 Exit after the Holding Period

As Björn Borg has a market cap of 1 707 MSEK and is listed on NASDAQ OMX today, it is off course
suitable for an IPO at the time of an exit. Its stable cash flows further underpin the possibility to exit
the investment through an IPO. It should also be possible to divest through an industrial or financial
sale where buyers should be able to achieve synergy effects from the acquisition. Here, smoothness
of the process and received premium should be the guiding factors when choosing an exit strategy.
Björn Borg should be possible to sell through all of the most frequently used exit strategies. This fact
provides strength to the argument that the company is a suitable LBO candidate.
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7.2 Result of the Björn Borg LBO
The study on Swedish PE firms revealed that the typical holding period in an LBO today is between 3-
7 years. Respondents also stated that a holding period of 5 years is used for calculation purposes, in
order to evaluate transaction return. Return is expressed as IRR and cash return. Here, PE firms need
to see an IRR of at least 20% and a cash multiple of 2-3X. However, for an investment to qualify as
truly attractive, IRR should be around 30% with cash multiple above 4X.
In order to provide a complete evaluation of the Björn Borg LBO, IRR and cash return are analyzed
through the different financing structures and operating scenarios. In addition to this several
sensitivity analyses are conducted in order to determine how exit multiple, offer price per share and
holding period affects IRR and cash return. In all of the results presented below, cash flow sweep,
cash balance, average interest and financing fees functions are enabled in order to assure that the
output is as close to reality as possible.
7.2.1 Base Case & Financing Structure 1

Financing structure 1 seen in figure 22 consists of 420 MSEK in term loan A and 120 MSEK in
mezzanine. It is the most realistic approach as this structure gives a total-debt/EBITDA multiple of
4.5X. As the base case operating scenario use the most achievable input assumptions, a combination
of financing structure 1 and the base case should provide the most realistic return of the LBO.
Financing structure 1 and the base case gives an IRR of 22.38% and a cash return of 2.7X given an exit
in year 5, see figure 23. This is an acceptable return for PE investors today. However, it is close to the
lowest acceptable limit and with the inherent uncertainty in the input assumptions. Many PE firms
would hesitate before engaging in an LBO of Björn Borg, if they believed that the base case was the
most probable scenario.
Figure 22: Financing structure 1.
57
Figure 23: IRR & cash return, exit in year 5 with financing structure 1 as the source of funds.

Combining the base case with financing structure 2 reveals that a higher leverage level increases
both IRR and cash return. It should be noticed though, that increasing the leverage level of Björn
Borg might not be possible in reality, as banks have strict debt/EBITDA covenants for providing debt
capital. Capital structure 2 has a total-debt/EBITDA multiple of 5.5 and should be able to realize in
the current debt market. However, this is a negotiation issue and depends on the banks willingness
to take on risk. Figure 25 shows that the base case in combination with financing structure 2 gives an
IRR of 23.37% and cash return of 2.9X.
58
As in the case of financing structure 2, further increase of the leverage level means a higher return.
When applying financing structure 3, IRR goes up to 24.03% and cash multiple remains at 2.9X.
Financing structure 3 has a total-debt/EBITDA multiple of 6.5. This is above the total-debt/EBITDA
multiples provided by the current debt market. As Björn Borg has relatively weak liquid assets that
could act as collateral, this financing structure is probably not realizable. However, financing
structure 3 helps analyzing the LBO valuation model as it show how increasing debt translates into a
higher transaction return.
59
Financing structure 4 has too much debt for Björn Borg but in accordance with the discussion in
chapter 7.2.3 it has a value for the analysis of the LBO valuation model. Financing structure 4 gives an
IRR of 25.79% and cash return of 3.1X. Again, increasing the debt in the LBO creates a higher return
for investors.
60
7.2.5 Management Case
As financing structure 1 is the most realistic source of funds it is the only one used for evaluating the
management case. The management case has an opportunistic view of Björn Borg’s development
during the holding period. This is reflected in a stronger growth rate and smaller expenditures than
the base case. Due to this, the management case creates a higher return compared to the base case.
In the management case, an LBO of Björn Borg gives a return of 32.12% IRR and 4.0X cash return.
This is in-line with the demands from PE firms and makes Björn Borg a suitable LBO target if it
develops according to the management case.
7.2.6 Ambition Case

As in the management case, financing structure 1 it is the only one used for evaluating the ambition
case. A yearly sales growth of 25% and further decline in expenditures gives an IRR of 41.60% and
cash return 5.7X in the ambition case. This is far above a truly attractive investment which is said to
have an IRR around 30% and cash return above 4X. If Björn Borg’s development during the holding
period meets the projections of the ambition case, the investors will realize a substantial profit.
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7.2.7 Bank Case
Also in the bank case, only financing structure 1 is used for evaluation. The bank case has a safe
approach to the company’s future development. It assumes a low sales growth and almost no cutting
of costs during the holding period. It could be that the bank case is too pessimistic but it provides
useful information about the return of the LBO in a worst case scenario. The bank case gives an IRR
of 10.98% and cash return of 1.7X. This is far too low for PE investors and indicates that Björn Borg is
not such a good LBO target as minimum demand on return will not be fulfilled in a worst case
scenario.
7.2.8 Sensitivity analysis

Figures 33-36 shows how IRR and cash return shifts with changing input assumptions of exit multiple,
offer price per share and exit year. All of the figures below are based on the base case in combination
with financing structure 1. From figure 33, it is visible that an increase in the exit multiple to 13,5X
together with a share price drop to 64.00 SEK gives an IRR of 25.29%. Similar, the same changes in
exit multiple and share price increase the cash return to 3.1X as seen in figure 35. Naturally, both a
lower share price and a higher exit multiple increases the return of the LBO. Figure 34 visualize how
IRR decreases with a longer holding period and vice versa. This is in contrast to the cash return which
actually increases with a longer holding period, see figure 36. As changes in IRR are relatively small
when extending the holding period, the sensitivity analysis reveals that it should be beneficial to
prolong the holding period to 7 years and thereby realize an IRR of 21.24% and a cash return of 3.9X
without changing the exit multiple or share price assumptions.
Figure 33: Sensitivity of IRR against changes in exit multiple and offer price per share.
62
Figure 34: Sensitivity of IRR against changes in exit year and exit multiple.
Figure 35: Sensitivity of cash return against changes in exit multiple and offer price per share.
Figure 36: Sensitivity of cash return against changes in exit year and exit multiple.
63
8 Conclusion
The complete LBO valuation model created in this thesis is attached in appendix I. The framework
below should be used as a complement to the valuation model in order to find a suitable LBO target.
This framework contains the essential characteristics of a suitable LBO target.
 Strong and predictable cash flows.

