OCP Group E-Cademy Dominique Jacquet

Case LBO SECAP // 1. Introduction & Objectives

Presentation of a LBO case study on the company SECAP

The case consists of 5 parts.

The introduction describes the industrial environment of the case, its objectives, its organization and the main skills acquired.

Module 2 aims to carry out the financial analysis of the target and to measure both its performance, but also its ability to generate stable and predictable flows of funds.

In Module 3, the assessment of the target’s fundamental value is deduced from the construction of its economic model and shows, through the forecasting of accounting documents and cash flow, the economic and financial environment favourable to the debt of the acquiring holding company.

The structuring is described in Module 4. Each tranche of financing is precisely described in order to understand the level of risk borne by the investor and how the expected return of each security is constructed. The module demonstrates that the hierarchy of returns is well respected, as well as the financial balance of the acquiring holding company, which has sufficient cash inflows to remunerate and repay financial receivables.

Finally, as SECAP was acquired 12 years after the construction of the LBO by Pitney Bowes, the analysis of the conditions for the exit of the LBO makes it possible to compare actual and expected returns, in Module 5, and to propose a number of comments and conclusions, in particular on the conditions for the success of an operation, but also on technical elements such as the estimation of the terminal value of a firm.

Excel file to download

WEBVTT 1 00:00:01.000 --> 00:00:03.980 Hello, and welcome to this case study, which is devoted to the 2 00:00:04.180 --> 00:00:08.120 acquisition of an industrial firm, SECAP. 3 00:00:08.160 --> 00:00:11.800 The acquisition was financed, structured through a leveraged 4 00:00:11.840 --> 00:00:14.710 buyout, which is a quite interesting 5 00:00:14.780 --> 00:00:18.540 case. In this introductory module, I 6 00:00:18.560 --> 00:00:22.530 will first give you some storytelling about the company, the evolution of 7 00:00:22.560 --> 00:00:26.260 the company throughout the years, and its business model. 8 00:00:26.340 --> 00:00:29.580 Then I will give you some information about the objectives of the 9 00:00:29.620 --> 00:00:33.370 case, the learning objectives, the structure of the case, 10 00:00:33.960 --> 00:00:37.320 and I will tell you which kind of competencies and skills you are going to 11 00:00:37.400 --> 00:00:41.360 acquire throughout the process. In 12 00:00:41.380 --> 00:00:44.040 this module, I propose you the following agenda. 13 00:00:44.120 --> 00:00:47.900 First, I'm going to start with the background, the story, the business 14 00:00:48.000 --> 00:00:50.780 model, the evolution of the company. 15 00:00:50.800 --> 00:00:54.730 Then I will give you a list of the learning objectives, the structure of the 16 00:00:54.840 --> 00:00:58.780 case. Last but not least, the skills you are going to acquire, 17 00:00:58.800 --> 00:01:02.680 again, throughout the process. Let's start 18 00:01:02.740 --> 00:01:05.481 with the story of the company and its business model. 19 00:01:05.620 --> 00:01:09.600 SECAP means Société d'Études et de Construction 20 00:01:09.620 --> 00:01:12.800 d'Appareils de Précision. It's a French company, which was 21 00:01:12.840 --> 00:01:16.700 founded back in nineteen thirty-one. 22 00:01:16.720 --> 00:01:19.520 The company is one hundred percent focusing on postal 23 00:01:19.600 --> 00:01:23.410 services. Initially, it's just manufacturing and selling and 24 00:01:23.480 --> 00:01:27.200 assembling franking machines, and then the company completely 25 00:01:27.300 --> 00:01:31.210 developed its offer to propose comprehensive mail processing and 26 00:01:31.360 --> 00:01:34.720 services to its customers, from folding to 27 00:01:34.820 --> 00:01:38.800 finishing to opening. A very important moment in the life of the 28 00:01:38.860 --> 00:01:42.460 company is nineteen eighty-four, when the company starts producing its 29 00:01:42.600 --> 00:01:46.380 own franking machines for rental, which means that the 30 00:01:46.420 --> 00:01:50.020 company is assembling the machine, keeps the machine in the balance 31 00:01:50.160 --> 00:01:54.090 sheet, but the machine is physically in the office of the customer, 32 00:01:54.120 --> 00:01:57.200 and the customer is paying a rental for the use of the machine. 