Lbo Valuation Model.pdf

Carl-Johan Strandberg

Leveraged Buyouts An LBO Valuation Model

Finance Master’s Thesis

Semester: Supervisor:

Spring 2010 Hans Lindqvist

Abstract During the eighties a new type of financial transaction started to emerge on an increasing basis. It was the so called “leveraged buyout” also known as the LBO. In the US private equity firms made it to the headlines in financial media from engaging in leveraged buyouts with small equity investments and large amounts of borrowed capital, their targets where large solid multinational corporations. Much has happened since the eighties. Back then leveraged buyouts where often associated with terms such as “Slash and Burn” or “Buy, Flip and Strip” often meaning hostile takeovers and huge layoffs. Today private equity firms focus more on active ownership, fast decisions without the bureaucracy of the stock market and long term value creation in order to profit from their buyouts. As private equity firms today invest tremendous amounts of capital through their private equity funds. Leveraged buyouts have become one of the major areas within investment banking. Even though the LBO is a common transaction it is often hard to find models used for valuation of such a deal. Private equity funds and investment banks all have their own valuation models but these are regarded as strictly confidential and seldom revealed to the public. Therefore the creation and publication of an LBO valuation model should be of great interest for everyone aiming at a future career within private equity, corporate finance or investment banking. This thesis derives a complete LBO valuation model including a framework for finding a suitable LBO target. The LBO valuation model is created in cooperation with the debt capital markets department at one of the leading investment banks in the Nordic region. The framework is based on a qualitative study conducted on seven of the most distinguished private equity firms active in Sweden. In order to show how the LBO valuation model and the framework works, both are applied on the retail company Björn Borg listed on NASDAQ OMX. To verify the accuracy of the framework, calculated return from the model is analyzed and compared to the indications given by the framework. Keywords: LBO Valuation, Leveraged Buyout, LBO, Private Equity, Investment Banking, Corporate Finance

Acknowledgements I would like to direct an acknowledgment to the private equity firms and their professionals that took part in my study. Regrettably their names have to be kept confidential. Without your participation this thesis would not have been possible. Visiting your organizations and discussing the topic with distinguished investors have not only provided me with invaluable insight into the private equity industry, it has also been a source of inspiration through the often long hours spent on this thesis. My deepest gratitude goes out to you that have provided me with consensus estimates and financial data not available to the public. Without those numbers the result of my calculations would not have been relevant. Also, I would like to thank Mr. X on the debt capital markets department of bank Y. The information regarding the LBO loan market that you provided me with has been essential for the completion of the valuation model. Finally I would like to thank my tutor Hans Lindqvist for giving me useful feedback in the process of writing this thesis.

Carl-Johan Strandberg

Table of Contents 1 Introduction .......................................................................................................................................... 1 1.1 Purpose and Thesis Question ........................................................................................................ 3 1.2 Limitations ..................................................................................................................................... 3 1.2.1 Purpose Limitations ................................................................................................................ 3 1.2.2 Empirical Evidence Limitations ............................................................................................... 3 1.2.3 Input & Assumption Limitations ............................................................................................. 3 1.3 Disposition ..................................................................................................................................... 4 2 Theory................................................................................................................................................... 5 2.1 The Private Equity Firm ................................................................................................................. 5 2.2 The Private Equity Fund................................................................................................................. 5 2.3 The Leveraged Buyout ................................................................................................................... 6 2.4 The LBO Financing Structure ......................................................................................................... 8 2.5 Exit Strategies .............................................................................................................................. 11 3 Method ............................................................................................................................................... 12 4 Empirics .............................................................................................................................................. 14 4.1 Description of Respondents ........................................................................................................ 14 4.2 Interview Findings ....................................................................................................................... 17 4.2.1 Number of Acquisitions during the Last Two Years ............................................................. 17 4.2.2 Impact on EV’s Due to the Downturn................................................................................... 18 4.2.3 Premiums.............................................................................................................................. 18 4.2.4 Holding Periods .................................................................................................................... 19 4.2.5 Exit Strategies ....................................................................................................................... 19 4.2.6 Leverage Levels..................................................................................................................... 20 4.2.7 Value Creating Factors in an LBO ......................................................................................... 21 4.2.8 IRR & Cash Return ................................................................................................................ 22 4.2.9 Characteristics of a Suitable LBO Target .............................................................................. 22 4.2.10 Valuation Models ............................................................................................................... 23 4.2.11 Exit Multiple ....................................................................................................................... 24 4.2.12 Tracking of Financial Statements ....................................................................................... 24 4.2.13 Due Diligence...................................................................................................................... 24 4.2.14 Debt Instances .................................................................................................................... 25 4.2.15 Cash Reserve ...................................................................................................................... 25 4.2.16 Future Outlook on the LBO Market .................................................................................... 26

4.3 Characteristics of a Strong LBO Candidate .................................................................................. 27 5 The LBO Valuation Model ................................................................................................................... 30 5.1 Equity Purchase Price & Enterprise Value ................................................................................... 30 5.2 Income Statement ....................................................................................................................... 32 5.3 Balance Sheet .............................................................................................................................. 33 5.4 Cash Flow Statement ................................................................................................................... 35 5.5 Debt Schedule ............................................................................................................................. 38 5.6 Returns Analysis .......................................................................................................................... 41 6 Input & Assumptions .......................................................................................................................... 42 6.1 Historical Income Statements ..................................................................................................... 42 6.2 Income Statement Assumptions ................................................................................................. 43 6.3 Opening 2009, In the Balance Sheet ........................................................................................... 45 6.4 Balance Sheet Assumptions ........................................................................................................ 45 6.5 Cash Flow Statement Assumptions ............................................................................................. 46 6.6 Financing Structures, Margins and Base-Rate ............................................................................. 47 6.7 Financing Fees and Other Expenses ............................................................................................ 49 6.8 Equity Purchase Price and Premium ........................................................................................... 50 6.9 Exit Multiple ................................................................................................................................ 51 7 Analysis ............................................................................................................................................... 52 7.1 Björn Borg’s Suitability for an LBO .............................................................................................. 52 7.1.1 Strong and Predictable Cash Flows ...................................................................................... 53 7.1.2 Leading and Defensible Market Position.............................................................................. 53 7.1.3 Realizable Growth Opportunities ......................................................................................... 54 7.1.4 Efficiency Enhancement Opportunities ................................................................................ 54 7.1.5 CAPEX Light, Small Initial Investments ................................................................................. 54 7.1.6 Strong Asset Base ................................................................................................................. 55 7.1.7 Low Entry Multiples .............................................................................................................. 55 7.1.8 Competent Management ..................................................................................................... 56 7.1.9 Moderate Leverage Level ..................................................................................................... 56 7.1.10 Strong Owner Structure ..................................................................................................... 56 7.1.11 Exit after the Holding Period .............................................................................................. 56 7.2 Result of the Björn Borg LBO ....................................................................................................... 57 7.2.1 Base Case & Financing Structure 1 ....................................................................................... 57 7.2.2 Base Case & Financing Structure 2 ....................................................................................... 58

7.2.3 Base Case & Financing Structure 3 ....................................................................................... 59 7.2.4 Base Case & Financing Structure 4 ....................................................................................... 60 7.2.5 Management Case ................................................................................................................ 61 7.2.6 Ambition Case....................................................................................................................... 61 7.2.7 Bank Case ............................................................................................................................. 62 7.2.8 Sensitivity analysis ................................................................................................................ 62 8 Conclusion .......................................................................................................................................... 64 9 Discussion ........................................................................................................................................... 65 10 Future Research................................................................................................................................ 66 11 Reliability & Validity ......................................................................................................................... 67 12 References ........................................................................................................................................ 68 13 Appendix I - The LBO Valuation Model .............................................................................................. 1 14 Appendix II – List of PE Firms with Presence in Sweden .................................................................... 1 15 Appendix III - Interview Inquiry .......................................................................................................... 1 16 Appendix IV - Interview Outline ......................................................................................................... 1 17 Appendix V – Björn Borg Annual Reports ........................................................................................... 1

1 Introduction During the eighties a new type of financial transaction started to emerge on an increasing basis. It was the so called “leveraged buyout” also known as the LBO. The general idea behind an LBO is that an investor acquires control of a company without disposing the capital normally required for these types of acquisitions. The essential part of this equation is spelled debt. Leveraged buyout investment firms also called “private equity” firms1 or “PE” firms made it to the headlines in financial media with their remarkable deals. One after the other private equity firms took on deals that were even more spectacular than the ones before. Buyout models have shown to be successful in both rising and falling markets this might be one explanation to why these kinds of deals have increased steeply in popularity excluded the last two years. Much has happened since the eighties. Back then leveraged buyouts where often associated with terms such as “Slash and Burn” or “Buy, Flip and Strip” often meaning hostile takeovers and huge layoffs. Today focus is more on active ownership, fast decisions without the bureaucracy of the stock market and long term value creation. This together with the leverage caused by the capital structure in the portfolio companies often means growth rates and earnings that exceed the performance of public noted companies. As a result of this, private equity funds today are being sought after both as buyers of mature companies with solid cash flow but also by investors trying to leverage their investments. Private equity funds are no longer only for institutional investors. This is another explanation to why private equity deals have significantly increased during the last decade. Today deals are bigger and private investors can now place smaller amounts in a broad variety of funds. Figure 1: Global private equity transaction volume between 1985 and 2006.