 Leading and defensible market position.
 Realizable growth opportunities.
 Efficiency enhancement opportunities.
 CAPEX light, small initial investments.
 Strong asset base.
 Low entry multiples.
 Competent management whose objectives are aligned with the strategy of the PE firm.
 Moderate leverage level.
 Strong owner structure.
 Exit should be possible after the holding period.
The fashion retail company Björn Borg listed on NASDAQ OMX was chosen in accordance with the
framework above. Analyzing Björn Borg’s characteristics reveals that the company conforms to a
certain extent with all the aspects of the framework, except the low entry multiples. Björn Borg was
chosen even though its entry multiples indicated that it could be an inappropriate LBO candidate.
The reason for this is explained as follows. The completion of the LBO valuation model required
historical financial data, prognosticated future growth rates and general information on the analyzed
company. In order to assure this, NASDAQ OMX was chosen as the sample base for finding a suitable
target. At the current time of selection, it was hard to find companies from the sample base that
fulfilled the demands on entry multiples. There were just no low-priced companies listed on the
market at that time. Therefore, as Björn Borg fulfilled all other aspects of the framework to some
extent, it was judged to be the most suitable company for an LBO at that time.
Evaluating Björn Borg against the derived framework gave an indication that an LBO of the company
should fulfill the demands on return held by private equity firms today. Even though the analysis
estimates the LBO as realizable it should be noticed that it reveals weaknesses in Björn Borg’s
efficiency enhancement opportunities, asset base and entry multiples. Taking these facts into
consideration, the return of the LBO should be close to the lower limit set up by PE investors. Bottom
line, the derived framework indicates that an LBO of Björn Borg is realizable but with moderate
return to investors.
Applying the developed LBO valuation model on Björn Borg based on a realizable financing structure,
achievable future development, and an exit in year 5, gave an IRR of 22.38% and cash return 2.7X.
This is a moderate return but it meets the demands from PE firms today. Hence, an LBO of a
company chosen according to the derived framework fulfills the demands on return held by private
equity firms today.
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9 Discussion
The derived framework in this thesis is deemed accurate due to the fact that a company chosen
according to the framework is able to meet demands on return held by PE investors. As Björn Borg
did not clearly fulfilled all of the aspect in the framework the analysis indicates that an LBO of the
company will not create an extremely profitable return. This is in-line with the results from the LBO
valuation model and makes the derived framework reliable as a guideline for finding suitable LBO
targets on the market.
When buying out a public company, the current market environment has a large impact on the result
of the LBO. As offer price per share is assumed to be the current market price of a company’s stock,
the general state of the stock market is directly affecting the profit of an LBO. A decrease in market
prices similar to the plummet of OMXSPI seen in May 2010 will adjust share prices downward for
most of the listed companies. In the case of Björn Borg, the stock has fallen to 60.00 SEK as of May
21st (Avanza 2010). Assuming that the projections and historical data used in the valuation model
holds for an LBO at that date, the return of the transaction would be IRR 25.36% and cash return
3.1X. This is a substantial increase in return and makes Björn Borg a profitable LBO candidate.
Therefore the timing of the buyout is essential for optimizing return. This adheres to the findings in
the conducted study, where PE firms stated that buying at attractive multiples is a key issue in order
to profit from a deal.
Further, as buying cheap is important, exiting at a high multiple is also crucial. Being able to divest
Björn Borg at an exit multiple of 14.0X instead of 12.5X would mean an IRR of 24.85% and cash return
of 3.0X. As most PE firms claim that they add value to their portfolio companies, such an increase in
the exit multiple would not be unlikely.
The holding period is also affecting return. As shown in the sensitivity analysis, chapter 7.2.8,
increasing the holding period from 5 to 7 years will shift cash return from 2.7X to 3.9X. This is a
significant lift of the money multiple and as PE firms puts greater weight to the cash return in their
investment decisions, extending the holding period would make Björn Borg a truly profitable LBO
target.
The calculated return from the LBO valuation model is extremely dependant on the inputs. This
makes it hard to predict the actual profit of an LBO. In order to make a sound investment decision a
professional approach is vital. A thorough due diligence in combination with extensive research in
regards to prognosticated development scenarios is a must for actors in the buyout industry.
Therefore it is often hard for an amateur to make accurate predictions regarding the input to the
model. However, as the main purpose of this thesis is to create an accurate LBO valuation model, the
input assumption research has been ranked second to the efforts of finding a working valuation
technique. As the output from the valuation model adheres to the theory research of the thesis, it
should be beyond all doubt that the created LBO valuation model is correct and applicable in a
professional setting.
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10 Future Research
Below are some suggestions to future research that would fortify the conclusion of this thesis and
broaden the understanding of the topic.
In order to strengthen credibility of the derived framework, successfully exited targets in conducted
LBO’s should be analyzed. Being able to show an alignment between the characteristics of those
firms and the derived framework will further confirm its accuracy. It would also reveal if the
framework contains any gaps or lacks vital features of a suitable LBO target.
To further test the LBO valuation model, input assumptions and calculated return for a certain target
should be acquired from a PE firm. These inputs should then be used in the created model in order to
compare the output to the result calculated by professional investors. Even if PE firms often treat this
type of information as confidential it should be possible to get a hold of assumptions and returns
from old deals. This approach would confirm if the created model delivers the same return as those
used by PE firms. If so, the validity of the model would be verified. Another way to verify the model
could be asking an independent professional firm to take a closer look at it in order to express their
opinion.
The input assumptions to the valuation model are based on Björn Borg’s last three years
performance. Tracking historical financial statements longer back in time would increase the
accuracy of input assumptions. Therefore, analyzing data before 2007 is suggested as future
research.
Conducting a thorough comp’s analysis, would provide for a deeper understanding regarding the
pricing of Björn Borg. Here, both transactions and peers should be included in order to determine the
accuracy of the premium used in the valuation model. A comp’s analysis would also indicate whether
the EV and entry multiple of the company is reasonable.
Repeating the steps in this thesis with another company instead of Björn Borg would also be an
interesting proposal for further work.
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11 Reliability & Validity
The LBO valuation model created in this thesis inherits from discussions with the “Debt Capital
Market” division at one of the leading investment banks in the Nordic region21. As such, it should be
similar to the ones used by professional investors today. Also, the genuine source used for deriving
the model assures that it provides suitable key figures appropriate for deciding upon an investment
scenario.
As the framework derived in this thesis is a result from interviews with seven of the most
distinguished PE firms in Sweden, it should reflect all of the important characteristics that a suitable
LBO target needs. The fact that all of the respondents gave similar answers confirms the reliability of
the study. Further, the large number of interviews underpins the validity of the framework.
The obvious uncertainties in this thesis are the input assumptions. In order to predict the future
development of Björn Borg, prognosticated sales growth and future expenditure levels are estimates
based on the company’s financial goals and historical expenditure levels. These estimates have an
inherent uncertainty and therefore affect the validity of the conclusion. In order to increase the
accuracy of the input assumptions, consensus estimates from several professional analysts should be
gathered. These estimates should then be analyzed and together with a deeper study of Björn Borg
form better input assumptions. Doing so would increase the validity of the result.
Another assumption that affects the result of the LBO to a great extent is the premium associated
with the buyout of Björn Borg. In line with the study on PE firms active in Sweden, a premium of 20%
was used in calculations. It is uncertain whether this is enough to acquire the company or if a higher
premium is needed. To secure a better estimate of the premium, a comparable transactions analysis
should be conducted. Studying the premium levels in LBO’s of similar companies would further
increase the validity of the buyout scenario.
21
Due to strict secretes policy a more detailed reference cannot be published.
67
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13 Appendix I - The LBO Valuation Model
LBO Valutation Model

Leveraged Buyout of Björn Borg from NASDAQ OMX
As Part of the Finance Master's Thesis
Leveraged Buyouts
By
1
Leveraged Buyout Analysis of Björn Borg, NASDAQ OMX
(Sek in millions, fiscal year ending December 31)
Transaction Summary
Sources of funds Uses of Funds Purchase Price Return Analysis
% of Total Multiple of EBITDA % of Total Offer Price per Share 67,0Sek Exit Year 5
Amount Sources 31/12/2009Cumulative Pricing Amount Uses Fully Diluted Shares 25 487 190,0 Entry Multiple 12,5x
Revolving Credit Facility - -% 0,0x 0,0x L+250 bps Purchase ValueCo Equity 1 707,6 78,70% Equity Purchase Price 1 707,6Sek Exit Multiple 12,5x
Term Loan A 420,0 19,36% 3,5x 3,5x L+250 bps Repay Existing Debt 80,9 3,73% Plus: Existing Net Debt (215,5) IRR 22,38%
Term Loan B - -% 0,0x 3,5x L+265 bps Tender / Call Premiums 341,5 15,74% Enterprise Value 1 492,2Sek Cash Return 2,7x
Term Loan C - -% 0,0x 3,5x L+280 bps Financing Fees 24,8 1,14%
2nd Lien - -% 0,0x 3,5x NA Other Fees and Expenses 15,0 0,69% Transaction Multiples Options
Mezzanine 120,0 5,53% 1,0x 4,5x L+1500 bps Enterprise Value / Sales Financing Structure 1
High-Yield Bonds - -% 0,0x 4,5x 20,00% LTM 31/12/2009 519,9 2,9x Operating Scenario 1
Equity Contribution 1 629,8 75,11% 13,6x 18,1x 2009E 519,9 2,9x Cash flow Sweep 1
Rollover Equity - -% 0,0x 18,1x Enterprise Value / EBITDA Cash Balance 1
Cash on Hand - -% 0,0x 18,1x LTM 31/12/2009 119,6 12,5x Average Interest 1
Total Sources 2 169,8Sek 100,00% 18,1x 18,1x Total Uses 2 169,8 100,00% 2014 313,7 4,8x Financing Fees 1
Summary Financial Data

Historical Period Projection Period
LTM Pro forma Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
2007 2008 2009 31/12/2009 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Sales 494,9 526,6 519,9 519,9 519,9 597,9 687,6 790,7 909,3 1 045,7 1 202,6 1 383,0 1 590,4 1 829,0 2 103,3
% growth NA 6,40% (1,26%) -% -% 15,00% 15,00% 15,00% 15,00% 15,00% 15,00% 15,00% 15,00% 15,00% 15,00%
Gross Profit 265,0 283,5 266,6 266,6 266,6 322,9 371,3 427,0 491,0 564,7 649,4 746,8 858,8 987,7 1 135,8
% margin 53,56% 53,84% 51,29% 51,29% 51,29% 54,00% 54,00% 54,00% 54,00% 54,00% 54,00% 54,00% 54,00% 54,00% 54,00%
EBITDA 146,2 135,7 119,6 119,6 119,6 179,4 206,3 237,2 272,8 313,7 360,8 414,9 477,1 548,7 631,0
% margin 29,54% 25,78% 23,01% 23,01% 23,01% 30,00% 30,00% 30,00% 30,00% 30,00% 30,00% 30,00% 30,00% 30,00% 30,00%
Capital Expenditures 15,3 2,9 1,4 1,4 1,4 7,8 8,9 10,3 11,8 13,6 15,6 18,0 20,7 23,8 27,3
% sales 3,09% 0,55% 0,27% 0,27% 0,27% 1,30% 1,30% 1,30% 1,30% 1,30% 1,30% 1,30% 1,30% 1,30% 1,30%
Cash Interest Expense 46,9 35,9 15,2 3,4 1,3 1,3 1,3 1,3 1,3 1,3 1,3
Total Interest Expense 51,0 40,1 19,4 7,5 5,5 5,5 2,1 2,1 2,1 2,1 2,1
Free Cash Flow