33 00:01:57.220 --> 00:02:00.970 It's absolutely fundamental in terms of business model and 34 00:02:01.120 --> 00:02:04.660 financial modeling. This start initially in 35 00:02:04.720 --> 00:02:07.840 eighty-four with three hundred and seventeen machines. 36 00:02:08.400 --> 00:02:10.361 It's going to be a tremendous success. 37 00:02:10.380 --> 00:02:13.920 And at the end of the story, in two thousand, when the company is acquired by 38 00:02:13.980 --> 00:02:17.900 Pitney Bowes, there are eighty-five thousand machines, 39 00:02:18.600 --> 00:02:21.590 and the rental revenues represent two-thirds of the 40 00:02:21.680 --> 00:02:25.160 turnover. So it's a business model, and it's a 41 00:02:25.200 --> 00:02:27.500 financial and commercial success. 42 00:02:29.300 --> 00:02:33.180 Producing the machines, but keeping the machines in the balance sheet is 43 00:02:33.220 --> 00:02:36.930 an interesting business model, but you need financial resources just to 44 00:02:37.140 --> 00:02:40.960 finance the assembling and the assets. 45 00:02:40.980 --> 00:02:44.240 Now, this is why the company has to be listed on a stock exchange, which 46 00:02:44.300 --> 00:02:47.440 happens in nineteen eighty-seven. 47 00:02:47.520 --> 00:02:51.040 The company, very shortly after, is acquired by Fimalac 48 00:02:51.600 --> 00:02:54.640 in nineteen eighty-nine, and this is the objective of this 49 00:02:54.800 --> 00:02:58.440 LBO. Fimalac means Financière Marc Ladreit de 50 00:02:58.480 --> 00:03:02.290 Lacharrière. Marc Ladreit de Lacharrière is a former CFO of a 51 00:03:02.380 --> 00:03:06.310 large French company. The price which is paid is 52 00:03:06.320 --> 00:03:10.060 one hundred and seventeen million euros, which at that time 53 00:03:10.140 --> 00:03:13.460 was seven hundred and seventy million French 54 00:03:13.520 --> 00:03:17.000 franc. There will be a leveraged buyout, so you 55 00:03:17.060 --> 00:03:20.960 create a holding, which is named Financière Secap, and 56 00:03:21.000 --> 00:03:24.460 Financière Secap is going to raise plenty of debt in order to finance the 57 00:03:24.520 --> 00:03:28.380 acquisition. Eventually, a few years later, the 58 00:03:28.420 --> 00:03:32.360 company is going to be sold to Pitney Bowes, which is a publicly traded 59 00:03:32.440 --> 00:03:33.500 US company. 60 00:03:35.020 --> 00:03:38.180 Why is this case so relevant and interesting? 61 00:03:38.240 --> 00:03:40.660 Simply because we have the real data. 62 00:03:40.700 --> 00:03:44.360 We have the real initial data when the 63 00:03:44.420 --> 00:03:48.360 investor takes a decision of acquiring and financing the 64 00:03:48.440 --> 00:03:52.390 company. We have the real data in terms of the, the accounts of 65 00:03:52.420 --> 00:03:56.400 the company, we have the forecasts, and we have the structure of 66 00:03:56.440 --> 00:03:59.660 the financing. But we also have the real exit 67 00:03:59.760 --> 00:04:03.500 conditions, not only because Pitney Bowes is a listed 68 00:04:03.600 --> 00:04:07.540 company, but because Secap is still listed a little bit 69 00:04:07.580 --> 00:04:11.040 with a few shares, and there will be a squeeze-out process. 70 00:04:11.080 --> 00:04:14.060 In the squeeze-out process, the company has to disclose the 71 00:04:14.120 --> 00:04:18.079 accounts and the valuation. So this is very interesting 72 00:04:18.140 --> 00:04:21.740 because we have real data for the leveraged buyout. 73 00:04:23.700 --> 00:04:27.300 In this case, we have five key learning objectives. 74 00:04:28.000 --> 00:04:31.900 First, it's an acquisition, so we are going to run the financial analysis of the 75 00:04:31.960 --> 00:04:35.240 company, and we are going to evaluate the firm using the 76 00:04:35.340 --> 00:04:39.200 discounted free cash flow method, which is a very traditional 77 00:04:39.300 --> 00:04:43.060 one, but we have the data again, so we are going to be able to run the 78 00:04:43.100 --> 00:04:46.300 analysis. Then we are going to question the debt 79 00:04:46.340 --> 00:04:50.320 capacity of the firm. Is the company able to put 80 00:04:50.400 --> 00:04:53.740 a lot of debt in the financial holding or not? 81 00:04:53.750 --> 00:04:57.280 Then there will be plenty of consequences on the structuring of the leverage 82 00:04:57.620 --> 00:05:01.120 buyout. There will be different hybrid, 83 00:05:01.200 --> 00:05:05.090 senior, subordinated debt instruments, and we are going 84 00:05:05.180 --> 00:05:08.860 to be able to analyze each of them. Analyzing 85 00:05:08.920 --> 00:05:11.820 means identifying the return and 86 00:05:11.960 --> 00:05:15.900 estimating the risk. Then we are going to be able to 87 00:05:15.940 --> 00:05:19.820 compare risk and return for all these instruments, and we are 88 00:05:19.840 --> 00:05:23.480 going to be able to set up a hierarchy in terms of risk 89 00:05:23.540 --> 00:05:25.140 return for the financing. 