Blackstone Group: Dry Powder in an LBO Drought (A)
(6 pages of text)
Case (Pub Mat)
In late 2016, it had been three years since Blackstone Group Inc. (Blackstone) had completed its last public-to-private leveraged buyout (LBO), and it had US$45 billion of capital available for investment, called “dry powder.” Blackstone’s head of private equity (PE) blamed this public LBO drought on “historically high multiples of cash flow.” Blackstone submitted a preliminary offer to acquire a firm they had previously acquired 11 years earlier and exited in 2009. The banks committed to provide a senior credit facility, consisting of a seven-year Term Loan B, a revolver, and junk bonds; management provided forecasts of revenue and earnings before interest, tax, depreciation, and amortization. The four-week exclusivity period was set to expire, and previous bidders in a recent takeover battle could re-emerge. Blackstone had to determine a final offer based on their LBO model.
These cases are suitable for both undergraduate- and graduate-level courses on mergers and acquisitions, PE, valuation, corporate finance, or financial modelling to provide an application of financial modelling in general and LBO modelling specifically. These cases provide a discussion of a potential target for an LBO-focused PE firm as well as background information on PE firms. After working through the cases and assignment questions, students will be able to understand the following:
- How PE firms operate, generate revenue, and evaluate deals.
- The characteristics of a good LBO candidate.
- How to develop an LBO capital structure and measure the key lending and valuation multiples.
- How to construct a sources and uses table and an initial balance sheet for a deal.
- How to develop an LBO model to determine initial rates of return to equity investors in different exit scenarios.
Finance and Insurance
United States, Large, 2016
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