EBITDA 179,4 206,3 237,2 272,8 313,7 360,8 414,9 477,1 548,7 631,0
Less: Cash Interest Expense (35,9) (15,2) (3,4) (1,3) (1,3) (1,3) (1,3) (1,3) (1,3) (1,3)
Plus: Interest Income 1,5 0,1 0,8 2,4 4,4 6,8 9,5 12,6 16,2 20,3
Less: Income Taxes (35,5) (47,4) (58,5) (68,5) (79,5) (92,9) (107,4) (124,0) (143,2) (165,2)
Less: Capital Expenditures (7,8) (8,9) (10,3) (11,8) (13,6) (15,6) (18,0) (20,7) (23,8) (27,3)
Less: Increase in Net Working Capital (1,2) (4,6) (5,3) (6,1) (7,0) (8,0) (9,2) (10,6) (12,2) (14,0)
Free Cash Flow 100,5 130,3 160,5 187,5 216,8 249,6 288,4 333,1 384,4 443,4
Cumulative Free Cash Flow 100,5 230,8 391,4 578,8 795,6 1 045,3 1 333,7 1 666,8 2 051,1 2 494,6
Capitalization
Cash 296,5 10,0 10,0 147,8 335,3 552,1 801,7 1 090,2 1 423,2 1 807,6 2 251,1
Revolving Credit Facility - - - - - - - - - - -

Term Loan A 420,0 33,0 - - - - - - - - -
Term Loan B - - - - - - - - - - -
Term Loan C - - - - - - - - - - -
Existing Term Loan - - - - - - - - - - -
2nd Lien - - - - - - - - - - -
Other Debt 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0
Total Senior Secured Debt 420,0 33,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0
Senior Notes - - - - - - - - - - -
Total Senior Debt 420,0 33,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0
Mezzanine 120,0 120,0 22,7 - - - - - - - -

High-Yield Bonds - - - - - - - - - - -
Total Debt 540,0 153,0 22,7 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0
Shareholders' Equity 1 614,8 1 714,2 1 847,0 2 011,0 2 203,1 2 425,8 2 686,3 2 987,2 3 334,9 3 736,1 4 199,1
Total Capitalization 2 154,9 1 867,2 1 869,7 2 011,0 2 203,1 2 425,8 2 686,3 2 987,3 3 334,9 3 736,1 4 199,1
% of Bank Debt Repaid -% 92,15% 100,00% 100,00% 100,00% 100,00% 100,00% 100,00% 100,00% 100,00% 100,00%
Credit Statistics
% Debt / Total Capitalization 25,06% 8,19% 1,22% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00% 0,00%
EBITDA / Cash Interest Expense 2,6x 5,0x 13,6x 70,0x 205,9x 236,8x 272,3x 313,1x 360,1x 414,1x 476,2x
(EBITDA - Capex) / Cash Interest Expense 2,5x 4,8x 13,0x 67,0x 197,0x 226,5x 260,5x 299,6x 344,5x 396,2x 455,6x
EBITDA / Total Interest Expense 2,3x 4,5x 10,6x 31,4x 49,7x 57,2x 169,8x 195,2x 224,5x 258,2x 296,9x
(EBITDA - Capex) / Total Interest Expense 2,3x 4,3x 10,2x 30,1x 47,6x 54,7x 162,4x 186,8x 214,8x 247,0x 284,1x
Senior Secured Debt / EBITDA 3,5x 0,2x 0,0x 0,0x 0,0x 0,0x 0,0x 0,0x 0,0x 0,0x 0,0x
Senior Debt / EBITDA 3,5x 0,2x 0,0x 0,0x 0,0x 0,0x 0,0x 0,0x 0,0x 0,0x 0,0x
Total Debt / EBITDA 4,5x 0,9x 0,1x 0,0x 0,0x 0,0x 0,0x 0,0x 0,0x 0,0x 0,0x
Net Debt / EBITDA 2,0x 0,8x 0,1x -0,6x -1,2x -1,8x -2,2x -2,6x -3,0x -3,3x -3,6x
2
Income Statement
Historical Period Projektion Period

LTM Pro forma Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
2007 2008 2009 31/12/2009 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Sales 494,9 526,6 519,9 519,9 519,9 597,9 687,6 790,7 909,3 1 045,7 1 202,6 1 383,0 1 590,4 1 829,0 2 103,3
% growth NA 6,4% (1,3%) - - 15,0% 15,0% 15,0% 15,0% 15,0% 15,0% 15,0% 15,0% 15,0% 15,0%
Cost of Goods Sold 229,8 243,1 253,3 253,3 253,3 275,0 316,3 363,7 418,3 481,0 553,2 636,2 731,6 841,3 967,5
Gross Profit 265,0 283,5 266,6 266,6 266,6 322,9 371,3 427,0 491,0 564,7 649,4 746,8 858,8 987,7 1 135,8
% margin 53,6% 53,8% 51,3% 51,3% 51,3% 54,0% 54,0% 54,0% 54,0% 54,0% 54,0% 54,0% 54,0% 54,0% 54,0%
Selling, General & Administrative 118,8 147,8 147,0 147,0 147,0 143,5 165,0 189,8 218,2 251,0 288,6 331,9 381,7 439,0 504,8
% sales 24,0% 28,1% 28,3% 28,3% 28,3% 24,0% 24,0% 24,0% 24,0% 24,0% 24,0% 24,0% 24,0% 24,0% 24,0%
Other Expense / (Income) - - - - - - - - - - - - - - -

EBITDA 146,2 135,7 119,6 119,6 119,6 179,4 206,3 237,2 272,8 313,7 360,8 414,9 477,1 548,7 631,0
% margin 29,5% 25,8% 23,0% 23,0% 23,0% 30,0% 30,0% 30,0% 30,0% 30,0% 30,0% 30,0% 30,0% 30,0% 30,0%
Depreciation & Amortization 4,1 7,0 7,0 7,0 7,0 6,0 6,9 7,9 9,1 10,5 12,0 13,8 15,9 18,3 21,0
Amortization - - - - - - - - - - - - - - -
EBIT 142,1 128,8 112,6 112,6 112,6 173,4 199,4 229,3 263,7 303,3 348,8 401,1 461,2 530,4 610,0
% margin 28,7% 24,5% 21,7% 21,7% 21,7% 29,0% 29,0% 29,0% 29,0% 29,0% 29,0% 29,0% 29,0% 29,0% 29,0%
Interest Expense
Revolving Credit Facility - - - - - - - - - - -
Term Loan A 23,8 12,8 0,9 - - - - - - - -
Term Loan B - - - - - - - - - - -
Term Loan C - - - - - - - - - - -
Existing Term Loan - - - - - - - - - - -
2nd Lien - - - - - - - - - - -
Mezzanine 21,8 21,8 13,0 2,1 - - - - - - -
High-Yield Bonds - - - - - - - - - - -
Commitment Fee on Unused Revolver 0,3 0,3 0,3 0,3 0,3 0,3 0,3 0,3 0,3 0,3 0,3
Administrative Agent Fee 1,0 1,0 1,0 1,0 1,0 1,0 1,0 1,0 1,0 1,0 1,0
Cash Interest Expense 46,9 35,9 15,2 3,4 1,3 1,3 1,3 1,3 1,3 1,3 1,3
Amortization of Deffered Financing Fees 4,2 4,2 4,2 4,2 4,2 4,2 0,8 0,8 0,8 0,8 0,8
Total Interest Expense 51,0 40,1 19,4 7,5 5,5 5,5 2,1 2,1 2,1 2,1 2,1
Interest Income (1,5) (0,1) (0,8) (2,4) (4,4) (6,8) (9,5) (12,6) (16,2) (20,3)
Net Interest Expense 38,6 19,3 6,8 3,1 1,0 (4,6) (7,3) (10,4) (14,0) (18,2)
Earnings Before Taxes 134,8 180,1 222,6 260,6 302,2 353,4 408,4 471,7 544,4 628,1
Income Tax Expense 35,5 47,4 58,5 68,5 79,5 92,9 107,4 124,0 143,2 165,2
Net Income 99,4 132,8 164,0 192,1 222,7 260,5 301,0 347,6 401,3 462,9
% margin 16,6% 19,3% 20,7% 21,1% 21,3% 21,7% 21,8% 21,9% 21,9% 22,0%
Income Statement Assumptions

