LBO af Dansk Supermarked

Nicolas West Oldrup & Frederik Høgdahl Bjerg

Student thesis: Diploma thesis


Executive Summary: The whole setup around a private equity fund is fascinating. Buying companies and developing them to achieve extremely high returns from 20% to 25% seems very appealing to most people in the financial world. Private equity funds mainly invest in unlisted companies with potential for resale later. Private equity funds inject equity in to companies and buy existing shareholders out of the companies, either wholy or partly. in whole or in part. Private equity funds typically invest in companies over a 3 to 7 year period and then sell them to new owners with a profit. The companies invested in, typically face a development that places great demands on the owners in terms of capital, resources and capabilities. One example could be a company moving towards international expansion. The private equity fund provides the necessary capital and management for the company to grow and achieve the new targets agreed in collaboration with management. Dansk Supermarked is a company that has gained a large market share in Denmark and the possibilities for growth seem to be limited. Therefore it is necessary to look for new markets for further growth. The Swedish and Polish markets for grocery shopping have been analyzed and it is estimated that in these markets there are good opportunities for growth. To evaluate Dansk Supermarked as an investment case for a private equity fund, it is necessary to value the company. In this task Dansk Supermarked is valued using the DCF model both with optimal capital structure and an LBO capital structure. In theory, it may well be that one can take advantage of leverage and achieve a lower WACC - and thus a higher business value in the DCF model. In reality, the valuation is transparent to all parties and the price of the company will not be higher as a result of financial leverage. Furthermore, the underlying cash flow is alike, and it should cost the same regardless of the debt structure. In this task a private equity fund will pay 47.447 million DKK for Dansk Supermarked, which is 6.447 million DKK more than Salling Fondene bought Dansk Supermarked for 7th of January 2014. The DCF model is extremely sensitive to changes in the factors WACC and growth (g). For example if WACC is changed from 7.5% to 9.0% and growth is changed from 2 to 3 the enterprise value of Dansk Supermarked in this task is 41.000 million DKK. After five years of ownership of Dansk Supermarked the private equity fund will sell the company. If the company can be traded to a multiple of 13.4 times EBITDA as it was between Salling Fondene and A.P. Møller Mærsk, the achieved return on investment would be 19.45%. If the trading multiple decreases to 12 times EBITDA, the return on investment decreases to 16.57%. In the last example the private equity fund’s required rate of return will not be achieved. Therefore, the private equity fund needs to sell Dansk Supermarked to a multiple of at least 13.4 times EBITDA in 2018 to provide a satisfactory return. Another option is to sell before 2018 when the IRR is very sensitive when cash flow over time is due. If Dansk Supermarked was sold a year before the end of the holding period in 2017 to a multiple of 12x EBITDA, the achieving return on investment would be 19.44 %. The private equity fund is forced to exit as soon as possible or as the latest in 2018 at a multiple of 13.4 times EBITDA or higher, to achieve their required return on investment.

EducationsGraduate Diploma in Finance, (Diploma Programme) Final Thesis
Publication date2014
Number of pages98