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Valuation Analysis and Structured

This document outlines a valuation analysis and proposed structured management buyout of SolarTech Inc. It includes an analysis of the company's financial performance and position, industry forecasts projecting strong growth in solar capacity, and two scenarios for the management buyout financing structure with different debt-to-equity ratios. The recommendation is that SolarTech is a good candidate for a management buyout and the proposed deal structure of 60% debt and 40% equity best meets the evaluation parameters.

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81 views19 pages

Valuation Analysis and Structured

This document outlines a valuation analysis and proposed structured management buyout of SolarTech Inc. It includes an analysis of the company's financial performance and position, industry forecasts projecting strong growth in solar capacity, and two scenarios for the management buyout financing structure with different debt-to-equity ratios. The recommendation is that SolarTech is a good candidate for a management buyout and the proposed deal structure of 60% debt and 40% equity best meets the evaluation parameters.

Uploaded by

vasosk
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Valuation Analysis and Structured

Management Buy-Out of SolarTech Inc.

City University of Seattle: MBA FIN 541


Outline
 Market & Financial Analysis

 Pro Forma Financial Plan

 Financing Proportions (Debt/ Equity Mix)

 Proposed Financing Structure

 Recommendation
Market & Financial Analysis - Profitability
Hist. Hist. Hist. Hist. Hist. Hist.
2010 2011 2012 2010 2011 2012
net sales 31,0 32,0 34,0 net income 2,1 2 2
growht rate n/a 3,23% 6,25% growth rate n/a -4.76% 25.00%

 Solartech Inc. demonstrates stable increase in net sales for the last two years by reaching the
level of $34.0 million for 2012;
 Comparing the Net sales in 2012 to those in previous years, the Net Income in 2012 indicated an
increase.
Market & Financial Analysis – Key Ratios

Hist. Hist. Hist. Rating


2012 2011 2010

Equity ratio 20,4% 20,0% 20,8% good


Debt retirement ratio 7,5 6,6 6,7 average
Operating cash flow margin 21,2% 18,4% 19,7% very good
Return on assets (ROA) -30,0% -25,6% -27,4% danger
Operating profit margin 19,1% 16,3% 17,4%

 A good equity ratio that guarantees more free cash for future growth;
 Each dollar of sales Solartech Inc. makes 19 cents before interest and taxes;
 Negative ROA – Solartech Inc. invests a high amount of capital in
production, while receiving a little income.
Market & Financial Analysis:
Comparison with industry

Solartech Inc. operates in Renewable Energy Services & Equipment Industry;


Solartech Inc. has average if not marginally better ratios than its rivals;
The industry appears to be in infancy/ is made up of underachievers.
Market & Financial Analysis – Industry Forecast

(Altenergymag. 2013)

The solar PV capacity is expected to continue to grow in the future – growing


market;
The substantial fall in solar PV cost suggests fall in prices of Solartech Inc.’s
products and put under condition the current price of its inventory;
The global cumulative installed capacity for solar PV is expected to reach 330,424
MW by 2020, growing at a CAGR of 23.7% during 2011-2020.
Market & Financial Analysis
Debt leverage and coverage ratios
Financial Covenants: Min./Max. Values
Net Debt/Equity 1,2 1,3 1,2 max. 2.0
Net debt/EBITDA 0,8 0,9 0,9 max. 3.5
EBITDA/Interest expense 10,3 9,8 10,2 min. 3.0
FCF/(Interest + Principal) 3,1 2,4 min. 1.0

 Net Debt/ Equity: Moderate/ Some Headroom;


 Net Debt/ EBITA: Low/ Headroom;
 EBITDA/Interest Expense: High/ No Headroom;
 FCF: High/ No Headroom.
The set up financial covenants and Solatech's ratios show that the company is
in compliance with covenants.
Pro Forma Financial Plan

 The Free Cash Flow is designed to measure a company’s financial


performance by calculating the firm’s operating cash flow from its
capital expenditures.
Financing Proportions – Debt/Equity Mix

Debt/ Equity Mix is a balance between funds


available, what the returns and covenants dictate, and
the financial structure can support.

Scenario 1 - an ideal mix of 60% Debt, 40% Equity


Scenario 2 – a mix of 15% Debt, 85% Equity.
Management Buy-Out

This transaction is when an equity interest in the business is


acquired by its management (with the cooperation of outside
finance).
Financing Sources

Management buyouts - too risky for banks to finance


through a loan in itself;

They typically finance at 4x cash flow;

Financing structure for Solartech Inc. - partially leveraged


through private equity financing (co-investor);

Co-investor exits the business within 5 years while


minimizing the risk.
Valuation
For the financing structure, we will utilize the DCF value for
Solartech Inc.
Financial Structure
Scenario 1

Scenario 2
Evaluation
Investors hedge their
investment bets based on
a balance of return.

Scenario 1 is presented as
a baseline or ideal to
contrast Scenario 2.
−a roughly 60% Debt/ 40%
Equity split;
−it would provide an IRR
of 15% in year 2016;
−more debt heavy then
equity (compared to
Scenario 2);
−comes closer to the
ceilings of the financial
covenants.
Evaluation, Cont.
Scenario 2

-never hits an IRR


of 15%, the
minimum desired
by an investor in
the 5-year period;

- high equity
investment;

-adequate
headroom on
each
covenant, with
the exception of
IRR.
Evaluation Cont.
Mezzanine Finance?
Use of mezzanine finance
could be considered in
scenario 1 or scenario 2, if:
- purchase price
exceeded the amount
that could be financed
using a loan/debt.

Mezzanine capital treated


as equity, but is essentially
debt;

Has a higher service fee


or cost than a traditional
loan;

The IRR is significantly


impacted due to the cost
of this capital –but the
return preference is not
there for a co-investor.
Recommendation
SolarTech Inc. appears to be a good candidate for a
management buyout.
Take in mind:
Part of a growing, but immature industry segment with
growing sales and good cash flow management;

Concern over a lackluster ROA => poorly utilized capital


internally.

Proposal:
The deal structure - a 60% Debt/ 40% Equity balance - best
meets parameters such as Covenants and IRR.
References
Altenergymag, (2012). Solar Photovoltaic (PV) Power - Global Market Size and Key Country
Analysis to 2020. Retrieved on June 21, 2013 from:
http://www.altenergymag.com/emagazine/2012/02/solar-photovoltaic-pv-power--global-
market-size-and-key-country-analysis-to-2020/1849
CSImarket, (2013). Renewable Energy Services & Equipment Industry. Retrieved on June
21, 2013 from: http://csimarket.com/Industry/Industry_Profitability.php?ind=605
Deloite (2004). Making The Break: A Practical Guide to MBO. Retrieved June 21, 2013 from:
http://www.deloitte.com/assets/Dcom-
UnitedKingdom/Local%20Assets/Documents/Guide%20to%20mbos.pdf
Eayers, Willis E., Mergers & Acquisitions: A Corporate Finance Perspective, 2013 Class
Presentation
International Energy Agency, (2012). World Energy Outlook 2012. Retrieved on June
21, 2013 from
http://www.worldenergyoutlook.org/media/weowebsite/2012/WEO2012_Renewables.pdf
Investopedia (2013). Debt/Equity Ratio. Retrieved June 21, 2013 from
http://www.investopedia.com/terms/d/debtequityratio.asp
TrcSolutions, (2013). Outlook bright for Future of Solar Energy. Retrieved on June 21, 2013
from: http://blog.trcsolutions.com/solar-energy/

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