Source: (Kaplan & Strömberg 2009)

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Private Equity or PE is equity capital not quoted on a public exchange. Private equity consists of investors and funds that make investments directly into private companies or conduct buyouts of public companies that result in a delisting of public equity.

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Figure 1 show how both the number of LBO’s and the aggregated equity value of LBO transactions have increased almost exponentially from the mid eighties until 2006. A dip in deals can be seen through the financial downturn during 1999-2001. Since then, the increase in transactions has been steadily growing from 2001 until the most recent economical slump starting in the summer of 2007. After that restrictive debt markets, lack of companies for sale and macro economical factors has lead to a decrease in LBO’s during the last years. Even though the last years and specifically the 2009 decrease in the Swedish private equity market has been worse than ever before seen in history, optimism can be heard among professional investors. In an article in Dagens Industri (Mellqvist 2010), the chairman of SEB, Marcus Wallenberg assures that Swedish banks are open to deals. Deals are still done but to lower leverage levels further a stronger focus is made towards core activities in companies today according to him. Even though there are fewer active funds on the PE market today than two years ago and their aggregated value is lower than before the trend is slowly increasing (Mellqvist 2010). The four big PE firms with strong presence in Sweden Nordic Capital, EQT, Altor and IK Investment Partners have all done few acquisitions during 2009. However investment activity has slowly started to grow recently and many of the big funds have a positive view on the near future. According to calculations made by SvD, these four PE actors have at least 216 billion SEK in investable capital (Neurath 2010). Björn Savén founder of IK Investment Partners states that 2010 will be an active year for IK (Neurath 2010). In the same article Björn Savén reveals his forecast that buyouts of medium sized companies will increase in the near future while deals including bigger firms will probably never reach the top levels seen during 2006/2007. Björn argues, back then the market was driven by extremely cheap financing in relation to risk. This was not sustainable. In the longer run it is more reasonable to believe that the market will establish itself on levels seen during 2000-2005 (Neurath 2010).

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1.1 Purpose and Thesis Question The purpose of this thesis is to create an LBO valuation model including a framework for finding a suitable LBO target. With the purpose stated above, this thesis aims to apply the created LBO valuation model and framework on a company in order to show how they both work.

1.2 Limitations In this thesis a number of limitations are set up in order to define the area of research. These are purpose limitations, empirical evidence limitations and input & assumption limitations. 1.2.1 Purpose Limitations The aim of this thesis is to apply the created LBO valuation model and framework on one single company. Testing the framework against several companies should increase its validity but in order to limit the work one single company is used for the analysis. 1.2.2 Empirical Evidence Limitations The qualitative nature of the conducted study has an inherent limitation. Often quantitative research provides stronger evidence for the findings. However as a qualitative approach is somewhat easier to administer and interpret it is deemed sufficient for the purpose of this thesis. The study is realized on a sample group of seven PE firms with presence in Sweden. This is a limitation as extending the sample group both in number of interviews and geographical coverage could increase the validity of the result. 1.2.3 Input & Assumption Limitations Companies listed on NASDAQ OMX are used as the sample base for finding a suitable LBO target in accordance with the derived framework. This limitation of the sample group assures for the possibility to acquire company specific information required as input to the LBO valuation model. Further, as most companies traded on the Swedish stock market have SEK as their currency base it is convenient to use NASDAQ OMX as the sample base. Availability of company related information is a limitation to the input and assumptions used in the LBO valuation model. In order to predict levels of sales and expenditures, historical financial data is used together with predicted sales growth from the selected company’s financial goals. This is a limitation as historical figures might not reflect the future estimates of a company to the fullest extent. In real life, expensive analytical tools such as Capital IQ, FactSet or Thomson ONE banker is used in order to retrieve consensus estimates. In addition to this professional investors conduct a deeper analysis of the company in order to reach credible estimates for the future development of the target.

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1.3 Disposition This thesis is divided into the following sections Theory, Method, Empirics, The LBO Valuation Model, Input & Assumptions, Analysis, Conclusion, Discussion, Future Research and Reliability & Validity. In the theory section a general description of the private equity setting is done. Here the different aspects of the PE firm’s business model including their management of the PE fund, the LBO, its financing structure and exit strategies are explained. The method chapter describes the approach used to fulfill the purpose. It includes a description of how the qualitative study on Swedish PE firms where conducted. Under empirics respondents of and findings from the study are presented together with the derived framework for choosing an LBO target. The LBO valuation model section is a step by step passage, showing how the LBO valuation model, attached in appendix I is constructed. In the paragraph input & assumptions all of the inputs to the LBO valuation model are introduced. The analysis section contains an analysis of Björn Borg’s suitability for an LBO and an analytical approach to the result of the LBO valuation model. Conclusion reveals the findings of the work. Then a discussion around the conclusion and factors impacting the result is held. Future research contains suggestions for future research that would broaden the understanding of the topic. Finally, a discussion around the validity & reliability of the conclusion is held in order to confirm the accuracy of the result.

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2 Theory 2.1 The Private Equity Firm As private equity is money invested in companies that are not publicly traded on a stock exchange or money invested in a buyout of a publicly traded company in order to make it private. Private equity firms are companies that manage private equity funds investing in private companies or buyouts of public companies. Private equity firms are often categorized as VC2 firms or PE firms depending on their investment profile. In general VC firms provide venture capital to companies in their early stage of development while PE firms invest in mature companies. Venture capital is used by new companies with large up-front capital requirements which cannot be financed by cheaper alternatives such as debt. PE capital is used for growing and enhancing existing companies with well proven business models that often have stagnated in development. A VC firm mainly provides capital to their investments for a stake in the company. As PE firms invest they typically acquire control of their targets through a buyout. These buyouts are often associated with a substantial amount of debt or leverage therefore they are referred to as leveraged buyouts. Leveraged buyouts can be done in several ways. In addition to the LBO, where a PE firm steps in as the new owner, management buyouts and club deals are also common. In a management buyout, MBO, the management of the company becomes the new owner through a buyout. In a club deal, several PE firms work together in order to raise capital for buying-out the target company. Even though the owner structure differs between the buyouts they are all valued in the same way. Here the LBO valuation model is used in order to calculate expected return of the deal.

2.2 The Private Equity Fund A PE firm raises equity capital through a private equity fund also called PE fund. The PE funds are legally organized as limited partnerships, LP’s where the general partners, GP’s manage the fund and the LP’s provide most of the capital.3 However it is common for the GP’s to provide at least 1 percent of the total capital. The typical PE fund are a “closed-end” vehicle which mean that investors commit to provide a certain amount of money to the fund until date of termination.4 A PE fund typically has a fixed life between seven to ten years but can be extended for up to three additional years. Invested capital is used for investment in portfolio companies5 as well as management fees to the PE firm. The PE firm normally has up to five years to invest the fund’s capital committed for portfolio companies. After that it has an additional five to eight years to return the capital to its investors. After committing their capital, limited partners have little say in how the general partner deploys the investment funds as long as the basic covenants of the fund agreement are followed. Common covenants include restrictions on how much fund capital that can be invested in one company and types of securities the fund can invest in etc.

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VC or venture capital is money provided by investors to startup firms with perceived long-term growth potential. This is a very important source of funding for startups that do not have access to capital markets. It typically entails high risk for the investor, but it has the potential for above-average returns. 3 The PE firm serves as the fund’s general partner. Limited partners typically include institutional investors such as corporate and public pension funds, endowments, insurance companies and wealthy individuals. 4 This contrasts with mutual funds which are so called open-end funds where investors can withdraw their invested capital whenever they like. 5 Companies bought and managed by PE funds are referred to as portfolio companies.

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By managing PE funds the PE firm or general partner is compensated in several ways. First the general partner earns an annual management fee, usually a percentage of capital committed. As investments are realized the general partner gets a percentage of capital employed. Also the general partner earns a share of the profits of the fund, a so-called “carried interest” that almost always equals to 20 percent (Kaplan & Strömberg 2009). Finally some general partners charge deals and monitoring fees to the companies in which they invest.

2.3 The Leveraged Buyout Finding a suitable target for an LBO is very much about finding companies that has unused debt capacity. Here cash flow plays an essential role. In an LBO, free cash flow is used to pay down debt. In theory the value of the equity in the firm will increase as debt is amortized. Also, in the post-LBO firm managements share ownership significantly increases their incentives to work hard in order to maximize their own wealth provided by their equity stake. This is sometimes referred to as a “carrot” effect on the management. The heavy debt burden also forces managers to run the company efficiently in order to avoid bankruptcy. This is referred to as a “stick”. Both the “carrot” and the “stick” ensure that management is doing their best in order to run the company as efficient as possible. In addition to this third-party investors such as the PE firm acquire a large equity stake in the target company. This provides these investors incentives to motivate and monitor managers. In order to do this PE firms often hold chairs in the board of the company. Arguments of how these incentives works together and creates value in an LBO are presented by Jensen’ in his studies (Jensen 1986) and (Jensen 1991). Further many studies have provided empirical evidence that supports Jensen’s arguments (LEHN & POULSEN 1989), (Kaplan 1989), (Baker & Wruck 1989), (Smith 1990), (Denis 1994), (Wruck 1994). Figure 2: The LBO concept.