Sales (% YoY growth) NA 6,4% (1,3%) - - 15,0% 15,0% 15,0% 15,0% 15,0% 15,0% 15,0% 15,0% 15,0% 15,0%
COGS (% margin) 46,4% 46,2% 48,7% 48,7% 48,7% 46,0% 46,0% 46,0% 46,0% 46,0% 46,0% 46,0% 46,0% 46,0% 46,0%
SG&A (% sales) 24,0% 28,1% 28,3% 28,3% 28,3% 24,0% 24,0% 24,0% 24,0% 24,0% 24,0% 24,0% 24,0% 24,0% 24,0%
Other Expense / (Income) (% of sales) - - - - - - - - - - - - - - -
Depreciation & Amortization (% of sales) 0,8% 1,3% 1,4% 1,4% 1,4% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0%
Amortization (% of sales) - - - - - - - - - - - - - - -
Interest Income 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0%
Tax Rate 26,3% 26,3% 26,3% 26,3% 26,3% 26,3% 26,3% 26,3% 26,3% 26,3%
3
Balance Sheet
Projection Period
Opening Adjustments Pro Forma Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
2009 + - 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Cash and Cash Equivalents 296,5 296,5 10,0 10,0 147,8 335,3 552,1 801,7 1 090,2 1 423,2 1 807,6 2 251,1
Accounts Receivable 38,0 38,0 69,7 80,1 92,1 106,0 121,9 140,1 161,2 185,3 213,1 245,1
Inventories 26,5 26,5 32,8 37,8 43,4 49,9 57,4 66,1 76,0 87,4 100,5 115,5
Prepaids and Other Current Assets 27,7 27,7 26,8 30,8 35,4 40,7 46,8 53,8 61,9 71,2 81,9 94,2
Total Current Assets 388,7 388,7 139,3 158,7 318,8 531,9 778,2 1 061,8 1 389,2 1 767,1 2 203,1 2 705,8
Property, Plant and Equipment, net 11,2 11,2 12,9 15,0 17,4 20,1 23,2 26,9 31,0 35,8 41,3 47,6
Goodwill and Intangible Assets 204,9 1 588,3 1 793,2 1 793,2 1 793,2 1 793,2 1 793,2 1 793,2 1 793,2 1 793,2 1 793,2 1 793,2 1 793,2
Other Assets - - - - - - - - - - - -
Deferred Financing Fees - 24,8 24,8 20,6 16,5 12,3 8,2 4,0 3,2 2,4 1,6 0,8 -
Total Assets 604,7 2 217,8 1 966,1 1 983,4 2 141,7 2 353,4 2 598,7 2 885,0 3 215,8 3 597,7 4 038,4 4 546,6
Accounts Payable 15,5 15,5 32,5 37,3 42,9 49,4 56,8 65,3 75,1 86,4 99,3 114,2
Accrued Liabilities 33,4 33,4 35,1 40,4 46,5 53,4 61,5 70,7 81,3 93,5 107,5 123,6
Other Current Liabilities 14,0 14,0 31,2 35,8 41,2 47,4 54,5 62,7 72,1 82,9 95,3 109,6
Total Current Liabilities 62,9 62,9 98,8 113,6 130,6 150,2 172,7 198,6 228,4 262,7 302,1 347,4
Revolving Credit Facility - - - - - - - - - - - - -

Term Loan A - 420,0 420,0 33,0 - - - - - - - - -
Term Loan B - - - - - - - - - - - - -
Term Loan C - - - - - - - - - - - - -
Existing Term Loan - - - - - - - - - - - -
2nd Lien - - - - - - - - - - - - -
Mezzanine - 120,0 120,0 120,0 22,7 - - - - - - - -
High-Yield Bonds - - - - - - - - - - - - -
Other Debt (Deferred tax) 40,0 (40,0) 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0
Other Long-Term Liabilities (trademark) 40,9 (40,9) - - - - - - - - - - -
Total Liabilities 143,8 602,9 251,8 136,3 130,6 150,2 172,7 198,7 228,5 262,7 302,1 347,4
Noncontrolling Interest 0,1 0,1 0,1 0,1 0,1 0,1 0,1 0,1 0,1 0,1 0,1 0,1
Shareholders' Equity 460,8 1 614,8 (460,8) 1 614,8 1 714,2 1 847,0 2 011,0 2 203,1 2 425,8 2 686,3 2 987,2 3 334,9 3 736,1 4 199,1
Total Shareholders' Equity 461,0 1 615,0 1 714,3 1 847,1 2 011,1 2 203,2 2 425,9 2 686,4 2 987,4 3 335,0 3 736,2 4 199,2
Total Liabilities and Equity 604,7 2 217,8 1 966,1 1 983,4 2 141,7 2 353,4 2 598,7 2 885,0 3 215,8 3 597,7 4 038,4 4 546,6
Balance Check 0,00 -0,01 -0,01 -0,01 -0,01 -0,01 -0,01 -0,01 -0,01 -0,01 -0,01 -0,01
Net Working Capital 29,3 29,3 30,5 35,1 40,4 46,4 53,4 61,4 70,6 81,2 93,3 107,3
(Increase) / Decrease in Net Working Capital (1,2) (4,6) (5,3) (6,1) (7,0) (8,0) (9,2) (10,6) (12,2) (14,0)
Balance Sheet Assumptions

Current Assets
Accounts Receivable (% of sales) 7,3% 7,3% 11,7% 11,7% 11,7% 11,7% 11,7% 11,7% 11,7% 11,7% 11,7% 11,7%
Inventories (% of sales) 5,1% 5,1% 5,5% 5,5% 5,5% 5,5% 5,5% 5,5% 5,5% 5,5% 5,5% 5,5%
Prepaid and Other Current Receivables (% of sales) 5,3% 5,3% 4,5% 4,5% 4,5% 4,5% 4,5% 4,5% 4,5% 4,5% 4,5% 4,5%
Current Liabilities
Accounts Payable (% of sales) 3,0% 3,0% 5,4% 5,4% 5,4% 5,4% 5,4% 5,4% 5,4% 5,4% 5,4% 5,4%
Accrued Liabilities (% of sales) 6,4% 6,4% 5,9% 5,9% 5,9% 5,9% 5,9% 5,9% 5,9% 5,9% 5,9% 5,9%
Other Current Liabilities (% of sales) 2,7% 2,7% 5,2% 5,2% 5,2% 5,2% 5,2% 5,2% 5,2% 5,2% 5,2% 5,2%
Historical levels compared to sales

Year 2007 2008 2009 3Y Mean
Sales 494,9 526,6 519,9
Accounts Receivable 61,7 79,9 38,0
Accounts Receivable (% of sales) 12,5% 15,2% 7,3% 11,7%
Inventories 24,6 33,8 26,5
Inventories (% of sales) 5,0% 6,4% 5,1% 5,5%
Prep. & Other C. Rec. 15,4 26,3 27,7
Prep. & Other C. Rec. (% of sales) 3,1% 5,0% 5,3% 4,5%
Accounts Payable 23,1 45,5 15,5
Accounts Payable (% of sales) 4,7% 8,6% 3,0% 5,4%
Accrued Liabilities 26,9 30,4 33,4
Accrued Liabilities (% of sales) 5,4% 5,8% 6,4% 5,9%
Other Current Liabilities 35,2 30,6 14,0
Other Current Liabilities (% of sales) 7,1% 5,8% 2,7% 5,2%
4
Cash Flow Statement
Projection Period
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Operating Activities
Net Income 99,4 132,8 164,0 192,1 222,7 260,5 301,0 347,6 401,3 462,9
Plus: Depreciation & Amortization 6,0 6,9 7,9 9,1 10,5 12,0 13,8 15,9 18,3 21,0
Plus: Amortization - - - - - - - - - -
Plus: Amortization of Financing Fees 4,2 4,2 4,2 4,2 4,2 0,8 0,8 0,8 0,8 0,8
Changes in Working Capital Items

(Inc.) / Dec. in Accounts Receivable (31,6) (10,5) (12,0) (13,8) (15,9) (18,3) (21,0) (24,2) (27,8) (32,0)
(Inc.) / Dec. in Inventories (6,4) (4,9) (5,7) (6,5) (7,5) (8,6) (9,9) (11,4) (13,1) (15,1)
(Inc.) / Dec. in Prepaid and Other Current Assets 0,9 (4,0) (4,6) (5,3) (6,1) (7,0) (8,1) (9,3) (10,7) (12,3)
Inc. / (Dec.) in Accounts Payable 17,0 4,9 5,6 6,4 7,4 8,5 9,8 11,3 13,0 14,9
Inc. / (Dec.) in Accrued Liabilities 1,8 5,3 6,1 7,0 8,0 9,2 10,6 12,2 14,0 16,1
Inc. / (Dec.) in Other Current Liabilities 17,2 4,7 5,4 6,2 7,1 8,2 9,4 10,8 12,4 14,3
(Inc.) / Dec. in Net Working Capital (1,2) (4,6) (5,3) (6,1) (7,0) (8,0) (9,2) (10,6) (12,2) (14,0)
Cash Flow from Operating Activities 108,3Sek 139,2Sek 170,8Sek 199,3Sek 230,4Sek 265,3Sek 306,4Sek 353,7Sek 408,2Sek 470,8Sek
Investing Activities
Capital Expenditures (7,8) (8,9) (10,3) (11,8) (13,6) (15,6) (18,0) (20,7) (23,8) (27,3)
Other Investing Activities - - - - - - - - - -
Cash Flow from Investing Activities (7,8Sek) (8,9Sek) (10,3Sek) (11,8Sek) (13,6Sek) (15,6Sek) (18,0Sek) (20,7Sek) (23,8Sek) (27,3Sek)
Financing Activities
Revolving Credit Facility - - - - - - - - - -
Term Loan A (387,0) (33,0) - - - - - - - -
Term Loan B - - - - - - - - - -
Term Loan C - - - - - - - - - -
Existing Term Loan - - - - - - - - - -
2nd Lien - - - - - - - - - -
Mezzanine - (97,3) (22,7) - - - - - - -
High-Yield Bonds - - - - - - - - - -
Other Debt - - - - - - - - - -
Dividends - - - - - - - - - -
Equity Issuance / (Repurchase) - - - - - - - - - -
Cash Flow from Financing Activities (387,0Sek) (130,3Sek) (22,7Sek) - - - - - - -
Excess Cash for the Period (286,5) - 137,8 187,5 216,8 249,6 288,4 333,1 384,4 443,4
Beginning Cash Balance 296,5 10,0 10,0 147,8 335,3 552,1 801,7 1 090,2 1 423,2 1 807,6
Ending Cash Balance 10,0 10,0 147,8 335,3 552,1 801,7 1 090,2 1 423,2 1 807,6 2 251,1
Cash Flow Statement Assumptions

