Acova Radiateurs Essay

770 Words Dec 17th, 2011 4 Pages
Acova Case EM
The purpose of this executive memo is to evaluate the justification to invest in a potential LBO candidate, Acova Radiateurs, and estimate the possible bidding price, keeping the minimum annual return required by Baring Capital’s investors at 30%-35%. 1. Justification of the Potential Transaction
We evaluate the prospects of Acova LBO transaction for Barings and come into a conclusion that Acova is a good potential LBO candidate is justified. a. Strong Cash Flow Generation Ability: Radiators manufacturing market in France is a mature market, with fast growth in a few new types of radiators. According to Acova’s financial history and the cash generating ability of the whole market, we expect steady and increasing
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e. Management Team: Acova’s management are very experienced and dedicated to the company’s operations and developments. The current CEO has a strong sales and marketing background. We consider it a promising team to cooperate with in further improving Acova’s operation after the potential transaction. 2. Valuation of the LBO Transaction
We value the company at about FFr390mm as of July 1990 using both APV and ECF methods, given the transaction structure of FFr 10mm in fees, 190mm in senior debt, 65mm in mezzanine financing, and 80mm in Bearing’s equity investment. We assume the required rate of return on equity to be 30%-35%, given the high risk of an LBO transaction. The result is well above the 340mm bidding price under consideration, yielding FFr50mm NPV. 3. Recommendations
We recommend Barings to take this LBO opportunity, given the strong cash generation ability, leading market position and professional management team. The bidding range is set to be FFr340mm to 390mm. On one hand, given the fact that strong rivals such as Zehnder have potential synergy with Acova, we consider 340mm to be the lowest possible range. On the other hand, a price higher than FFr 390mm will not meet the required rate of return of Barings.

Using APV method, we discounted unlevered cash flow with cost of asset to arrive at NPV of an unlevered firm. The terminal value is the exit value 608,100 thousand in 1993.Then we adjusted the value with

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