Source: (Citigroup corporate and investment banking 2006)

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Figure 2 show the LBO concept where the purchase price is primarily financed through different debt instruments that are paid down with future operating cash flows6 of the acquired company. According to the source (Citigroup corporate and investment banking 2006) initial capital structure typically consists of 75% debt and 25% equity. These numbers varies from deal to deal and also depends on macro economical factors and debt issuer’s willingness to take on risk. The same goes for stated IRR7 in the figure as it also differs depending on demands from investors. However, an IRR of 25-30% seems likely to be accepted by most PE investors in Sweden as the mean value of cost of capital for Swedish buyout firms is 23% according to a study by the Swedish Venture Capital Association (Svenska Riskkapitalföreningen 2009). The different debt layers in figure 2 represents the various sources of debt ranging from high cost debt such as High-Yield / PIK note financing in debt layer 1 down to low cost financing such as a revolving credit facility and term loans in layer 5. The “revolver” in layer 5 is typically undrawn at the exit of the deal. However a certain amount of debt is often left after exit due to tax shield benefits. From time of entry throughout the time until exit, debt is repaid. As the enterprise value remains constant, these transactions result in a considerable equity growth. Equity growth together with value creation activities conducted by management and sponsors are translated to proceeds for investors at the time of exit. In order to keep cash flows maximized during the holding period, no dividends are paid out to share holders. Further, the key return drivers of an LBO can be categorized as follows (Citigroup corporate and investment banking 2006). 

Leverage on acquisition and subsequent debt pay down. This is done through maximizing of free cash-flow through strict CAPEX, R&D and working capital discipline.

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Increased firm value through EBIDTA growth between time of investment and exit. Possible through sustainable earnings growth, cost control and possibly restructuring upside or synergies with other companies in the portfolio of the financial investor.

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Increased firm value through multiple-expansion between time of investment and exit. Driven by evolving industry fundamentals (e.g. cyclicality of industry), quality of assets, enhanced organic growth outlook and improved equity capital market conditions.

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Limited duration of investment. Value is created by, buying in weak markets and exit during robust M&A and equity market within a 3-7 years period. Here, tradeoff between time to exit, total proceeds and IRR is important.

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Operating cash flow, OCF=EBIT+Depreciation-Taxes IRR or Internal Rate of Return is a discount rate often used in capital budgeting. IRR makes the net present value of all cash flows from a particular project equal to zero. Generally speaking, the higher a project's internal rate of return, the more desirable it is to undertake the project. 7

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2.4 The LBO Financing Structure Traditionally in an LBO transaction, debt has typically been around 75% of the financing structure (Citigroup corporate and investment banking 2006). However, today financing with debt levels somewhere close to 50% is more common. Given the high levels of debt included in transactions like this, the ability for PE funds to lend money is crucial. The information regarding the different debt instances provided below is extracted from discussions with the debt capital markets department of a leading Nordic investment bank8 and a report written by Citigroup’s corporate and investment banking department (Citigroup corporate and investment banking 2006). Interest rates for loans issued by investment banks through a syndicate of lenders consist of two parts. The first part is the official interbank offer rate for short term loans in Sweden. The Stockholm Interbank Offer Rate is referred to as STIBOR. STIBOR is the interest rate banks are charged when borrowing from other banks for maturities longer than overnight. The rate is determined by Riksbanken9 and fluctuates over time10. In order to hedge interest rates on loans in an LBO an instrument called Interest Rate SWAP, or just SWAP, is utilized. SWAP instruments are OTC11 contracts provided by investment banks and financial institutions. SWAP rates are fixed during the instruments term and the actual rate differs depending on the term of the contract. Common terms for SWAP instruments are 1, 3, 5 or 10 years. On top of the SWAP rate banks charge a spread or margin on their loans. This spread/margin is the premium that the bank charges in order to make a profit. Spreads are negotiated for each debt facility and is highly dependable on the current capital market as well as the risk associated with each loan. For example, if the spread is 2.50% for a revolving credit facility and the current SWAP rate is 3.16%, the actual cost of the loan is 2.50%+3.16%=5.66%. The debt part of the LBO financing structure often includes a broad array of loans, securities or other debt instruments with varying terms and conditions that appeal to different classes of investors. The financing structure is unique for each deal. Each credit facility is negotiated and therefore the cost and size of the different facilities differs from deal to deal. However a similar financing structure is applied to all buyouts. The structure comprises of the following sources of finance. 

Senior debt or first lien secured debt such as a revolving credit facility and term loan facilities. This is the cheapest type of debt.

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Mezzanine debt, ranked between traditional debt and equity.

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High-Yield Bonds, referred to as corporate bonds.

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Equity contribution, the lowest ranked source of finance and therefore the most expensive.

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No further reference can be done due to the banks confidential policy. Riksbanken is Sweden’s central bank. 10 STIBOR is often set for a period of three months. 11 OTC, Over The Counter 9

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Senior debt is the main financing source in an LBO and typically has a term of 5-10 years. It consists of bank loans with a higher ranking, lower flexibility and lower cost of capital than the other sources of funds. As it ranks higher than other securities in regards to the owner’s claims on assets and income in the event of the issuer becoming insolvent, it has a lower cost than lower ranked debt such as mezzanine, high-yield bonds and equity contribution. Interest rate is SWAP plus a spread of 2-3% with the credit spread tied to the appraised fair market value of land and buildings, enterprise value as well as the liquidation value of machinery and equipment. Senior debt is somewhat flexible with varying collateral and covenant packages as well as amortization schedules. It often comprises of 2550% of the total deal. The debt is used to finance property and equipment as well as other long-lived assets, acquisitions, buyouts and stock repurchases. Main lenders are commercial and investment banks, mutual funds, structured investment funds and finance companies. A traditional cash flow revolving credit facility also called “revolver” is a senior debt secured by inventory and accounts receivable which is the most liquid operating asset. It is a line of credit extended by a bank or group of banks that permits the borrower to draw varying amounts up to a specified aggregate limit for a specified period of time, often 5 years or more. It is unique in that amounts borrowed can be freely repaid and re-borrowed during the term of the facility. A revolver requires the borrower to maintain a certain credit profile through compliance with financial maintenance covenants contained in a credit agreement. It is common for companies to utilize a revolver or equivalent lending arrangements to provide ongoing liquidity for seasonal working capital needs, capital expenditures, letters of credit and other general corporate purposes. A revolver is most often not used to fund the purchase of the target in an LBO. Also it is usually undrawn at close. Revolvers are typically arranged by one or more investment banks and then syndicated to a group of commercial banks and finance companies. In order to compensate lenders for making this credit line available to the borrower, a nominal annual commitment fee is charged on the undrawn portion of the facility. The revolver often comprises of 5-15% of the total deal but depends on the fluctuations in working capital. Typical interest rate is SWAP plus a spread of 2.0-2.5% cash interest only, with credit spread tied to value of current assets, financial performance and risk measures. A term loan, called “leveraged loan” when non-investment grade, is a loan with a specified maturity that requires amortization according to a defined schedule. Like a revolver, a traditional term loan for LBO financing is structured as a first lien debt obligation and requires the borrower to maintain a certain credit profile through compliance with financial maintenance covenants contained in the credit agreement. Unlike the revolver a term loan must be fully funded on the date of closing and once principal is repaid, it cannot be re-borrowed. Term loans are classified by an identifying letter such as A, B or C etc. in accordance with their lender base, amortization schedule and term. Term loan A, called “TLA”, are commonly referred to as amortizing term loan because it typically require substantial principal repayment throughout the life of the loan. Term loans with significant annual required amortizations are perceived by lenders as less risky than those with a looser repayment schedule. Consequently, term loan A’s are often the lowest priced term loans in the capital structure. Term loan A’s are syndicated to commercial banks and finance companies together with the revolver and are often referred to as “pro rata” tranches because lenders typically commit to equal percentages of the revolver and term loan A during syndication. Term loan A’s in the LBO financing structure often have a term that ends simultaneously with the revolver.

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B term loans, or “TLBs”, are commonly referred to as “institutional term loans” due to the fact that they are sold to institutional investors. Term loan B’s are used to a greater extent than term loan A’s in LBO financings. Typical, term loan B’s are larger in size and has a longer term than term loan A’s. A reason for the longer term is that, bank lenders prefer to have their debt mature before term loan B’s. Term loan B’s are generally amortized at a nominal rate such as 1% per annum. The rest is repaid as a bullet at maturity. Common tenor for term loan B’s is up to seven years. As institutional investors prefer non-amortizing loans with longer maturities and higher coupons, TLBs are more suitable for them to invest in than term loan A’s. Mezzanine debt is a highly negotiated instrument between the issuer and investors. It is tailored to meet the financing needs of the specific transaction and required investors return. As such it allows for great flexibility in structuring terms. It provides incremental capital at a cost below that of equity, which enables stretching of leverage levels and purchase price when alternative capital sources are inaccessible. Mezzanine debt has embedded equity instruments, usually warrants attached to it. The issuance of corporate bonds is an additional more expensive source of finance if senior debt is used up. Because of the inherent high leverage levels associated with an LBO, these bonds are usually deemed non-investment grade. This is a rating of “Ba1” or below from Moody’s Investor Service (Moody's 2009) and “BB+” or below when using a rating scale from Standard and Poor’s (Standard & Poor's 2009). Due to this, bonds issued through an LBO are often referred to as “highyield” or in some cases “Junk” bonds because of the relative high risk associated with this type of investment. Typical term of the bonds is 6-10 years and they mature after the senior debt. Issuance of bonds is a flexible instrument that can be structured as a debt security with fixed equity coupon and equity-linked features such as warrants. High-Yield debt is often structured as 20-40% of total deal cost. It has yearly payments of interest and repayment of principals at maturity. Interest rate is SWAP plus a spread. Size of spread is tied to cash flows and depends on the investment grade of the bond. Main lenders are pension funds, insurance and finance companies, debt and mutual funds, hedge funds or other institutional and private investors. High-Yield debt is usually publicly traded. Equity stake in an LBO today usually comprises of 50-60% of the total capital. However this figure varies through time and is highly dependable on bank covenants. As dividend and liquidation rights are subordinated to the interest of the debt lenders, equity contribution provides a cushion for lenders and bondholders in the event that the company’s enterprise value deteriorates. Shareholders often receive their invested capital back at the time of exit, typical after 3-7 years. Management often invests in equity with the LBO sponsor. In most buyouts, a PE firm is the LBO sponsor. Sponsors typically seek a 25-30% compounded annual total return over five years. For large LBO’s several sponsors may team up to create a consortium of buyers, thereby reducing the amount of each individual sponsor’s equity contribution. This is known as a “club deal”.