Capital Expenditures (% of sales) 1,3% 1,3% 1,3% 1,3% 1,3% 1,3% 1,3% 1,3% 1,3% 1,3%
Historical levels compared to sales

Year 2007 2008 2009 3Y Mean
Sales 494,9 526,6 519,9
CAPEX 15,3 2,9 1,4
CAPEX (% of sales) 3,1% 0,5% 0,3% 1,3%
5
Debt Schedule
Projection Period
Pro forma Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Swap 10Y 3,16% 3,16% 3,16% 3,16% 3,16% 3,16% 3,16% 3,16% 3,16% 3,16% 3,16%
Cash Flow from Operating Activities 108,3Sek 139,2Sek 170,8Sek 199,3Sek 230,4Sek 265,3Sek 306,4Sek 353,7Sek 408,2Sek 470,8Sek
Cash Flow from Investing Activities (7,8) (8,9) (10,3) (11,8) (13,6) (15,6) (18,0) (20,7) (23,8) (27,3)
Cash Available for Debt Repayment 100,5Sek 130,3Sek 160,5Sek 187,5Sek 216,8Sek 249,6Sek 288,4Sek 333,1Sek 384,4Sek 443,4Sek
Total Mandatory Repayments MinCash (84,0) - - - - - - - - -
Cash From Balance Sheet 10,0 286,5 - - 137,8 325,3 542,1 791,7 1 080,2 1 413,2 1 797,6
Cash Available for Optional Debt Repayment 303,0Sek 130,3Sek 160,5Sek 325,3Sek 542,1Sek 791,7Sek 1 080,2Sek 1 413,2Sek 1 797,6Sek 2 241,1Sek
Revolving Credit Facility

Revolving Credit Facility Size 65,0
Spread 2,50%
Term 10 years
Commitment Fee on Unused Portion 0,50%
Beginning Balance - - - - - - - - - -
Drawdown/(Repayment) - - - - - - - - - -
Ending Balance - - - - - - - - - -
Interest Rate 5,66% 5,66% 5,66% 5,66% 5,66% 5,66% 5,66% 5,66% 5,66% 5,66%
Average Interest Expense - - - - - - - - - -
Commitment Fee 0,3 0,3 0,3 0,3 0,3 0,3 0,3 0,3 0,3 0,3
Term Loan A Facility

Size 420,0
Spread 2,50%
Term 5 years
Repayment Schedule 20,00% 20,00% 20,00% 20,00% 20,00% -%
Beginning Balance 420,0Sek 33,0Sek - - - - - - - -

Mandatory Repayments (84,0) - - - - - - - - -
Optional Repayments (303,0) (33,0) - - - - - - - -
Ending Balance 33,0Sek - - - - - - - - -
Interest Rate 5,66% 5,66% 5,66% 5,66% 5,66% 5,66% 5,66% 5,66% 5,66% 5,66%
Interest Expense 12,8 0,9 - - - - - - - -
Term Loan B Facility

Size -
Spread 2,65%
Term 6 years
Repayment Schedule 1,00% Per Annum, Bullet at Maturity
Mandatory Repayments - - - - - - - - - -
Optional Repayments - - - - - - - - - -
Ending Balance - - - - - - - - - -
Interest Rate 5,81% 5,81% 5,81% 5,81% 5,81% 5,81% 5,81% 5,81% 5,81% 5,81%
Interest Expense - - - - - - - - - -
Term Loan C Facility

Size -
Spread 2,80%
Term 7 years
Ending Balance - - - - - - - - - -
Interest Rate 5,96% 5,96% 5,96% 5,96% 5,96% 5,96% 5,96% 5,96% 5,96% 5,96%
Existing Term Loan Facility

Size -
Spread 3,00%
Remaining Term 0 years
Ending Balance - - - - - - - - - -
Interest Rate 6,16% 6,16% 6,16% 6,16% 6,16% 6,16% 6,16% 6,16% 6,16% 6,16%
6
2nd Lien
Size -
Spread -%
Term 0 years
Repayment - - - - - - - - - -
Ending Balance - - - - - - - - - -
Interest Rate 3,16% 3,16% 3,16% 3,16% 3,16% 3,16% 3,16% 3,16% 3,16% 3,16%
Mezzanine
Size 120,0Sek
Spread 15,00%
Term 10 years
Beginning Balance 120,0Sek 120,0Sek 22,7Sek - - - - - - -

Optional Repayments - (97,3) (22,7) - - - - - - -
Ending Balance 120,0Sek 22,7Sek - - - - - - - -
Interest Rate 18,16% 18,16% 18,16% 18,16% 18,16% 18,16% 18,16% 18,16% 18,16% 18,16%
Interest Expense 21,8 13,0 2,1 - - - - - - -
High-Yield Bonds
Size -
Coupon 20,00%
Term 10 years
Repayment at maturity - - - - - - - - - -
Ending Balance - - - - - - - - - -
7
Returns Analysis
Projection Period
Pro forma Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Entry EBITDA Multiple 12,5x
Initial Equity Investment 1 629,8
EBITDA 179,4 206,3 237,2 272,8 313,7 360,8 414,9 477,1 548,7 631,0
Exit EBITDA Multiple 12,5x
Enterprise Value at Exit 2 242,1 2 578,5 2 965,2 3 410,0 3 921,5 4 509,7 5 186,2 5 964,1 6 858,7 7 887,5
Less: Net Debt

Revolving Credit Facility - - - - - - - - - -
Term Loan A 33,0 - - - - - - - - -
Term Loan B - - - - - - - - - -
Term Loan C - - - - - - - - - -
Existing Term Loan - - - - - - - - - -
2nd Lien - - - - - - - - - -
Mezzanine 120,0 22,7 - - - - - - - -
High-Yield Bonds - - - - - - - - - -
Other Debt 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0 0,0
Total Debt 153,0Sek 22,7Sek 0,0Sek 0,0Sek 0,0Sek 0,0Sek 0,0Sek 0,0Sek 0,0Sek 0,0Sek
Less: Cash and Cash Equivalents 10,0 10,0 147,8 335,3 552,1 801,7 1 090,2 1 423,2 1 807,6 2 251,1
Net Debt 143,0Sek 12,7Sek (147,8Sek) (335,3Sek) (552,1Sek) (801,7Sek) (1 090,2Sek) (1 423,2Sek) (1 807,6Sek) (2 251,0Sek)
Equity Value at Exit 2 099,1Sek 2 565,7Sek 3 113,0Sek 3 745,3Sek 4 473,6Sek 5 311,5Sek 6 276,4Sek 7 387,3Sek 8 666,4Sek 10 138,6Sek
Cash Return 1,3x 1,6x 1,9x 2,3x 2,7x 3,3x 3,9x 4,5x 5,3x 6,2x
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Initial Equity Investment (1 629,8Sek) (1 629,8Sek) (1 629,8Sek) (1 629,8Sek) (1 629,8Sek) (1 629,8Sek) (1 629,8Sek) (1 629,8Sek) (1 629,8Sek) (1 629,8Sek)
Equity Proceeds 2 099,1Sek - - - - - - - - -
2 565,7Sek - - - - - - - -
3 113,0Sek - - - - - - -
3 745,3Sek - - - - - -
4 473,6Sek - - - - -
5 311,5Sek - - - -
6 276,4Sek - - -
7 387,3Sek - -
8 666,4Sek -
10 138,6Sek
IRR 28,79% 25,47% 24,07% 23,12% 22,38% 21,76% 21,24% 20,79% 20,40% 20,06%
IRR - Assuming; Exit in Year 5E IRR - Assuming; Offer Price per Share = 67,00
Exit Multiple Exit Year
22,38% 11,5x 12,0x 12,5x 13,0x 13,5x 22,38% 3 4 5 6 7
64,00 21,82% 22,72% 23,60% 24,46% 25,29% 11,0x 19,15% 19,61% 19,69% 19,60% 19,45%
65,00 21,41% 22,31% 23,19% 24,04% 24,87% 11,5x 20,84% 20,82% 20,61% 20,34% 20,06%
Offer Price 66,00 21,01% 21,90% 22,78% 23,63% 24,45% Exit 12,0x 22,48% 21,99% 21,51% 21,06% 20,66%
per Share 67,00 20,61% 21,51% 22,38% 23,22% 24,05% Multiple 12,5x 24,07% 23,12% 22,38% 21,76% 21,24%
68,00 20,22% 21,12% 21,99% 22,83% 23,65% 13,0x 25,63% 24,23% 23,22% 22,44% 21,81%
69,00 19,84% 20,73% 21,60% 22,44% 23,26% 13,5x 27,15% 25,31% 24,05% 23,10% 22,36%
70,00 19,47% 20,36% 21,22% 22,06% 22,88% 14,0x 28,63% 26,36% 24,85% 23,75% 22,89%
Cash Return - Assuming; Exit in Year 5E Cash Return - Assuming; Offer Price per Share = 67,00
Exit Multiple Exit Year
2,7x 11,5x 12,0x 12,5x 13,0x 13,5x 2,7x 3 4 5 6 7
64,00 2,7x 2,8x 2,9x 3,0x 3,1x 11,0x 1,7x 2,0x 2,5x 2,9x 3,5x
65,00 2,6x 2,7x 2,8x 2,9x 3,0x 11,5x 1,8x 2,1x 2,6x 3,0x 3,6x
Offer Price 66,00 2,6x 2,7x 2,8x 2,9x 3,0x Exit 12,0x 1,8x 2,2x 2,6x 3,1x 3,7x
per Share 67,00 2,6x 2,6x 2,7x 2,8x 2,9x Multiple 12,5x 1,9x 2,3x 2,7x 3,3x 3,9x
68,00 2,5x 2,6x 2,7x 2,8x 2,9x 13,0x 2,0x 2,4x 2,8x 3,4x 4,0x
69,00 2,5x 2,6x 2,7x 2,8x 2,8x 13,5x 2,1x 2,5x 2,9x 3,5x 4,1x
70,00 2,4x 2,5x 2,6x 2,7x 2,8x 14,0x 2,1x 2,5x 3,0x 3,6x 4,2x
8
Assumptions Page 1 - Income Statement and Cash Flow Statement
Projection Period
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Income Statement Assumptions

