CASE 3: CONGOLEUM
We believe Congoleum is a good LBO candidate for several reasons:
1. Low debt levels:
a. Leverage Ratio = 4.61% (LT Debt/Total Assets)
b. Interest Coverage = 40x (EBIT/Interest Expense)
2. Excess cash on hand: $95.1 million
3. Good stability of business operations resulting in stable earnings and cashflows going forward, further enforced by patents.
4. No major capital requirements to continue business operations.
5. Sound asset base that can be used to raise debt as collateral .
Overall Valuation Approach
Since the leverage ratio for Congoleum will decrease over time as debt used to finance the purchase is repaid, we will use the APV ...view middle of the document...
Find Terminal Value of ITS assuming same growth rate as FCF i.e. 8% and then PV (Terminal Value of ITS)
C. Value of Levered Firm
1. Add the two together to get Value of Levered Firm i.e. $559.21m
D. Value of Equity
1. Subtract the value of existing debt of $15.6, unfunded pension liabilities of $34.5m and add existing cash of $95.1m (source: Exhibit 7)
2. Divide by 12.2 million shares to get value per share of $49.53 (or equity value of $604.21M compared to proposed value of $463.60).
Key: We would justify the price of 38 i.e. a 50% price premium over current market price by highlighting that IF we were to go ahead with the LBO, we can expect the equity value to be higher than the price offered. Hence, we are actually underpaying for the LBO.
Things to Consider
* Our valuation is dependent on our inputs assumptions.
* Post-LBO, Congoleum will have a leverage ratio of 94% (compared to industry average of 80% and comparables used with 70-75%). In addition, it will have a leverage ratio of 89.7% as it pays down its debt from...