Leverage Buy-Out of INTOOLS
Fontys Internationale Hogeschool Economie (FIHE)
Course of Studies:
International Business and Management Studies
Date of completion:
17th May 2010
Traumann AG, a machine constructor from Witten, Germany, wants to extend its business to Eastern Europe. Therefore, the company plans to acquire the Slovakian tool manufacturer INTOOLS. In order to save taxes and minimise risk this acquisition is facilitated by a Special Purpose Vehicle (SPV) located on the British Cayman Islands, owned by the Traumann family. By means of Leverage Buy- Out (LBO) the purchase is financed using a significant amount of loan and only little owner's equity. The loan for the LBO is provided by the Adlerbank in Düsseldorf, Germany, which includes the acquisition price as well as the interest and redemption for the first three years. Depending on the available Free Cash Flows (FCFs) and the outcome of Altman's Z”-score, the interest rate will be determined. INTOOLS initial Z”-score is 2.13 in 2010 equalling a S&P Rating of BB+.
To enable the most beneficial acquisition, INTOOLS financial situation has to be optimised. Thus, the following methods are applied: working capital management (WCM), sale and leaseback (SALB), factoring, leasing of a machine, and advanced WCM. WCM focuses on enhancing the debtor collection period (DCP), creditor payment period (CPP), and stockholding period (SP). As benchmark the working capital scorecard is taken into consideration. The optimization of WCM results in a reduction of trade debtors by 17.6%, of inventory by 85.89%, whereas the liabilities decrease significantly by 92.28%. By means of SALB an enormous boost of cash, worth € 494,127.04, can be recognized in 2010. The factoring of all EU trade debtors additionally provides an increase in INTOOLS’ liquidity. The same effect can be achieved by the leasing of a profiling machine. Finally, the advanced WCM, consisting of the streamlining stock management and just- in- time production, generates a further amount of € 133,705.87 in cash.
All methods (WCM, SALB, factoring, leasing and advanced WCM) lead to an improved Z”-score of 4.07 equalling a S&P rating of AA, and free cash flow worth € 3,178,891.82 in 2010 after optimization.
Within the conclusion the importance of the applied methods is described. Furthermore, recommendations on order and time of realization of the optimization measures are given. The most important are WCM measures as they have a huge impact due to synergy effects.
This advisory report has been written by five students within the Learning Arrangement HLA10 Project Financial Analysis. It belongs to the main phase of the study course “International Business and Management Studies” at the Fontys Internationale Hogeschool Economie in Venlo, Netherlands.
The goal of this project is to operate as a consultancy group and give recommendations to our principal Traumann family, which is situated in Witten, Germany, and wants to acquire the Slovakian tool manufacturer INTOOLS by means of leverage buy out. Our challenge was to evaluate the present financial situation of INTOOLS and to provide advices how to improve the overall financial situation of it.
Most of our research is based on online sources and we also used additional literature. Furthermore, with our advisory report, its analysis and results we would like to address the Traumann family itself and our lecturer Ms Grotenrath from the Fontys Internationale Hogeschool Economie.
Now we would...
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