Sales (% growth) 15,0% 15,0% 15,0% 15,0% 15,0% 15,0% 15,0% 15,0% 15,0% 15,0%
Base 1 15,0% 15,0% 15,0% 15,0% 15,0% 15,0% 15,0% 15,0% 15,0% 15,0%
Management 2 20,0% 20,0% 20,0% 20,0% 20,0% 20,0% 20,0% 20,0% 20,0% 20,0%
Ambition 3 25,0% 25,0% 25,0% 25,0% 25,0% 25,0% 25,0% 25,0% 25,0% 25,0%
Bank 4 10,0% 10,0% 10,0% 10,0% 10,0% 10,0% 10,0% 10,0% 10,0% 10,0%
5 -% -% -% -% -% -% -% -% -% -%
Cost of Goods Sold (% sales) 46,0% 46,0% 46,0% 46,0% 46,0% 46,0% 46,0% 46,0% 46,0% 46,0%
Base 1 46,0% 46,0% 46,0% 46,0% 46,0% 46,0% 46,0% 46,0% 46,0% 46,0%
Management 2 43,0% 43,0% 43,0% 43,0% 43,0% 43,0% 43,0% 43,0% 43,0% 43,0%
Ambition 3 40,0% 40,0% 40,0% 40,0% 40,0% 40,0% 40,0% 40,0% 40,0% 40,0%
Bank 4 49,0% 49,0% 49,0% 49,0% 49,0% 49,0% 49,0% 49,0% 49,0% 49,0%
5 -% -% -% -% -% -% -% -% -% -%
SG&A (% sales) 24,0% 24,0% 24,0% 24,0% 24,0% 24,0% 24,0% 24,0% 24,0% 24,0%
Base 1 24,0% 24,0% 24,0% 24,0% 24,0% 24,0% 24,0% 24,0% 24,0% 24,0%
Management 2 22,0% 22,0% 22,0% 22,0% 22,0% 22,0% 22,0% 22,0% 22,0% 22,0%
Ambition 3 20,0% 20,0% 20,0% 20,0% 20,0% 20,0% 20,0% 20,0% 20,0% 20,0%
Bank 4 26,0% 26,0% 26,0% 26,0% 26,0% 26,0% 26,0% 26,0% 26,0% 26,0%
5 -% -% -% -% -% -% -% -% -% -%
Other Expense / (Income) (% of sales) -% -% -% -% -% -% -% -% -% -%

Base 1 -% -% -% -% -% -% -% -% -% -%
Management 2 -% -% -% -% -% -% -% -% -% -%
Ambition 3 -% -% -% -% -% -% -% -% -% -%
Bank 4 -% -% -% -% -% -% -% -% -% -%
5 -% -% -% -% -% -% -% -% -% -%
Depreciation & Amortization (% sales) 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0%
Base 1 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0%
Management 2 1,2% 1,2% 1,2% 1,2% 1,2% 1,2% 1,2% 1,2% 1,2% 1,2%
Ambition 3 1,4% 1,4% 1,4% 1,4% 1,4% 1,4% 1,4% 1,4% 1,4% 1,4%
Bank 4 0,8% 0,8% 0,8% 0,8% 0,8% 0,8% 0,8% 0,8% 0,8% 0,8%
5 -% -% -% -% -% -% -% -% -% -%
Amortization (% sales) -% -% -% -% -% -% -% -% -% -%
Base 1 -% -% -% -% -% -% -% -% -% -%
Management 2 -% -% -% -% -% -% -% -% -% -%
Ambition 3 -% -% -% -% -% -% -% -% -% -%
Bank 4 -% -% -% -% -% -% -% -% -% -%
5 -% -% -% -% -% -% -% -% -% -%
Interest Income 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0%
Base 1 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0%
Management 2 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0%
Ambition 3 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0%
Bank 4 0,8% 0,8% 0,8% 0,8% 0,8% 0,8% 0,8% 0,8% 0,8% 0,8%
5 -% -% -% -% -% -% -% -% -% -%
Cash Flow Statement Assumptions

Capital Expenditures (% sales) 1,3% 1,3% 1,3% 1,3% 1,3% 1,3% 1,3% 1,3% 1,3% 1,3%
Base 1 1,3% 1,3% 1,3% 1,3% 1,3% 1,3% 1,3% 1,3% 1,3% 1,3%
Management 2 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0% 1,0%
Ambition 3 0,5% 0,5% 0,5% 0,5% 0,5% 0,5% 0,5% 0,5% 0,5% 0,5%
Bank 4 3,1% 3,1% 3,1% 3,1% 3,1% 3,1% 3,1% 3,1% 3,1% 3,1%
5 -% -% -% -% -% -% -% -% -% -%
9
Assumptions Page 2 - Balance Sheet
Projection Period
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Current Assets
Account Receivable (% of sales) 11,7% 11,7% 11,7% 11,7% 11,7% 11,7% 11,7% 11,7% 11,7% 11,7%
Base 1 11,7% 11,7% 11,7% 11,7% 11,7% 11,7% 11,7% 11,7% 11,7% 11,7%
Management 2 10,0% 10,0% 10,0% 10,0% 10,0% 10,0% 10,0% 10,0% 10,0% 10,0%
Ambition 3 9,0% 9,0% 9,0% 9,0% 9,0% 9,0% 9,0% 9,0% 9,0% 9,0%
Bank 4 15,2% 15,2% 15,2% 15,2% 15,2% 15,2% 15,2% 15,2% 15,2% 15,2%
5 - - - - - - - - - -
Inventories (% of sales) 5,5% 5,5% 5,5% 5,5% 5,5% 5,5% 5,5% 5,5% 5,5% 5,5%
Base 1 5,5% 5,5% 5,5% 5,5% 5,5% 5,5% 5,5% 5,5% 5,5% 5,5%
Management 2 5,3% 5,3% 5,3% 5,3% 5,3% 5,3% 5,3% 5,3% 5,3% 5,3%
Ambition 3 5,1% 5,1% 5,1% 5,1% 5,1% 5,1% 5,1% 5,1% 5,1% 5,1%
Bank 4 6,4% 6,4% 6,4% 6,4% 6,4% 6,4% 6,4% 6,4% 6,4% 6,4%
5 - - - - - - - - - -
Prepaid + Other Current Assets (% sales) 4,5% 4,5% 4,5% 4,5% 4,5% 4,5% 4,5% 4,5% 4,5% 4,5%
Base 1 4,5% 4,5% 4,5% 4,5% 4,5% 4,5% 4,5% 4,5% 4,5% 4,5%
Management 2 4,3% 4,3% 4,3% 4,3% 4,3% 4,3% 4,3% 4,3% 4,3% 4,3%
Ambition 3 4,0% 4,0% 4,0% 4,0% 4,0% 4,0% 4,0% 4,0% 4,0% 4,0%
Bank 4 5,3% 5,3% 5,3% 5,3% 5,3% 5,3% 5,3% 5,3% 5,3% 5,3%
5 - - - - - - - - - -
Current Liabilities
Accounts Payable (% of sales) 5,4% 5,4% 5,4% 5,4% 5,4% 5,4% 5,4% 5,4% 5,4% 5,4%
Base 1 5,4% 5,4% 5,4% 5,4% 5,4% 5,4% 5,4% 5,4% 5,4% 5,4%
Management 2 5,7% 5,7% 5,7% 5,7% 5,7% 5,7% 5,7% 5,7% 5,7% 5,7%
Ambition 3 6,0% 6,0% 6,0% 6,0% 6,0% 6,0% 6,0% 6,0% 6,0% 6,0%
Bank 4 3,0% 3,0% 3,0% 3,0% 3,0% 3,0% 3,0% 3,0% 3,0% 3,0%
5 - - - - - - - - - -
Accrued Liabilities (% sales) 5,9% 5,9% 5,9% 5,9% 5,9% 5,9% 5,9% 5,9% 5,9% 5,9%
Base 1 5,9% 5,9% 5,9% 5,9% 5,9% 5,9% 5,9% 5,9% 5,9% 5,9%
Management 2 6,0% 6,0% 6,0% 6,0% 6,0% 6,0% 6,0% 6,0% 6,0% 6,0%
Ambition 3 6,2% 6,2% 6,2% 6,2% 6,2% 6,2% 6,2% 6,2% 6,2% 6,2%
Bank 4 5,4% 5,4% 5,4% 5,4% 5,4% 5,4% 5,4% 5,4% 5,4% 5,4%
5 - - - - - - - - - -
Other Current Liabilities (% sales) 5,2% 5,2% 5,2% 5,2% 5,2% 5,2% 5,2% 5,2% 5,2% 5,2%
Base 1 5,2% 5,2% 5,2% 5,2% 5,2% 5,2% 5,2% 5,2% 5,2% 5,2%
Management 2 5,5% 5,5% 5,5% 5,5% 5,5% 5,5% 5,5% 5,5% 5,5% 5,5%
Ambition 3 5,8% 5,8% 5,8% 5,8% 5,8% 5,8% 5,8% 5,8% 5,8% 5,8%
Bank 4 2,7% 2,7% 2,7% 2,7% 2,7% 2,7% 2,7% 2,7% 2,7% 2,7%
5 - - - - - - - - - -
10
(Sek in millions)
Assumptions Page 3 Financing Structures and Fees
Financing Structures Purchase Price