90 00:05:26.100 --> 00:05:30.020 Last but not least, as we have all the data, we are going 91 00:05:30.040 --> 00:05:33.340 to be able to run an ex post financial analysis, 92 00:05:33.440 --> 00:05:36.320 identifying the actual versus the projected 93 00:05:36.400 --> 00:05:37.580 return. 94 00:05:38.700 --> 00:05:41.040 There will be four parts in this case. 95 00:05:41.100 --> 00:05:44.700 First, we are going to make a traditional financial analysis of the target 96 00:05:44.800 --> 00:05:48.490 company, Secap, identifying return on capital, 97 00:05:48.540 --> 00:05:52.040 return on sales, et cetera. Then we are going to 98 00:05:52.100 --> 00:05:55.540 capitalize on the financial development model. 99 00:05:55.580 --> 00:05:59.460 We have the forecasts. As we have the forecasts, we are going to be able 100 00:05:59.520 --> 00:06:03.260 to make a financial evaluation of the firm, discounting 101 00:06:03.360 --> 00:06:06.648 free cash flows at the weighted average cost of capital.... 102 00:06:06.728 --> 00:06:10.398 Once we have set up the price, we are going to have a look at the 103 00:06:10.648 --> 00:06:14.638 financing structure, the financial holding, which hold the 104 00:06:14.748 --> 00:06:18.208 shares of SECAP, the Financière SECAP. 105 00:06:18.268 --> 00:06:21.928 We are going to look at each and every debt instrument, 106 00:06:22.508 --> 00:06:26.118 understand, again, the risk return, look at the ordinary 107 00:06:26.188 --> 00:06:30.158 shares. But what is also very interesting is that we are going to have a look 108 00:06:30.208 --> 00:06:34.188 at the holding company's financial equilibrium, 109 00:06:34.208 --> 00:06:37.348 because it's not enough to make sure that the money is available to make the 110 00:06:37.408 --> 00:06:41.148 acquisition. You have to make sure that during the whole period 111 00:06:41.288 --> 00:06:45.028 of LBO, cash inflows and cash outlays are 112 00:06:45.268 --> 00:06:48.838 matching. Last but not least, again, the end of the 113 00:06:49.008 --> 00:06:52.508 story and the acquisition by Pitney Bowes in two thousand and 114 00:06:52.628 --> 00:06:53.908 one. 115 00:06:54.968 --> 00:06:58.888 In terms of skills, of competencies you are going to acquire throughout the 116 00:06:58.908 --> 00:07:02.768 process, we start obviously with financial analysis, a very 117 00:07:02.788 --> 00:07:06.468 traditional one. Business valuation, how do 118 00:07:06.548 --> 00:07:10.547 you calculate and discount the free cash flows at the weighted average 119 00:07:10.588 --> 00:07:14.568 cost of capital? The WACC calculation is going to be quite 120 00:07:14.588 --> 00:07:18.468 relevant. Then it's going to be about financial modeling and 121 00:07:18.528 --> 00:07:21.948 forecasting. We are going to build the 122 00:07:21.968 --> 00:07:25.868 P&L cash flow and balance sheet throughout the period. 123 00:07:25.888 --> 00:07:29.288 Then there will be the presentation of the junior debt instrument. 124 00:07:29.308 --> 00:07:32.568 This is going to be subordinated debt, also named mezzanine 125 00:07:32.668 --> 00:07:36.128 financing, and we are going to make some actuarial calculation of the 126 00:07:36.168 --> 00:07:40.068 expected return for each and every instrument. 127 00:07:40.108 --> 00:07:43.908 Then we are going to have a look at the terminal value, and there will be 128 00:07:43.948 --> 00:07:47.768 some reflections about the terminal value, which is quite 129 00:07:47.788 --> 00:07:51.288 fundamental when you discount free cash flows. 130 00:07:52.528 --> 00:07:56.108 Now, we can start with measuring the financial performance of 131 00:07:56.248 --> 00:08:00.228 SECAP, the target company for the acquisition, and we are going to run a 132 00:08:00.268 --> 00:08:04.088 very traditional financial analysis.

