Questions for Private Equity / Cross-Border M&A Case

Version: 16-Nov-2011

Thu Class due by Thu 12:00 noon; Sat Class due by Fri 9:00pm

The most important step: Read the case and know the case facts. Next, understand the underlying
economics. Do not get caught up in making a model without first thinking about the transactions at hand.
To help you, try to answer the following questions:
-

Is Yell a good leveraged buyout candidate?

How similar are the UK and US businesses?
Do the management projections in Exhibit 6 and Exhibit 7 make sense to you?
If you were part of the Apax/Hicks Muse team, would you trust the mgmt. projections?
How does Yells projected debt affect its valuation?
How does the cross-border nature of the business affect the valuation?
How much is Yell worth?
How much would you bid for Yell?
If you were part of the Apax/Hicks Muse team, would you recommend the deal?

1.

Choose one valuation method (either WACC or APV)

2.

Make a model to value BT Yellow Book and Yellow Book USA (combined). Your model should be
flexible so that a user can change items such as tax rates, growth rates, etc. Please express the final
value in British pounds (GBP or ).

3.

To help you, we have posted a spreadsheet titled HBS Cross-Border M&A Posted Numbers.xls.
Download this spreadsheet and use the numbers. Also, if you notice any typos, please let us know.

4.

Make any needed assumptions in order to complete the valuation. Make your assumptions clear.

5.

We suggest inserting a separate spreadsheet for each part of the analysis. For example, you might
have spreadsheets for revenues, costs, debt schedules, taxes, etc.

6.

There are quite a few Assumption/Inputs that need to be made.

assumptions and choices as transparent as possible.

7.

The Yellow Book USA projections do not have changes in NWC for years 2002 and 2007. You need
to think about how to calculate these numbers.

8.

Do not forget the terminal value calculation.

9.

We will not do much with the private equity issues (mgmt fee, trans. fees, and carry). Dont worry.

10.

Look for helpful comments and hints. They will be posted on the Class 05 page.

11.

Do NOT get stressed about little questions. Most likely, no two groups will have exactly the same
numbers. We simply have to make too many assumptions. In fact, we will become suspicious if two
groups have the same numbers

12.

If you are feeling ambitious, you can allow your model to value the company using either WACC or
APV. Most likely, I will be reviewing this case using APV. I believe the APV methodology is more
appropriate for a levered transactions. If APV is new to you, this may be a good chance to learn
about it.

Figure out how to make the

Help and Hints:

Putting together all the different parts of the valuation is a bit difficult (more in the sense of keeping
track of lots of numbers rather than mathematical.) Please try your best. We understand the
difficulties. This assignment is a bit complicated.

If you are overwhelmed, value the UK business first to make your life easier. If all you complete is
the UK analysis, you will have completed the majority of the thought process.

We will grade mostly based on the valuation of the UK business. Valuation of the USA business
will comprise much less than 50% of the grade.

The revenue model for the USA business is obviously a bit more complicated. Just use common
sense and keep new launches separate from existing sales.

You need to estimate terminal values throughout. An easy way to do estimate terminal values is
with growing perpetuities. Assume a growth rate (2% is fine). Take the Yr 6 values and gross them
up by 1.02 to get an estimate of Yr 7 values. Apply the growing perpetuity formula and calculate.

If using APV, you will need both a terminal value (TV) of cashflows and a TV of ITS.

If using APV, the interest tax shields are not certain.

discounting by ra (the unlevered rate).

For the UK, I have used the 30-yr riskfree rate when appropriate (i.e., in the CAPM). I assumed a
market-risk premium of 6.5%. Please do whatever you feel is most appropriate. We can discuss
assumptions in class.

To get ra(USD), I first calculated ra(GBP). I then used the following formula to get the US dollar
discount rate: 1+ra(USD) = (1+ra(GBP)) * (1+rf(USD)) / (1+rf(GBP)). Some of you may
recognize the equation as similar to the equation for covered interest parity. You can use the same
methodology to convert rWACC from GBP to USD.

Using WACC only, the professors workbook includes the following 11 worksheets: Cover Page,
Inputs, Outputs, UK Revenues/Costs, UK FCFs, UK WACC, USA EBIT, USA FCFs, USA WACC,
Loans, and Disc Rates. One goal of the professors model is to spread out calculations so nothing
gets crowded.

To capture their riskiness, consider

Make sure to send your valuations to the TA by the times shown at the top of page 1.