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2.5 Exit Strategies As stated above most PE funds exit/monetize their investments in a portfolio company within approximately 3-7 years. This is done in order to provide timely returns to their LPs. The primarily exit strategies are: 

Financial sale includes sale to another PE fund, LBO-backed firm or investment company.

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Industrial sale means sale to strategic buyer or sale to management.

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Secondary buyout, recapitalizations of the company in a new LBO.

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IPO, in an Initial Public Offering the PE fund sells a portion of or all its shares in the target to the public. This means bringing the company back to the stock market.

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Dividend Recapitalization, while not a true exit strategy this means issuance of new debt used to pay shareholders a dividend instead of proceeds from a company sale.

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Bankruptcy, this option is not preferred.

Figure 3: Exit strategies used by Swedish PE firms during 2007.

8%

3%

8% Industrial sale 41% 41%

Other exit 30% Finansial sale 10%

10%

Sale to other PE firm 8% IPO 8% Sale to entrepreneur 3%

30% Source: (Swedish Private Equity & Venture Capital Association 2009)

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3 Method To build a relevant framework for finding a suitable LBO candidate a series of interviews with PE firms active on the Nordic market where conducted. The study revealed what distinguished investment professionals look for in a potential target company. It also gave answer to other important questions needed for the creation of the LBO valuation model. Some of those questions discussed demands on expected return, average holding periods, reasonable premiums and suitable exit strategies etc. Due to the high level of secretes in the PE industry, many of the approached firms were reluctant to participate in the interviews if their identity where revealed. Therefore no firm names are used when presenting the results of the study. Instead a short description of the interviewed firm regarding its size and investment profile assures the reader that the participating firms are among the absolute top tier investors in the Nordic region. In order to find suitable interview candidates the Swedish PE setting was screened. From the screening procedure a list of twenty-eight interesting companies appeared. The list is presented in appendix II. Each company from the list where sent an envelope containing a personally signed interview inquiry. See appendix III for the complete inquiry letter. As the companies responded to the inquiry a discussion regarding their participation emerged. While some of the approached firms claimed that they were not suitable to participate in the study due to their lack of knowledge regarding LBO’s, others referred to secretes as a reason to decline the offer. Also, after digging deeper into the asked firm’s business models some of the companies where taken of the list due to their lack of experience from LBO’s. As the list narrowed down, only a few firms showed extensive experience from LBO’s and PE investments. From those, seven firms were chosen as interview objects. These seven all has a long history on the Swedish PE market and has participated in numerous well known LBO’s during the last decade. As such, they all provide a solid foundation of knowledge suitable for deriving the framework and LBO model in this thesis. The qualitative study that this paper is based upon is of a semi-structured character. Each interview was an open discussion but with certain questions guiding the outline. See appendix IV for the complete interview outline. Each respondent had been sent the questions in advance in order for them to think over their answers. This was also a good way to assure for the discussion to flow as smooth as possible. Six of the interviews were conducted face-to-face at the interviewed firm’s offices. Being able to sit down with the interview target and talk over the topic gave the interviews a good depth. The interviewed persons were asked to contribute with their experience regarding the topic. This assured that important aspects of the topic not covered by the outline also where discussed. Each interview where recorded, this was strictly for academic purpose and all recordings where erased after the completion of the thesis. One of the interviews where responded to by email. In this case the respondent wrote answers to the questions formed in the outline, here no deeper discussion where conducted.

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Companies listed on NASDAQ OMX where used as the sample base for finding a suitable LBO target according to the framework. A thorough analysis indicated that Björn Borg could be appropriate for a buyout. Further an LBO valuation model was created from discussions with debt capital markets at a leading Nordic investment bank. To evaluate validity of the derived framework, the LBO valuation model was applied on Björn Borg and the result was analyzed.

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4 Empirics 4.1 Description of Respondents Firm A is one of the leading alternative asset managers in the Nordic countries and Russia. They manage funds with approximately €3.6 billion in total capital. Their team comprises 150 people in Helsinki, Stockholm, Copenhagen, Oslo and Moscow. Buyout investments have been a part of firm A’s investment strategy since the company’s foundation in 1989. Their buyout team is working locally in the Nordic countries. The firm’s investment professionals work closely with the management teams to develop their portfolio companies. They are aiming to be an active value adding owner of its portfolio companies. Firm A buyout invests in mid-sized unquoted Nordic companies in various industries. Their team has in-depth expertise in multiple sectors such as manufacturing and engineering, industrial services, retail, outsourcing, and healthcare. Main targets set for portfolio companies are growth, improved profitability and strengthened strategic position. Firm A buyout has currently 27 portfolio companies and invests in businesses with typical net sales of €50-500 million and market cap of €50-250 million. Firm B is a private equity investor that owns and develops middle sized companies whose revenues range from 400 million to 4 billion SEK. Their target profile is profitable and stable companies with dedicated and ambitious management teams. Firm B currently manages 8.5 billion SEK invested in three funds. Their primary sources of capital commitments come from international pension funds, endowments and insurance companies. In their role as owner they appoint boards of directors, which give tight support to management and foster continued development of the business. They recruit prospective board of directors from their extensive network of industrial advisors. Since its inception, firm B has been introduced to more than 2000 companies across the Nordic region. In total, this has so far led to 30 acquisitions and 71 follow-on acquisitions. The firm aims to double the earnings of portfolio companies they own. Firm B is an active owner, bringing focus, know-how and capital to its portfolio companies. In 1997 firm B launched a 200 million SEK fund. Today the fund is closed and all its capital, including profits, have been returned to investors. An independent evaluator ranked a firm B fund, as one of the world’s most successful funds of its vintage. Their latest fund was launched in 2007 and has aggregated capital commitment of 5.2 billion SEK. Firm B has been generating excellent returns to their investors over the last fifteen years. Firm C is a leading independent Nordic buyout firm with exclusive focus on middle market transactions where enterprise value typically ranges between €50-200 million. They have an experienced team with demonstrated ability to create investment opportunities. Their team is a complementary combination of investment, operational and consulting expertise. It consists of 17 persons with extensive local and international expertise. Firm B targets companies with a sustainable competitive advantage in the Nordic marketplace. They have a proven track record of building better and more competitive companies. In order to do this firm B engages in intensive partnerships with management to generate tangible operational improvements. The firm has a strategy to deliver returns through organic growth and add-on acquisitions. They act as a provider of equity capital and debt facilities but also a strategic sparring partner with an extensive analytical toolbox. Since 2000, firm C has invested more than €226 million in 39 transactions. Today they manage three funds aggregating over €550 million. Firm C is one of the most experienced Nordic middle market buyout firms.

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Firm D is a private equity firm focused on investing in and developing medium sized companies in the Nordic region. The typical size of their investments is €25-150 million in equity, but selectively they can take on investments with up to €400 million in equity. Firm D provides buyout and growth capital in companies with revenues of €50-500 million. They have an investment team with members presenting every Nordic country. Their members all have international experience in fields such as private equity, consulting, investment banking and various industrial sectors. Leading institutional investors from the Nordic region, the rest of Europe and the US have committed a total of €3.8 billion to firm D in three funds. Their latest fund was closed in 2008 with a committed capital of €2 billion. Firm D’s investment strategy is to target sustainable performance improvements in order to build the strongest possible business over time. Such fundamental improvements are pursued within all fields including enhanced revenue growth, margin expansion and capital efficiency. Firm D also actively seeks to build and develop businesses in partnerships with the incumbent owners and has achieved such co-ownerships in a majority of its investments to date. Firm E is a private equity firm focusing primarily on investments in large- and medium-sized companies in the Nordic region and on selected international investment opportunities. Since 1989 firm E’s funds have invested in a large number of Nordic-based companies operating in different sectors. In a dedicated partnership with management of the portfolio company, firm E seeks to create value in its investments through committed ownership and by targeting strategic development and operational improvements. Their model for value creation is characterized by a careful approach to investment selection, a drive for excellence and a committed ownership mindset. The firms disciplined investing involves multiple deal sourcing channels, careful analysis, thorough due diligence and a clear post acquisition plan. Their overriding aim is to build enduring partnerships and create long-term value, whether by creating new industrial combinations, pursuing a strategic repositioning or exploring internationalization opportunities. Firm E’s investment advisors have extensive experience in private equity investments, mergers, acquisitions and public equity offerings. Their investment professionals have backgrounds in investment banking, management consulting and industry. In addition, a unique and extensive external network of experienced industrialists and specialists advise them on a situation by situation basis. Firm E is currently investing their latest fund which reached its hard cap in 2008 with €4300 million in committed capital. Well-known international institutional investors including private and public pension funds, insurance companies, endowment funds and funds-of-funds have invested capital in firm E’s funds. They currently have offices in Jersey, Copenhagen, Frankfurt, London, Helsinki, Oslo and Stockholm. In November 2009, Wall Street Journal, together with Dow Jones and Private Equity News/Financial News, published a list of the world’s top 10 private equity firms, where firm E ranks 2nd place based on performance. The list is based on academic research providing a view of a private equity firm’s performance relative to its peers during 1996-2005.

