LBO af Kesa Electricals

Abstract

The purpose of this master thesis is to analyze the possibility for a UK leveraged buyout (LBO) for Private Equity (PE) investors during a difficult financial environment. But how exactly does this current difficult environment influence the PE funds’ ability to conduct public-to-private (PTP) transactions in the most sophisticated and largest market for PE, the UK? From the theoretical discussion I find that PE funds create value through direct value creation in the form of operational effectiveness and indirectly through the reduction of agent cost occurring in the public corporation. The high level of debt should be negative in a recession, because it increases the likelihood of bankruptcy. On the other hand, bankruptcy theories provide arguments for why PE owned firms could be able to operate with higher debt without increasing the risk of bankruptcy. Through more stable cash flows and easier access to new equity, they could neutralize the effects of the higher debt. The empirical research of PE funds and their portfolio companies showed that on average PE funds improve the profitability and productivity of the portfolio companies before and after the financial crisis and generate a higher return in the funds than for comparable firms, although the variation in the funds’ performance are huge. To test the theories and the empirical research I conduct my own financial PE target screening of current UK public companies, using a number of different financial criteria. From this I identify 25 potential target companies from a pure financial perspective. I selected Kesa Electricals (hereafter, Kesa) as a case study for a potential PTP transaction because of the company’s current low valuation and the potential turnaround of this company, which could make it an attractive Leveraged Buyout (LBO) case for a PE investor. Finally, I conduct a strategic assessment of Kesa combined with a profitability analysis. These analyzes makes the foundation of a budget for the DCF-valuation. The overall conclusion is that the LBO of Kesa would generate an IRR of 183 %. Compared with the required return of 30 %, the overall recommendation is that the LBO case is an attractive investment for a PE investor. As always with DCF-analyzes one must take into account that the results are highly sensitive to the assumptions in the model.