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Leveraged Buyouts: A Practical Guide to Investment Banking and Private Equity, + Website


Praise for Leveraged Buyouts

"Pignataro's books are exceptional guides to finance and LBO analysis. Leveraged Buyouts, particularly, is a fantastic primer for those looking to understand the practical application of private equity. If A Random Walk Down Wall Street is the bible for understanding the financial world, Pignataro's books are the bible for understanding the application."
—Fred Coulson, Founder and Managing Partner, Five Elms Capital

"Paul's approach to financial modeling and valuation is a great road map for anyone looking to develop the skill set necessary to work on complex financial transactions. His replicable process is a great foundation for investment professionals and simplifies transaction and valuation analysis with a step-by-step approach and real-world examples."
—Eric J. Bruun, Managing Director, CID Capital

"From our view at Graham Partners, Leveraged Buyouts provides an excellent technical guide for young private equity and investment banking professionals, who need to be capable of building an analytical model to evaluate and price a leveraged buyout, and then need to be able to explain their thinking to the firm's most senior personnel. Paul Pignataro's writing is clear and straightforward, and we have made Leveraged Buyouts required reading for new personnel on the Graham Partners team."
—Steven C. Graham, Senior Managing Principal, Graham Partners

"Leveraged Buyouts is an extremely valuable 'how-to-do-it' primer on fundamental and advanced analytic techniques for creating and evaluating private equity acquisition models. Its ongoing dissection of the creative acquisition of H. J. Heinz by Warren Buffett's Berkshire Hathaway and 3G Capital will be of great practical interest to students, finance professionals, and investors."
—Charles H. McGill, Adjunct Finance Professor, NYU Stern School of Business

"From the bootstrap deals of the '70s, to the $26 billion buyout of RJR Nabisco in the '80s, to today's $28 billion blockbuster deal for Heinz, LBOs have transformed the capital markets and the way in which companies are bought and sold. Yet, other than a handful of Wall Street practitioners, few understand how they work. In Leveraged Buyouts, Paul Pignataro does a masterful job of using the Heinz deal to explain the intricacies of LBOs, making his book a must-read for any aspiring investment professional or anyone with an interest in finance."
—Jack Perkowski, Founder and Managing Partner, JFP Holdings Ltd.

"Anyone who wants to become an expert at leveraged buyouts must read this book. Paul's expertise in this area is invaluable and this book is a straightforward 'how-to' guide that is a must have addition to any finance library."
—Obed Cepeda, Portfolio Manager, Bishop, Rosen & Co.

PAUL PIGNATARO is the founder and CEO of the New York School of Finance (NYSF). He has over thirteen years of experience in investment banking and private equity in business mergers, acquisitions, restructurings, asset divestitures, asset acquisitions, and debt and equity transactions covering the oil, gas, power and utility, Internet and technology, real estate, defense, travel, banking, and service industries. Mr. Pignataro continues to participate on the training team, actively providing training at bulge bracket banks and M&A teams at corporations, and billion-dollar funds. Prior to his entrepreneurial endeavors, Mr. Pignataro worked at TH Lee Putnam Ventures, a $1 billion private equity firm affiliated with buyout giant Thomas H. Lee Partners. Prior to TH Lee, Mr. Pignataro worked in the investment banking department of Morgan Stanley.

Preface xi

The Heinz Case Study xii

How This Book Is Structured xiii

Part One Leveraged Buyout Overview 1

Chapter 1 Leveraged Buyout Theory 3

Cash Availability, Interest, and Debt Pay-Down 3

Operation Improvements 4

Multiple Expansion 4

What Makes Good Leveraged Buyout? 4

Exit Opportunities 5

Is Heinz a Leveraged Buyout? 5

Chapter 2 What Is Value? 7

Book Value 7

Market Value 7

Enterprise Value 8

Multiples 12

Three Core Methods of Valuation 14

Chapter 3 Leveraged Buyout Analysis 19

Purchase Price 19

Sources and Uses of Funds 22

IRR Analysis 33

Part Two Leveraged Buyout Full-Scale Model 49

Chapter 4 Assumptions 51

Purchase Price 57

Sources of Funds 63

Uses of Funds 69

Chapter 5 The Income Statement 75

Revenue 76

Cost of Goods Sold 76

Operating Expenses 77

Other Income 78

Depreciation and Amortization 80

Interest 80

Taxes 81

Nonrecurring and Extraordinary Items 82

Distributions 82

Shares 83

Heinz Income Statement 84

Last Twelve Months (LTM) 108

Income Statement--Projections 116

Chapter 6 The Cash Flow Statement 133

Cash Flow from Operating Activities 133

Cash Flow from Investing Activities 137

Cash Flow from Financing Activities 137

Financial Statement Flows Example 138

Heinz Cash Flow Statement 144

Heinz Last Twelve Months (LTM) Cash Flow 154

Cash Flow Statement Projections 160

Chapter 7 The Balance Sheet 179

Assets 179

Liabilities 182

Heinz Balance Sheet 184

Chapter 8 Balance Sheet Adjustments 199

Goodwill 200

Heinz Balance Sheet Adjustments 208

Chapter 9 Depreciation Schedule 221

Straight-Line Depreciation 222

Accelerated Depreciation 222

Deferred Taxes 227

Projecting Depreciation 231

Projecting Amortization 241

Projecting Deferred Taxes 244

Chapter 10 Working Capital 247

Asset 247

Liability 247

Operating Working Capital 248

Heinz’s Operating Working Capital 251

Projecting Operating Working Capital 262

Operating Working Capital and the Cash Flow Statement 271

Chapter 11 Balance Sheet Projections 279

Cash Flow Drives Balance Sheet versus Balance

Sheet Drives Cash Flow 283

Balancing an Unbalanced Balance Sheet 301

Chapter 12 Debt Schedule and Circular References 309

Debt Schedule Structure 309

Modeling the Debt Schedule 310

Circular References 329

Automatic Debt Pay-Downs 337

Basic Switches 339

Finalizing the Model 339

Chapter 13 Leveraged Buyout Returns 351

Exit Value 351

Returns to 3G Capital 355

Multiple Expansion 361

Debt Pay-Down 364

Conclusion 364

Part Three Advanced Leveraged Buyout Techniques 365

Chapter 14 Accelerated Depreciation 367


Accelerated versus Straight-Line Depreciation 372

Chapter 15 Preferred Securities, Dividends, and Returns to Berkshire Hathaway 377

Preferred Securities 377

Preferred Dividends 378

Returns to Berkshire Hathaway 388

Chapter 16 Debt Covenant Ratios, and Debt Fee Amortization 395

Coverage Ratios 395

Leverage Ratios 397

Debt Fee Capitalization and Amortization 399

Chapter 17 Paid-in-Kind Securities 409


Appendix 1: Model Quick Steps 417

Appendix 2: Financial Statement Flows 419

Income Statement to Cash Flow 419

Cash Flow to Balance Sheet 420

Appendix 3: Excel Hot Keys 421

About the Companion Website 423

About the Author 425

Index 427