Structure Public / Private Target 1
1 2 3 4 5 Offer Price per Share 67,00
Sources of funds Structure 1 Structure 2 Structure 3 Structure 4 Status Quo
Revolving Credit Facility Size 65,0 65,0 65,0 65,0 - Fully Diluted Shares Outstanding 25 487 190St
Revolving Credit Facility Draw - - - - - Equity Purchase Price 1 707,6
Term Loan A 420,0 420,0 420,0 420,0 -
Term Loan B - 60,0 60,0 60,0 - Plus: Total Debt 80,9
Term Loan C - 60,0 60,0 60,0 - Plus: Preferred Securities -
2nd Lien - - - - - Plus: Non-controlling Interest 0,1
Mezzanine 120,0 120,0 120,0 240,0 - Less: Cash and Cash Equivalents (296,5)
High-Yield Bonds - - 120,0 240,0 - Enterprise Value 1 492,2
Equity Contribution 1 629,8 1 509,8 1 389,8 1 149,8 -
Rollover Equity - - - - -
Cash on Hand - - - - Calculation of Fully Diluted Shares Outstanding
- - - - - Offer Price per Share 67,00
Total Sources of Funds 2 169,8 2 169,8 2 169,8 2 169,8 -
Equity(% Purchase Price) 95,44% 88,42% 81,39% 67,34% Basic Shares Outstanding 25 148 384
Uses of Funds Plus: Shares from In-the-Money Options 1 250 000
Equity Purchase Price 1 707,6 1 707,6 1 707,6 1 707,6 - Less: Shares Repurchased -911 194
Repay Existing Bank Debt 80,9 80,9 80,9 80,9 - Net New Shares from Options 338 806
Tender / Call Premiums 341,5 341,5 341,5 341,5 - Plus: Shares from Convertible Securities 0
Financing Fees 24,8 24,8 24,8 24,8 24,8 Fully Diluted Shares Outstanding 25 487 190
Other Fees and Expenses 15,0 15,0 15,0 15,0 -
- - - - - -
- - - - - - Outstanding Options/Warrants
- - - - - - Number of Exercise In-the-Money
- - - - - - Tranche Shares Price Shares Proceeds
Total Uses of Funds 2 169,8 2 169,8 2 169,8 2 169,8 24,8 Tranche 1 155 300 74,60 0 0,00
Tranche 2 1 250 000 48,84 1 250 000 61 050 000,00
Financing Fees Tranche 3 0 0,00 0 0,00
Fees Tranche 4 0 0,00 0 0,00
Structure 1 Size (%) (Sek) Tranche 5 0 0,00 0 0,00
Revolving Credit Facility Size 65,0 4,0% 2,6 Total 1 405 300 1 250 000 61 050 000,00
Term Loan A 420,0 4,0% 16,8
Term Loan B - 4,0% - Convertible Securities
Term Loan C - 4,0% - Conversion Conversion New
2nd Lien - -% - Amount Price Ratio Shares
Mezzanine 120,0 4,5% 5,4 Issue 1 0 0,00 0,00 0
High-Yield Bonds - 4,5% - Issue 2 0 0,00 0,00 0
Senior Bridge Facility - -% - Issue 3 0 0,00 0,00 0
Senior Subordinated Bridge Facility - -% - Issue 4 0 0,00 0,00 0
Other Financing Fees & Expenses - Issue 5 0 0,00 0,00 0
Total Financing Fees 24,8 Total 0
Amortization of Financing Fees