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Firm F manages a group of private equity funds focusing on investments in lower mid-market buyout and later-stage expansion capital transactions in the Nordic region. Firm F was founded in 1994. Since then, they have invested in more than 50 Nordic mid-market companies and successfully realized some 40 of these investments, becoming the undisputed leader in its market segment. Firm F invests in companies where they can serve as a catalyst for change and thereby transforming these companies into Nordic, European or global market leaders by providing for genuine and sustainable improvements within operations and strategic positioning. Since 1994, firm F has managed 6 funds with total commitments exceeding €1 billion, delivering superior returns to its investors. The funds are backed by well-reputed Nordic and international institutions including public and private pension funds, insurance companies, endowment funds and funds-of-funds. Overall, the Nordic region represents 20%, Europe 60%, the US 20% of investments into firm F’s funds. Some 30 institutions from 10 countries make up the investor base. Firm F has a staff of 10 investment professionals with a broad range of industrial and financial experience. Size of investments is €5-50 million in equity investment per transaction, including follow-on investments. Firm G is a leading Northern European mid-market buy-out firm with a unique regional footprint. They lead buy-outs within the €50-500 million deal range in the consumer, industrial and services sector. The firm target opportunities for majority stakes in profitable, cash-generative companies headquartered in the Netherlands, Nordic region and the UK. Firm G currently has €1.66 billion of total funds under management. Their transactions are a direct result of their long term strategy based on local presence together with regional sector expertise and intelligent reading of the market. The investment strategy of their buyout teams are firmly based on local knowledge and a committed partnership with management. Firm G has a team of 25 investment professionals operating from 3 offices in Amsterdam, London and Stockholm. They have a wealth of experience in closing and managing successful deals in the Northern European region. Their network of sector specialists can advise them when originating deals and their trusted external industry specialists help them realize areas of potential value creation and assist management to deliver on the agreed growth strategy.

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4.2 Interview Findings Even though the seven interviews where of a semi-structured character they all pointed in the same direction. The answers to the questions formed in the interview outline, seen in appendix IV, gave a similar picture from all of the respondents. Small differences in their answers where noted. However these differences seem to reflect the firm’s size, investment profile and industry focus rather than a radical view on the buyout market today. In order to keep the respondents anonymous, their answer to each question is not presented in the thesis. Instead a summary of the interviews is presented below. 4.2.1 Number of Acquisitions during the Last Two Years A majority of the firms has done fewer acquisitions and less exits during the last two years. Main reasons for this is said to be that the current market condition has made it hard for seller and buyers to agree on reasonable price levels. The current downturn has also led presumptive target companies to focus on other things than selloffs. The higher cost of debt and the unwillingness from banks to lend money has played a secondary role in the decrease of buyouts. Even though it has affected the number of transactions done during the last two years it cannot be claimed to be the main reason for the decrease. However, PE firms have been affected to a higher extent by the increased cost of debt compared to their competitors in a bidding situation, the industrial buyers. PE firms have in general a bit weaker competitive position compared to industrial buyers due to the fact that PE firms often need to lend more money than the industrial buyers. The financial turbulence has also forced some of the PE firms to work a lot with their current portfolio companies in order to fulfill the covenant demands from lenders. Therefore they have not been able to focus on new acquisitions to the same extent as before. As indicated above, the far most important reason for the decrease in transactions is said to be the lack of sellers. This is particularly evident in the answer from one of the respondents. “When the economy fell off, all sellers disappeared and pricing uncertainty emerged. These factors are far more important than the cost and availability of debt.” One firm also claims that fund technical aspects have been a reason for them to decrease the number of investments. “Our funds are fully invested, so we did not have any room for additional investments.” Even though the majority of respondents claimed that their buyout activity has stagnated, there were some firms that had done surprisingly many deals during the last year. This is explained as an expression of each opportunity rather than a reflection of the current market condition. Here distressed companies is said to be attractive buyout candidates due to their low market values. Another firm answered that they have done several acquisitions during the previous years because their analysis showed on possibilities to buy companies to lower multiples during the downturn. This together with the fact that they just started a new fund made them believe that is was a good time to invest. However the same respondent underpins that sellers still value their companies at too high multiples, therefore you need to dig deeper into the market in order to find attractive investments. Also, the fact that the same firm invests in smaller companies than their peer’s has made them more insensitive to the cost of debt and ability to raise large amounts of debt.

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4.2.2 Impact on EV’s Due to the Downturn The question regarding the recent downturns impact on enterprise values had similar answers to the previous question. “There were no companies for sale during the downturn. No one wanted to sell when their companies where low valued. Sellers still had a high price that did not reflect the market. Buyers were not willing to pay more than the market value of the companies. Therefore no deals were done.” Other respondents stated the same thing when they said. “It is true to some extent that the economical slump lowered the EV’s and provided for attractive entry multiples but in most cases sellers still value their companies as before the downturn.” As revenues still have not reached the same levels as before the slump, current multiples tend to be quite unattractive. Also if prices actually dropped willingness among owners to sell decreased. Again distressed companies could be of interest due to the fact that they might have to sell at a low multiple. There will always be an arbitrage if one is able to buy a cyclical company when it has low earnings and is low valued, if it will come back to higher earnings during a reasonable time frame. 4.2.3 Premiums All of the respondents agreed on the fact that buyout premiums are highly depending on the actual target and how you calculate the premium. Some suggested that it is natural to calculate how large premium the LBO model can motivate. In most buyouts from the stock market there is no bidding procedure. Instead it is more common for a presumptive buyer to place a bid and hope for accept. Premiums depend on the owner structure of the target company. As small shareholders do not make any threat to the deal price, the important thing is to agree on the price with the largest shareholders. Worst case scenario is if owners with more than 10% of the shares do not accept the bid. Such owners, for instance aggressive hedge funds sitting on these kinds of corner positions could hinder a sale. A situation like that could force the buyer to increase the bid. In a bidding scenario the premium of course depends on other bidders. Today, the market has a tendency not to appreciate bids from PE firms. In general, if a PE firm and an industrial buyer places bids on the same target, owners want to have a bit more in order to go with the PE firm. Here one respondent says that the PE industry needs to be better at communicating their business model in order for target owners to gain increased confidence in the PE funds as owners. The interviews indicated that a reasonable premium assumption could be somewhere between 2030% even though one respondent explained how this number in reality could range between 10100%. Premiums are also highly dependable on the major stock holder’s in-price and the development of the stock. If the valuation of the company is low due to temporary causes such as low earnings during a downturn, premiums tend to be higher and vice versa. Therefore in a decreasing stock market premiums are significantly higher, probably around 40-60%. If a stock is traded close to all-time high or over the last three years average lower premiums can be motivated.

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4.2.4 Holding Periods The study showed that the typical holding period for PE firms today is between 3-7 years. Ten years ago holding periods where a bit shorter, typically 3-5 years. As the PE industry started to emerge in the Nordic region during the 90ies, it was possible to buy cheap and do small changes to the portfolio holdings before you sold them off for a higher price. These multiple arbitrage situations are scarce today. Nowadays it is much harder to buy cheap. Therefore the holding periods tend to be a bit longer. In the current market, a PE firm needs to create value for the portfolio company in order to sell it at a higher price. This is one of the explanations for the longer holding periods seen today. A major part of the respondents stated that they had postponed exists during the last two years due to the lack of buyers on reasonable price levels. In such cases, if it is clear that the company has a steady continuing growth, it could be good to prolong the holding period. All of the interviewed firms preferred a shorter holding period over a longer one, as long as their demands on IRR and cash return were fulfilled. Most of the funds have an option to hold their investments longer than 7 years, sometimes up to 10 years if the market condition hinders them from making a profitable exit before. However, in LBO calculations, PE firms often apply a 5 years holding period in order to compare different cases to each other. Branch standard applied in calculations were said to be 3-5years. 4.2.5 Exit Strategies When deciding upon exit strategies, all of the respondents work with “dual track” schemes in order to evaluate the best possible exit strategy. This is often done before the acquisition. In general the PE firm has more than one possible exit strategy. Suitable exit strategies differ from time to time. Here, trends in the economy often decide what strategy is best for the moment. Historically there have been a lot of financial sales to other PE firms. Portfolio companies were bought from smaller actors and sold onto bigger players. This was how it worked before the downturn and it was partly explained by the fact that PE firms could increase their loans steadily and therefore pay higher prices. This led to steadily increasing prices in the past. At the same time industrial buyers had a hard time motivating the high prices on companies. In the more recent past, during 2009, there have been many industrial exits. This is explained by the fact that industrial buyers today has a greater understanding for how value is created in the targets and therefore can compete with bids from PE actors. Industrial buyers also have a lot of capital and are not that dependant on the credit market conditions. This has given them an advantage during the downturn. Most respondents prefer when other actors, both industrial and financial, approaches them with an offer. This can in certain cases avoid the negative development in sales price that often occurs if an investment bank tries to push a company onto the market without having a pronounced buyer present. Some companies are better suited for an IPO than others. Some are too small. For a company to fit on the stock market it needs to be of a certain size and somewhat non-volatile in order to deliver predictable dividends to shareholders. Stable companies are easier to sell at an attractive price level on the stock market. Respondents state that IPO’s are a stronger exit alternative today than a year ago. However, in the case of an IPO timing is often of great importance. In many cases industrial buyers have synergy effects from the acquisition of a company. Therefore they can pay a high premium. This gives industrial- or financial-sales a slight benefit compared to IPO’s where the seller

