LBO Lab · Level 3: The price of one turn

Time 0:00 / 8:00 targetHints 0Base 800 pts

Case brief · Level 3 of 8

Kestrel Print & Pack

Specialty packaging

Kestrel is a fictional packaging converter financed with a senior loan (3.0x) and a cash-pay mezzanine tranche (1.5x at 12%). Half of excess cash sweeps to the senior loan.

The vendor is asking for one more turn of EBITDA on price. Debt sizes are fixed by the lenders, so any extra price is funded with equity.

LTM revenue / EBITDA: $350m / $77.0m (22.0%)
Growth / margin step: 4.0% p.a. / +50 bps p.a.
Capex / D&A, % rev.: 3.0% / 3.5%
Tax rate: 25%
Entry / exit multiple: 7.0x / 7.0x
Senior debt: 3.0x at 8.0%, 1% amort.
Sub / mezzanine: 1.5x at 12.0% cash
Cash sweep: 50%
Senior interest on: opening balance

Holding the exit multiple and debt amounts constant, how many points of sponsor IRR does one extra turn of ENTRY multiple cost (IRR at 7.0x entry minus IRR at 8.0x entry)?

Tolerance +/-0.15pts

	A	B	C
1	Inputs ($m unless stated)		Blue = hard-coded input (shaded = you may change it); black = formula; green = link to another sheet
2
3	Operating case
4	LTM revenue ($m)	350.0
5	LTM EBITDA margin	22.0%
6	Revenue growth p.a.	4.0%
7	EBITDA margin change p.a.	0.5%	added to the prior-year margin
8	D&A, % of revenue	3.5%
9	Capex, % of revenue	3.0%
10	NWC investment, % of change in revenue	10.0%
11	Tax rate	25.0%	on EBITDA - D&A - interest (cash + PIK)
12
13	Transaction
14	Entry EV / LTM EBITDA	7.0x
15	Exit EV / EBITDA (end of Year 5)	7.0x
16	Transaction fees, % of EV	2.0%
17	Minimum cash, funded at close ($m)	10.0
18
19	Debt
20	Senior debt, x LTM EBITDA	3.0x
21	Senior interest rate	8.0%
22	Senior mandatory amortisation, % of original p.a.	1.0%
23	Cash sweep, % of excess cash to senior	50%
24	Sub / mezzanine debt, x LTM EBITDA	1.5x
25	Sub cash interest rate	12.0%	on opening balance
26	Sub PIK interest rate	0.0%	accrues on opening balance, added to principal
27	Senior interest basis (1 = opening, 2 = average)	1	2 is circular: iterative calculation is on
28
29	Equity
30	Management rollover, % of total equity	0.0%
31	Management incentive pool, % of equity gain	0.0%
32
33	Scenario & covenants
34	Scenario (1 = base, 2 = downside)	1
35	Downside: EBITDA haircut from Year 1	0.0%
36	Covenant: max net debt / EBITDA	6.0x
37	Covenant: min EBITDA / cash interest	2.0x
38
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