Hello, and welcome to this case study, which is devoted to the acquisition of an industrial firm, SECAP.
The acquisition was financed, structured through a leveraged buyout, which is a quite interesting case.
In this introductory module, I will first give you some storytelling about the company, the evolution of the company throughout the years, and its business model.
Then I will give you some information about the objectives of the case, the learning objectives, the structure of the case, and I will tell you which kind of competencies and skills you are going to acquire throughout the process.
In this module, I propose you the following agenda.
First, I'm going to start with the background, the story, the business model, the evolution of the company.
Then I will give you a list of the learning objectives, the structure of the case.
Last but not least, the skills you are going to acquire, again, throughout the process.
Let's start with the story of the company and its business model.
SECAP means Société d'Études et de Construction d'Appareils de Précision.
It's a French company, which was founded back in nineteen thirty-one.
The company is one hundred percent focusing on postal services.
Initially, it's just manufacturing and selling and assembling franking machines, and then the company completely developed its offer to propose comprehensive mail processing and services to its customers, from folding to finishing to opening.
A very important moment in the life of the company is nineteen eighty-four, when the company starts producing its own franking machines for rental, which means that the company is assembling the machine, keeps the machine in the balance sheet, but the machine is physically in the office of the customer, and the customer is paying a rental for the use of the machine.
It's absolutely fundamental in terms of business model and financial modeling.
This start initially in eighty-four with three hundred and seventeen machines.
It's going to be a tremendous success.
And at the end of the story, in two thousand, when the company is acquired by Pitney Bowes, there are eighty-five thousand machines, and the rental revenues represent two-thirds of the turnover.
So it's a business model, and it's a financial and commercial success.
Producing the machines, but keeping the machines in the balance sheet is an interesting business model, but you need financial resources just to finance the assembling and the assets.
Now, this is why the company has to be listed on a stock exchange, which happens in nineteen eighty-seven.
The company, very shortly after, is acquired by Fimalac in nineteen eighty-nine, and this is the objective of this LBO.
Fimalac means Financière Marc Ladreit de Lacharrière.
Marc Ladreit de Lacharrière is a former CFO of a large French company.
The price which is paid is one hundred and seventeen million euros, which at that time was seven hundred and seventy million French franc.
There will be a leveraged buyout, so you create a holding, which is named Financière Secap, and Financière Secap is going to raise plenty of debt in order to finance the acquisition.
Eventually, a few years later, the company is going to be sold to Pitney Bowes, which is a publicly traded US company.
Why is this case so relevant and interesting? Simply because we have the real data.
We have the real initial data when the investor takes a decision of acquiring and financing the company.
We have the real data in terms of the, the accounts of the company, we have the forecasts, and we have the structure of the financing.
But we also have the real exit conditions, not only because Pitney Bowes is a listed company, but because Secap is still listed a little bit with a few shares, and there will be a squeeze-out process.
In the squeeze-out process, the company has to disclose the accounts and the valuation.
So this is very interesting because we have real data for the leveraged buyout.
In this case, we have five key learning objectives.
First, it's an acquisition, so we are going to run the financial analysis of the company, and we are going to evaluate the firm using the discounted free cash flow method, which is a very traditional one, but we have the data again, so we are going to be able to run the analysis.
Then we are going to question the debt capacity of the firm.
Is the company able to put a lot of debt in the financial holding or not? Then there will be plenty of consequences on the structuring of the leverage buyout.
There will be different hybrid, senior, subordinated debt instruments, and we are going to be able to analyze each of them.
Analyzing means identifying the return and estimating the risk.
Then we are going to be able to compare risk and return for all these instruments, and we are going to be able to set up a hierarchy in terms of risk return for the financing.
Last but not least, as we have all the data, we are going to be able to run an ex post financial analysis, identifying the actual versus the projected return.
There will be four parts in this case.
First, we are going to make a traditional financial analysis of the target company, Secap, identifying return on capital, return on sales, et cetera.
Then we are going to capitalize on the financial development model.
We have the forecasts.
As we have the forecasts, we are going to be able to make a financial evaluation of the firm, discounting free cash flows at the weighted average cost of capital....
Once we have set up the price, we are going to have a look at the financing structure, the financial holding, which hold the shares of SECAP, the Financière SECAP.
We are going to look at each and every debt instrument, understand, again, the risk return, look at the ordinary shares.
But what is also very interesting is that we are going to have a look at the holding company's financial equilibrium, because it's not enough to make sure that the money is available to make the acquisition.
You have to make sure that during the whole period of LBO, cash inflows and cash outlays are matching.
Last but not least, again, the end of the story and the acquisition by Pitney Bowes in two thousand and one.
In terms of skills, of competencies you are going to acquire throughout the process, we start obviously with financial analysis, a very traditional one.
Business valuation, how do you calculate and discount the free cash flows at the weighted average cost of capital? The WACC calculation is going to be quite relevant.
Then it's going to be about financial modeling and forecasting.
We are going to build the P&L cash flow and balance sheet throughout the period.
Then there will be the presentation of the junior debt instrument.
This is going to be subordinated debt, also named mezzanine financing, and we are going to make some actuarial calculation of the expected return for each and every instrument.
Then we are going to have a look at the terminal value, and there will be some reflections about the terminal value, which is quite fundamental when you discount free cash flows.
Now, we can start with measuring the financial performance of SECAP, the target company for the acquisition, and we are going to run a very traditional financial analysis.