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receives market price for their company. Another disadvantage of the IPO is that a seller cannot exit 100% of the company at once. Instead they have to keep a certain amount of shares in the company for some additional time in order to create confidence among the new shareholders. The study highlights that the key to exit your holdings with a significant profit is to provide well positioned and professionally managed companies to the market at the right time. Deciding factors for choosing an exit strategy are valuation and smoothness of the process. As an IPO often means a smaller premium and costs a lot of time and money, most of the interviewed firms prefer an industrial- or financialsale in the form of a recap. 4.2.6 Leverage Levels During the eighties, but also more recently in 2007 and beginning of 2008, LBO’s with leverage levels up to 80% where not uncommon. The recent financial downturn has lowered the debt/equity ratios significantly. All of the asked firms were of the same opinion when they said that deals today typically comprises of 50% debt and 50% equity. However, the number differs a bit from deal to deal. Here the financials and character of the target decides how much you can pull from the debt market. A stable business can have a debt/equity ratio up to 60% today. A high EBITDA makes it possible to have more debt and less equity in the capital structure. Today, banks will lend you up to 3-4X EBITDA in senior debt depending on stability and size of the target. In a more complex debt structure it should be possible to add 1X EBITDA with the use of mezzanine or other subordinated debt. This makes 5X EBITDA the maximum amount of net-debt available for an LBO in the current market according to the study. When asked about increasing leverage levels in the future, the consensus where that the debt/equity ratios probably will reach the high levels seen during 2007 again. However, it will take a very long time before that happens. One respondent comments “We will probably see those levels again but it will take a long time. A year ago it was almost impossible to get finance from banks for these kinds of deals. Margins and set up fees where extremely high. The strengthening of the market has been rather fast during the last year, so today, the market looks much better than it did a year ago. Levels seen during 2006-2007 were too high. It was too easy and cheap to borrow money back then.” Another respondent state, “I don’t believe that we will see debt/equity ratios at 80% in a close future. This is a too high leverage level that can lead to bankruptcy.”

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4.2.7 Value Creating Factors in an LBO The interviews revealed that the most value creating factor in an LBO is not the financial transaction itself. Optimizing the capital structure and receiving a financial leverage from the tax shield accounts for around 20% of the value creation. Approximately 30% comes from multiple expansion and the rest, 50%, from operational changes, so called soft values. One of the interviewed companies described the value creation process as following. “We will create an optimal capital structure for the portfolio company. We seek to improve the company’s competitiveness and profitability by refocusing business unit strategies, operational enhancements to improve margins, balance sheet management and efficient use of capital. We will also pursue add-on acquisitions and divestments, focus on core activities, divest non-core operations and build critical mass to play a leading role in the industry.” All of the respondents were focused on EBITDA growth. Here management plays an important role in the future development of the portfolio company. Aligning management interests with the PE firm’s interests is essential in making a profitable deal. Most of the participants in the study look at “best practice” actors in the industry in order to benchmark their portfolio companies and try to develop them in the same direction. This often means cutting costs and having a strategic plan for growing market shares etc. Here the financial operations such as capital structure plays a secondary role in the increase of EV/EBITDA multiples. Private equity is good at shrinking the balance sheets by cutting costs. The capital freed by these actions has traditionally not been used for amortizations of debt. Instead it has been used for growing the company by acquisitions. This increases the revenues for the company. By doing so, you can make a recap after a couple of years and continue to grow the company without investing more capital. Another firm described the value creating process like this. “We act as the catalyst in realizing long-term profit enhancement. Setting mutual long-term goals with portfolio company management is a critical factor in successfully creating value. This might include actions that require several years to come to fruition such as strategic add-on acquisitions, aggressive organic growth or establishing an international sales organization. Key elements in a corporate agenda include basic approach to secure competitiveness by reducing complexity, streamlining processes, reducing cost levels and ensuring an appropriate financial structure. Growth and development are encouraged by expansion into new markets, investment in product development and other organic growth initiatives. Combined with resources provided by a unique network of external advisors we can quickly analyze complex investments or strategic situations, support rapid decision making with respect to potential transactions and internal change at the portfolio company level. Our investments are often industry-consolidating buyouts in which two or more related businesses are acquired and combined into a new, stronger entity.”

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4.2.8 IRR & Cash Return Even though demand on return from investments varies with the risk associated with each deal. The respondents gave similar answers to what return they need in order to take on an investment. The least acceptable IRR is between 20-30% after 4-5 years. Most of the firms answered that a calculated IRR of 20% is the lowest acceptable figure. Some said that the calculated IRR should be over 30% for them to consider the deal. IRR is an important measure for all of the respondents. However, cash return is of greater importance for the PE firms. This became evident as one of the firms said. “You cannot eat an IRR.” This statement highlights the fact that being able to double your money is more important than showing a high IRR. Even though the measures has a certain covariance, showing a high cash multiple is very important. The firms revealed that a cash multiple of 2-3X is the lower limit for their investments. In their calculations, PE firms typically has a cash return of 4X but in attractive cases they can have numbers up to 6X in cash return. All firms needed to see that the demands on return were fulfilled within 4-5 years in their valuation model. In general a PE investor expects a return on 5% over the stock market. “For us, a good investment can have a cash multiple of 6X and an IRR of 70% when exiting after 5 years.” 4.2.9 Characteristics of a Suitable LBO Target It became evident that the ability to estimate the company’s future development is a key issue when finding a suitable LBO target. Here PE firms try to find companies with a large prognosticated organic growth. Therefore non-cyclical companies should act as a theoretical group for selection. If a company is cyclical, the investor needs to understand how the cycle behaves in order to make a good assumption of future profits. This is possible to do but in general PE firms prefer non-volatile companies with predictable and stable cash flows. Other factors that the respondents look at are profit margin and CAPEX. CAPEX is important, if your target needs big investments in order to grow, it is not such an interesting investment for the PE firm. Low entry multiples, EV/EBITDA, is needed in order to exit the holdings with a profit. Worst case scenario is if the EV/EBITDA multiple drops during the holding period. This is referred to as a multiple contraction and should by all means be avoided. Instead sponsors want to see the multiples grow up to the point of an exit. A multiple arbitrage boosts the PE firms return. Therefore companies that trade at low multiples are potential targets. Here distressed companies could be worth looking into as those often have low earnings and therefore low EV’s. Specific key ratios tracked in the PE industry are, EV/EBITDA, EV/EBITA, EV/Sales, EV/Cash flow and (EV-CAPEX)/Cash flow. “A good deal has an EV/EBITDA entry multiple between 6X-10X.” “We avoid companies with EV/Sales above 2X.” “EV/Cash flow should not be more than 10X.” The key ratios are often used as a sanity check of the target. If key ratios are ok, soft factors such as industry, management, business model, market position etc. are often the ones deciding whether to take on the investment or not.

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Taking the above characteristics into consideration non-cyclical, stable industries such as healthcare are often good at producing LBO candidates. CAPEX light industries such as the service sector where expenditures typically are small and cash flows often large should also provide a solid ground for finding suitable targets. When looking for growing sectors, public outsourcing is such a sector where there has been a lot of LBO’s recently. An idea is to find sectors exposed to underlying positive emerging trends. One of those could be the fast food industry in Sweden even though it is not traditionally CAPEX light. As growth is important, high growths often mean high EV’s. Therefore it can be hard for PE firms to compete with industrial actors and IPO’s over companies with extremely strong growth rates. 4.2.10 Valuation Models In order to evaluate LBO’s all of the respondents used their own LBO valuation model. Calculations are made in-house and most of the efforts consist of deriving reasonable input variables. Comparable companies and comparable transactions models are used in order to derive input such as reasonable entry and exit multiples to the LBO model. Some of the interviewed firms used investment banks as helpers in their work with looking at peers. No one used the DCF valuation model to any greater extent. Most firms never used the DCF model as they said its output is too sensitive to changes in the perpetuity growth rate. Those firms that actually used the DCF model did it only occasionally if data on peers were not available. “An LBO model has a practical approach and reflects reality as opposed to the DCF model which is strictly theoretical. We do not use the DCF model in our daily work. The LBO model tells us how much money we will make on the deal. The DCF model does not.” No one of the respondents wanted to share their LBO models with the author of this thesis as these calculations were highly confidential. In their LBO models, all of the firms in the survey use a couple of scenarios. In order to evaluate the transaction to its fullest extent they typically use a base case, a management case, an ambition case and a bank case. The base case is used in order for the PE firm to evaluate the deal. The management case is based on numbers given from the management of the portfolio company and the ambition case is used as a best case scenario. The bank case has a somewhat pessimistic setup of inputs. Therefore it gives a lower result. Due to this, the bank case is used when presenting the deal to the lending bank. This assures that the covenants set up by the bank will be somewhat low and therefore possible to adhere with.