Term 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Revolving Credit Facility Size 10 0,3 0,3 0,3 0,3 0,3 0,3 0,3 0,3 0,3 0,3
Term Loan A 5 3,4 3,4 3,4 3,4 3,4 - - - - -
Term Loan B 6 - - - - - - - - - -
Term Loan C 7 - - - - - - - - - -
2nd Lien 0 - - - - - - - - - -
Mezzanine 10 0,5 0,5 0,5 0,5 0,5 0,5 0,5 0,5 0,5 0,5
High-Yield Bonds 10 - - - - - - - - - -
Senior Bridge Facility 10 - - - - - - - - - -
Seni or Subordi na ted Bri dge Fa ci l i ty 10 - - - - - - - - - -
Other Financing Fees & Expenses 10 - - - - - - - - - -
Annual Amortization 4,2 4,2 4,2 4,2 4,2 0,8 0,8 0,8 0,8 0,8
Administrative Agent Fee 1,0 1,0 1,0 1,0 1,0 1,0 1,0 1,0 1,0 1,0
11
14 Appendix II – List of PE Firms with Presence in Sweden
AAC Capital Partners, www.aaccapitalpartners.com
Accent Equity Partners, www.accentequity.se
Affärsstrategerna, www.astrateg.se
Altor Equity Partners, www.altor.com
Bure Equity, www.bure.se
CapMan, www.capman.com
CVC Capital Partners, www.cvc.com
East Capital Partners, www.eastcapital.com
EQT Partners, www.eqt.se
EQVITEC Partners, www.eqvitec.com
European Equity Partners, www.eeplp.com
FSN Capital Partners, www.fsncapital.no
Hakon Invest, www.hakoninvest.se
IK Investment Partners, www.ikinvest.com
Investor, www.investorab.com
Montagu Private Equity, www.montagu.com
Nordic Capital, www.nordiccapital.com
Nordstjernan, www.nordstjernan.se
Northzone Ventures, www.northzone.com
Norvestor Equity, www.norvestor.com
Novax, www.novax.se
Priveq Investment, www.priveq.se
Procuritas, www.procuritas.se
Ratos, www.ratos.se
SEB Venture Capital, www.foretagsinvest.seb.se
Segulah, www.segulah.se
1
Sixth AP Fund, www.apfond6.se
Spiltan Investment, www.spiltan.se
2
15 Appendix III - Interview Inquiry
April 6th, 2010
To Whom It May Concern:
This letter is an inquiry for an interview with someone at your organization. As a graduate student at Karlstad
Business School, I am currently working on my master’s thesis. I write about private equity in general but more
specifically Leveraged Buyouts. As part of my work I have been looking at valuation models used in the PE
industry today. In my thesis I use different enterprise valuation models in order to find a suitable LBO target
among the publicly traded companies on the Swedish stock market. The models I have been looking at are
intrinsic valuation models such as DCF analysis and an LBO valuation model derived from investment
professionals at UBS investment bank and Deutsche bank’s leveraged finance group. I also use more market
focused valuation models such as comparable companies- and comparable transactions- analysis in the search
for a target firm.
The purpose of my thesis is to derive a framework for finding a suitable LBO target. My idea is to develop such
a framework based on qualitative interviews with professional investors in the PE industry. The framework will
be used when selecting a target company among publicly traded companies on the Swedish market. In order to
verify the framework, the different valuation models described above will be applied on the target and
calculated “expected return” will be compared to the demands on cost of capital held by PE firms active on the
Swedish market.
You have been sent this letter due to the fact that I think your organization has valuable knowledge that would
enrich my thesis. Therefore I would like to conduct an interview with someone at your organization. The
structure of the interview will be somewhat open. However, I will have some lead questions in order to
develop our discussion. Some of the questions I would like to ask you are, your general outlook on the LBO
market in the near future, what you as an investment professional look for in a suitable LBO target, and what
kind of valuation models you use in order to arrive at an investment decision. I would also like to know what
cost of capital you use when evaluating a business opportunity.
You will off course have the option to remain anonymous. If that is the case, the source of information given by
the interview will not be referred to in my written work. The information I receive will only be used by me for
academic purpose. If you think that certain questions are of such character that they conflict with your
interests I will accept that you cannot answer them.
I am flexible regarding the practical aspect of the interview. It could be done face to face at your preferred
location or conducted by phone if that is more suitable for you. In order to keep this letter as short as possible I
do not provide a more detailed layout of the interview. However, you will receive an outline with questions
that I would like to ask you, before the interview takes place. If you need such an outline in order to decide
whether to take part in an interview, just let me know and I will send you one.
I know that your time is valuable and would therefore like to keep the interview as short as possible. I estimate
the interview session not to take longer than one hour of your time. I hope that you consider my inquiry and
get back to me with an answer soon.
Thank you for your time and consideration.
Sincerely,
Grad. Student, Karlstad Business School
1
16 Appendix IV - Interview Outline
Thank you for taking the time to participate in this interview. I know that you and your organization
have valuable knowledge regarding LBO’s. Therefore your answers will beyond all doubt enrich my
thesis.
This is an outline for the interview. If you think that certain questions are of such character that they
conflict with your firm’s interests or if you feel that you cannot answer them, they will be skipped
immediately. The interview will be a somewhat open discussion, so please feel free to discuss
matters not highlighted by these questions if you feel that there are issues more important for you as
a professional investor than those discussed below. The information received in this interview will
only be used by Carl-Johan Strandberg for academic purpose. If you choose to be anonymous, the
source of information given by this interview will not be referred to in my written work.
Company name:
Short description of the firm:
Date of the interview:
Interview with:
Position within the company:
Do you want this interview to be anonymous?
1
Have your firm done fewer acquisitions than usually, during the last two years?
If why, what are the main reasons for this? Cost of debt etc.
Didn’t the economical slump lower the EV’s? If that was the case wouldn’t it be a great opportunity
to “buy low” during the downturn and “sell high” when the economy regains strength?
How large (%) is the “sweeteners” premiums when buying out a publicly traded company from the
Swedish market today?
How long is your usual holding period before making an exit of a portfolio company?
Have your company postponed any exits of portfolio companies during the last two years due to
the current market conditions? If yes, what are the main reasons for this?
What exit strategies do you prefer and why? Is there any exit strategies that are worse than others
right now? What are the deciding factors that you look at when choosing an exit strategy?
2
During the eighties, LBO’s with leverage levels as high as 80% could be observed. What are the
typical leverage levels (Debt/Equity ratios) in your portfolio companies today? What would you say
are the main reasons for the decrease in Debt/Equity ratios as time has gone by? Do you think we
ever again will see leverage levels comparable with those during the eighties?
Which are the most value creating factors in an LBO, as you see it? Is it the leverage, creating
increased earnings due to the tax-shield? Delisting of the public company creating less restriction
on the owner? Change of management and better competence from the PE firm. Or is it maybe
management incentives? Others?
What is your cost of capital used when evaluating investment decisions? What IRR do you need to
have on an investment in order to take it on? What cash return do you need to have on an
investment in order to take it on?
What factors, both financial but also others such as firm characteristics do you take into
consideration when finding a suitable LBO target? Any specific key ratios that is more important
than others? Such as stable cash flow, good prognosticated results, low EV/EBITDA entry multiples
or others? What kind of multiples do you look at in a target?
Is there any industry that is especially good at producing suitable LBO candidates? I mean is there
any industries where you are more likely to find suitable LBO targets? If that is the case, what
characterizes such an industry?
3
Which valuation models do you use when estimating the return of an LBO? Do you use DCF
analysis, LBO valuation model, comparable companies’ analysis, comparable transactions analysis
etc? If you use an LBO valuation model, have you developed this model on your own or is it a
model that is used by several PE firms and Investment banks? Do you make all the calculations
needed for an investment decision “in house”?
Is there any valuation model that has a greater importance?
How do you derive a reasonable exit multiple (used for valuation) in the end of the projection
period for your targets? How much value do you assume to add from managerial and synergy
effects to a portfolio company?
How long, back in time, do you track targets financial statements in order to make a reasonable
valuation?
Can you shortly describe the due diligence process conducted by your company when evaluating a
target? Where do you get consensus estimates and other forecasted numbers? What kind of data
source services do you use? Bloomberg, Factset, Thomson ONE Banker, Ibbotson etc.
4
What kind of debt instances do you usually use in an LBO? Revolving credit facility, Term loans,
High-Yield bonds etc. Do you have any interest rates available for the different type of loans? If
you use SWAP instruments instead of STIBOR in you calculations, do you have any interest rate
levels for those SWAP’s?
Is it common for you to use the cash and cash equivalents in a target firm as part of the sources of
funds for the buyout? Is that common in the industry or do you usually want to keep cash within
the company? What are the min cash levels you strive to maintain in a portfolio company?
How is your future outlook on the LBO market?
Can you give an example of suitable LBO candidates on the Swedish market and on the world
market?
5
17 Appendix V – Björn Borg Annual Reports
Figure 1: Income statement for Björn Borg, 2007 and 2008.
1
Figure 2: Income statement for Björn Borg, 2008 and 2009.
2
Figure 3: Balance sheet for Björn Borg, 2007 and 2008.
3
4
5
Figure 6: Cash flow statement for Björn Borg, 2007 and 2008.
6
Figure 7: Cash flow statement for Björn Borg, 2008 and 2009.

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Carl-Johan Strandberg

An LBO Valuation Model

Semester: Spring 2010

Source: (Kaplan & Strömberg 2009)

1.2.1 Purpose Limitations

1.2.2 Empirical Evidence Limitations

1.2.3 Input & Assumption Limitations

2.1 The Private Equity Firm

2.2 The Private Equity Fund

2.3 The Leveraged Buyout

Figure 2: The LBO concept.

Source: (Citigroup corporate and investment banking 2006)

 Mezzanine debt, ranked between traditional debt and equity.

 High-Yield Bonds, referred to as corporate bonds.

 Industrial sale means sale to strategic buyer or sale to management.

 Secondary buyout, recapitalizations of the company in a new LBO.

 Bankruptcy, this option is not preferred.

Figure 3: Exit strategies used by Swedish PE firms during 2007.

10% Finansial sale 10%

Source: (Swedish Private Equity & Venture Capital Association 2009)

4.1 Description of Respondents

4.2.1 Number of Acquisitions during the Last Two Years

4.2.5 Exit Strategies

4.2.6 Leverage Levels

Another firm described the value creating process like this.

4.2.9 Characteristics of a Suitable LBO Target

“A good deal has an EV/EBITDA entry multiple between 6X-10X.”

“We avoid companies with EV/Sales above 2X.”

“EV/Cash flow should not be more than 10X.”

4.2.10 Valuation Models

4.2.12 Tracking of Financial Statements

4.2.13 Due Diligence

4.2.15 Cash Reserve

“Right now is an attractive time to buy.”

“Buy, buy and buy!”

 Strong and predictable cash flows.

5.1 Equity Purchase Price & Enterprise Value

Figure 5: Calculation of fully diluted shares outstanding.

Figure 6: Calculation of equity purchase price and enterprise value.

Figure 7: Part of income statement.

5.3 Balance Sheet

5.4 Cash Flow Statement

Figure 9: Calculations of cash flow from operating activities.

Figure 10: Calculations of ending cash balance.

Figure 11: Calculations of cash available for optional debt repayment.

𝐵𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔 𝐵𝑎𝑙𝑎𝑛𝑐𝑒 + 𝐸𝑛𝑑𝑖𝑛𝑔 𝐵𝑎𝑙𝑎𝑛𝑐𝑒

𝐵𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔 𝐵𝑎𝑙𝑎𝑛𝑐𝑒 + 𝐸𝑛𝑑𝑖𝑛𝑔 𝐵𝑎𝑙𝑎𝑛𝑐𝑒

Further, commitment fee on unused revolver is calculated as stated above.

𝐸𝑛𝑡𝑒𝑟𝑝𝑟𝑖𝑠𝑒 𝑉𝑎𝑙𝑢𝑒 𝑎𝑡 𝐸𝑥𝑖𝑡

Cash return is calculated as equity value divided by initial equity investment.

6.1 Historical Income Statements

Figure 12: Historical financial data in the income statement.

Source: (Björn Borg AB 2009)

Source: (Björn Borg AB 2010)

6.2 Income Statement Assumptions

6.4 Balance Sheet Assumptions

Figure 15: Historical levels compared to sales.

6.5 Cash Flow Statement Assumptions