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4.2.11 Exit Multiple The exit multiple is an essential part of the LBO model as it determines the value of the target at the time of an exit. All of the interviewed PE firms used the value of the entry multiple as exit multiple in their calculations. Off course all investors want to sell their portfolio holdings at the highest possible multiple. However, this is not accounted for in the model and profits above the entry multiple is considered a bonus. As described in chapter 4.2.9 a multiple arbitrage is preferred while a multiple contraction is often severe for the profit of the LBO. In order to get an understanding for what reasonable entry/exit multiples would be, comparable companies and comparable transactions models are used. Another useful approach is to look at the targets historical multiples in order to get an indication of attractive levels. “In an LBO model we use the same entry multiple as exit multiple, unless you can motivate why you should increase the multiple during the holding period. One such case could be if you buy a cyclical company when it is extremely low valued.” 4.2.12 Tracking of Financial Statements Most firms track the financial statements of their targets as long back as possible. In reality the recent 3-5 years is of most interest but tracking longer back in time can give a good feel for the company’s cyclicality. If large structural changes have been made in the target company, financial statements before those changes are of lesser importance as they do not reflect the current company that good. The same argument holds for the comparable companies and comparable transactions models. Here, only recent figures and transactions are of interest. Old figures on comps do not reflect the current market and should therefore not be used for valuation purpose. 4.2.13 Due Diligence The due diligence is a complicated process where every aspect of the target company is evaluated in order to understand how the company works and what risks are associated with the investment. Financial-, tax-, legal-, insurance-, environmental-, management- and commercial-due diligence are often done before a transaction. The financial D.D. checks the financial data such as balance sheets and income statements. Legal D.D checks contracts, patents etc. An environmental D.D looks for risks associated with environmental issues. As lawsuits for polluting the environment often are expensive, this part of the D.D can sometimes be important. A complete D.D is seldom done in-house. Here most firms contract consultants such as McKinsey, Bain or BCG etc. Sometimes PE firms have the competence to carry out certain parts of the D.D while others are outsourced. A D.D normally takes 2-3 months but can be done in 4 weeks if needed. Due to the fact that the D.D is a somewhat costly process, a “letter of intent” is written before the PE firm starts the D.D. A letter of intent gives the PE firm exclusive right to buy the target during a specific time frame. If the result of the D.D is ok, a “purchase agreement” is written and the deal is closed. “We spend a lot of money on management consultants. This is done in order to understand the market. Getting help from the outside is especially interesting when acting on foreign markets.”

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4.2.14 Debt Instances The question regarding debt instances aimed to create a better understanding for the different debt instruments used in an LBO on the Swedish market today. The answers revealed a somewhat simpler debt structure than the one prepared in the created LBO model. Due to a non existing market for high-yield bonds in Sweden, this debt instrument is seldom used in a transaction on the Swedish market. Also covenant light loans such as 2nd lien are rare. Similar, using mezzanine as a part of the financing is not done to any bigger extent according to respondents. However mezzanine can be used in order to increase the leverage level. A common covenant from banks is not to provide debt capital over 3,5X EBITDA. Here mezzanine can be used in order to add 1X EBITDA on top of that. This makes the maximum debt level 4,5X EBITDA with the use of mezzanine. As always, this figure is highly transaction specific and varies with the associated risk of the target company and the current condition of the credit market. In addition to the debt/EBITDA multiple banks today are looking at the debt/equity ratio when deciding on the size of debt that they provide. Given the current market, banks are unwilling to finance deals with more than 50% debt. The interviews gave a clear picture of the regular debt structure and interest rate levels in an LBO today. There is always a credit line present. This is used to finance peaks in CAPEX and net working capital. Here a revolving credit facility is common. Typical commitment fee on the revolver is 1%. Margin on the revolver is approximately 3.5%. Arrangement fee on total debt is around 4% and margins for senior debt are typically 3%. Senior debt used in transactions are often term loans in the form of tranche A, B and C. Tranche A margin is 2.5%, tranche B margin 3.0% and tranche C margin 3.5%. Repayment plans of term loans vary from tranche to tranche but usual repayment plans are straight amortization and bullet repayment. The common base rate used is STIBOR but is it not uncommon to use SWAP instruments in order to hedge the interest rate risk. Here market rates of SWAP´s are used. In the case of mezzanine financing a margin of 15% with 50% cash contribution is reasonable today. 4.2.15 Cash Reserve If there is a large cash reserve within a target company, it could be used to repay as much as possible of the loans during the first year of the holding period. However, a normal scenario is to use a bridge loan facility as part of the debt structure. The bridge loan amounts to the free cash of the firm minus minimum cash level and is held for a short time until the PE firm has acquired control of the target. After that the bridge loan is fully repaid with the free cash of the firm. This construction keeps term loans as low as possible and decreases the interest rate costs of the LBO. Another smart solution is to pay out the cash as dividends before the acquisition of the target. This lowers the EV of the target and by doing so the PE firm avoids paying a premium on the cash holdings of the company. In reality, it is common to keep the free cash of the target at a minimum level during the holding period. The minimum cash level is used as a safety for temporary peaks in the net working capital. It is also necessary to keep a certain level of cash within the firm not to distract the management. On the other side, every investor should aim at keeping the cash level as small as possible. Otherwise it is a waste of financial resources. Minimum cash level used in the LBO valuation model is highly depending on the size of net working capital but a reasonable min cash level could be 5% of sales. Some of the respondents claimed that they did not use a min cash level in their LBO model due to its small impact on the result.

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4.2.16 Future Outlook on the LBO Market All respondents were convinced that the activity on the LBO market will increase during the next years. Reasons for this are increasing willingness from the banks to lend money. Current multiples are attractive as they are below historical levels. PE firms have a lot of capital waiting to be invested and many portfolio companies that they want to exit within the next years. Many industrial actors have been waiting with the restructuring of their companies. Also, industrial buyers will have more capital when the economy grows. Growing revenues are already in-priced at the stock market but not in the PE setting. This makes PE an opportunity for investors seeking an upside to their portfolio. “In the future we will see higher demands on PE funds that want to continue being successful. During 2005-2007 it has been easy to make a profit on investments. Any firm could buy a company with borrowed capital and wait for the multiples to increase. That kind of behavior will not be successful during the next years. In the future you need to have an ability to actively grow the company instead of just being a passive owner. This will increase the pressure on PE firms and investors will abandon those PE firms that they do not think will be able to create value. This means a tougher climate on the PE market in the future.” “It will beyond all doubt be an attractive market to act on in the future.” “Right now is an attractive time to buy.” “Buy, buy and buy!”

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4.3 Characteristics of a Strong LBO Candidate The study conducted on Swedish PE firms revealed a set of company characteristics essential for choosing a suitable LBO target. These are.           

Strong and predictable cash flows. Leading and defensible market position. Realizable growth opportunities. Efficiency enhancement opportunities. CAPEX light, small initial investments. Strong asset base. Low entry multiples. Competent management whose objectives are aligned with the strategy of the PE firm. Moderate leverage level. Strong owner structure. Exit should be possible after the holding period.

It is necessary for a suitable LBO candidate to generate strong and predictable cash flows. This is due to the large part of debt in the capital structure of the post-LBO firm. Strong cash flow is needed in order to fulfill bank covenants while paying interest, fees and amortization of the debt. Strong cash flows are often provided by mature companies with a large existing customer base, proven business model and well known brand name. In order for a company to have a strong stable cash flow they often operate in a non-volatile market or a non-cyclical industry. If the target is a cyclical company it is extremely important to understand the business cycle in order to predict future cash flows. Also, understanding the cycle is essential for entering the investment when it is low valued due to low earnings. The target should have a leading and defensible market position meaning that it should be hard for competitors to take large market shares from the company. This is often the case in industries were extensive R&D, investments, technology or patents are needed in order to enter the market. Another entry barrier is brand name. Being a well known and respected brand often means a larger market share and therefore stronger sales figures than the competitors. Companies with strong market position and brand name are often able to generate stronger cash flows with lesser CAPEX’s than targets with a weaker brand and position. The point regarding market position is very much related to strong cash flows discussed above. Realizable growth opportunities ensure that it is possible for the company to grow during the holding period. Here organic growth such as projected sales growth from estimates is important. Also acquisition driven growth should be taken into consideration. In many cases synergy effects could be achieved from mergers with new companies or other portfolio companies held by the PE firm. In order to find growth opportunities it should be useful to look at underlying emerging trends. Strong growth means an increased EBITDA which makes it possible for the company to take on more debt and still fulfill the covenants. Bigger companies should also in theory benefit from economies of scale and therefore get a better profit. Also if growth is significant, there is a possibility that there will be a multiple arbitrage when exiting the holdings.

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PE firms try to create value in their portfolio companies by improving operational efficiencies and cutting costs. In order to realize this there has to be room for efficiency enhancement in the target company. Cutting costs is often done by lowering overhead costs, reducing personnel, streamlining production, shortening the supply chain or implementing new management information systems. When engaging in operational efficiency improvements, PE firms often look at best practice companies in order to evaluate improvement possibilities in their holdings. If an LBO target has no room for operational improvements or cost cutting measures it will be hard for the PE firm to add value to the company during the holding period. Therefore it is essential that the target has a potential for efficiency enhancement. Many of the interviewed PE firms mentioned how important it was for an LBO target to be CAPEX light. Being CAPEX light means that the company has low capital expenditures. All else being equal, low CAPEX requirements enhance a company’s cash flow generation capabilities and therefore increase the debt level which the company can bear. As a result, the best LBO candidates tend to have limited capital investment needs. However, a company with substantial CAPEX requirements may still present an attractive investment opportunity if it has a strong growth profile, high profit margins and the business strategy is validated during due diligence. Also, companies that normally have high CAPEX requirements could be interesting if they are fully invested at the time of the buyout. For instance a manufacturing company that traditionally has high CAPEX’s could be an interesting LBO candidate if their plant & equipment is up to date and do not need an upgrade during the next years. In general it is important that the LBO candidate do not need a large initial investment in order to be profitable. Having a strong asset base is essential for raising debt in the leveraged loan market. As the targets assets acts as collateral for their loans, assets are immediately affecting the achievable leverage level of the post-LBO firm. A strong asset base also indicates high entry barriers into the targets market because of the substantial capital investment required. This assures that the targets market position can be defended against competitors. See discussion regarding defensible market position above. Being able to enter the investment at a low multiple is an important criterion for a successful LBO. In order to allow for a smooth and timely exit procedure the target must be reasonably priced. Investing in companies with low entry multiples decreases the probability of a multiple contraction during the holding period. It also increases the chance of a multiple arbitrage which often means superior return to investors. Companies that trade at low multiples are potential targets. Here, distressed companies could be worth looking into as those often have low earnings and therefore low EV’s. Important entry multiples are EV/EBITDA, EV/EBITA, EV/Sales, EV/Cash flow and (EVCAPEX)/Cash flow. Suggested levels on entry multiples are EV/EBITDA below 10X, EV/Sales below 2X and EV/Cash flow below 10X. The key ratios provide as a sanity check of the target. If key ratios are ok, soft factors such as industry, management, business model, market position etc. are often the ones deciding whether to take on the investment or not.

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Having a competent management team of the portfolio company whose objectives are aligned with the strategy of the PE firm is important in order to develop the target in the right direction during the holding period. If the management of the company fails in delivering well enough results, the PE firm can replace them with executives expected to do a better job. Often as a PE firm steps in as the new owner of a company they exchange some of the previous board members for professionals that they think will steer the company in the right direction. It is also common for the PE firm to appoint candidates to certain management positions in order to assure that the company is run in a way that adheres to their strategy. The high levels of debt in the financial structure of portfolio companies after an LBO transaction places greater demands on the management to operate the company more efficiently. Because free cash flow is committed to service debt, management’s ability to use available funds appropriate is crucial. Here management incentives such as ownership stakes are often used in order to align management’s interests with those of the PE firm. The target should have a moderate leverage level in order to be a suitable LBO candidate. As PE firms use increased leverage as a tool for gearing the company through the LBO there must be room for increased debt in the targets financial structure. One part of the value creating process in an LBO is to create an optimal capital structure of the target and thereby minimizing tax payments. Companies with already large tax-shields will not see the same increase in net income due to the LBO. Therefore companies with high debt/equity ratios are not the best candidates for an LBO. In order to acquire a company for a reasonable price the owner structure of the target plays an important role. A suitable LBO candidate should have a strong owner structure with few major stock holders. As owners with less than 10% of the shares cannot affect the premium level of the deal, focus should be on getting an acceptance on the bid price from majority owners. Being able to discuss the premium with few strong shareholders increases the possibility to achieve an agreement at a lower cost. A strong owner structure also counteracts the chance that actors with a corner position in the company declines the bid from the PE firm. The last point to take into consideration, when finding a suitable LBO target is the possible exit strategies at the end of the holding period. Some companies are too small for an IPO. Others might just not be appreciated by the stock market. Current market conditions can hinder certain exit alternatives as well as premiering others. Such factors are often hard to now on forehand. However, before deciding on a target company a reflection upon possible exit strategies are necessary. Here investments with several feasible scenarios are in general, preferred before alternatives with a single possible exit strategy.

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5 The LBO Valuation Model In real life, professional investors use their own valuation models in order to estimate expected returns and in the end decide whether to take on a deal or not. In the world of finance these models are often regarded as “hard currency” and reflect the core competence of the investment firm. The models are essential tools for acting on the market and in many cases the differences in valuation approach explain why some investors are more successful than others. Because of this valuation models are treated as corporate secrets and not public information. The following arguments explain why it is hard for an “outsider” to get a hold of accurate financial models used in the industry today. However, it should be stated that the fundamentals in the different models are the same. When it comes to LBO valuation it is all about deriving “free cash flow” available for repaying debt. As calculated free cash flow is used to repay debt, the value of equity is increasing. This increase is calculated as IRR and cash return which both is measures of profitability of the LBO. The complete LBO valuation model is attached in appendix I. For input assumptions used in the model see chapter 6, input & assumptions.

5.1 Equity Purchase Price & Enterprise Value When buying out a public target equity purchase price is calculated as the product of offer price per share and fully diluted shares outstanding. Offer price per share reflects the current market price of the stock. In addition to this a premium or a so called sweetener is paid on top of the offer price to assure that the stockholders accept the bid. The premium varies from deal to deal but historical levels have been somewhere around 10-20% (Giddy 2009). Fully diluted shares outstanding is the total number of shares that would be outstanding if all possible sources of conversion such as options, warrants and convertible securities were exercised. In the model offer price per share is set to 67.00 SEK. Björn Borg offers two incentive schemes based on warrants in the company. See chapter 6, input & assumptions for details on those. Figure 4 shows the calculation of in-the-money shares and proceeds from the exercise of warrants in the incentive schemes. Figure 4: New shares from in-the-money warrants and proceeds from the exercise of warrants.

The offer price per share is greater than the exercise price for tranche 2 warrants. This means that the total number of in-the-money shares from the incentive schemes are 1 250 000. At the initialization of the LBO, the proceeds from the sale of these shares are used to buy back shares from the market. Proceeds from the sale of shares in each tranche are calculated as exercise price

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multiplied with in-the-money shares. Total proceeds from the sales of in-the-money shares are the sum of proceeds from each tranche. Figure 5: Calculation of fully diluted shares outstanding.

Number of basic shares outstanding is taken from the yearly report (Björn Borg AB 2010) and amounts to 25 148 384. Shares from in-the-money options were calculated above. In order to arrive at the number of shares repurchased, total proceeds from the sales of in-the-money shares are divided by offer price per share. Figure 5 shows how fully diluted shares outstanding are calculated as basic shares outstanding plus, shares from in-the-money options less, shares repurchased. As there are no other convertible securities in Björn Borg, fully diluted shares outstanding equals 25 487 190. Figure 6: Calculation of equity purchase price and enterprise value.

Figure 6 is showing the equity purchase price and enterprise value. In order to calculate enterprise value, cash and cash equivalents is subtracted from the sum of equity purchase price, total debt, preferred securities and non-controlling interest.

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5.2 Income Statement Appendix I show the complete income statement calculated in the LBO valuation model. The income statement consists of an historical period and a projection period. Numbers in the historical period are taken from the targets historically reported financial data (Björn Borg AB 2009) and (Björn Borg AB 2010). Projected sales growth during the holding period is depending on the operating scenario. See chapter 6 for used scenarios. Prognosticated figures on cost of goods sold, SG&A and depreciation & amortization is calculated from their historical percentage levels of sales. LTM in the historical period stands for “Last Twelve Months” and is normally the calculated last year’s financial numbers on the day of the calculation. In order to simplify calculations, the model is using the annual report of 2009 as the LTM period. This means that the calculations are assumed to be done on the 1st of January 2010. The Pro forma column in the income statement is adjusted to reflect an approximation of the targets current situation according to until actual date of calculations released financial data. The projection period used spans from one to ten years. This means that an exit can be done somewhere in the period ranging from one, up to ten years with the interval of one year. Forecasts of financial data are rarely available for more than five years ahead. Due to this all forecasted numbers in year five are assumed to remain unchanged until year ten. Figure 7: Part of income statement.

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The dark fields in figure 7 marks cells for input data. The other cells show results of calculations. Historical data for sales, cost of goods sold, SG&A and depreciation & amortization are taken from the targets financial statements. The spreadsheet calculates sales growth, gross profit, EBITDA12, EBIT13 etc. Figures for the projection period are calculated from the income statement assumptions, shown in the bottom of the income statement in appendix I. Assumptions such as sales growth, cost of goods sold, SG&A etc. are calculated from historical levels of sales as described above. In the income statement assumptions, interest income and tax rate is stated. Interest income is the interest rate received on capital invested by the company. Tax rate is the Swedish corporate tax rate. The lower part of the income statement reflects interest expenses from loans taken in order to finance the buyout. This is described in more detail under section 5.5 debt schedule. Net interest expense is worth extra notice as this number is the tax shield subtracted from EBIT before the tax expense is calculated. The tax shield creates leverage by decreasing taxable income due to the high levels of debt in the targets capital structure. The tax shield is essential in an LBO and gives companies with high debt/equity ratios the benefit of a lower tax expense. Another key figure in the income statement that should be watched closely is EBITDA as it gives a first indication of the targets ability to service debt. Further, net income is important as it is used in the cash flow statement in order to arrive at the free cash flow or the ending cash balance of the firm.

5.3 Balance Sheet Appendix I show the complete balance sheet calculated in the LBO valuation model. The balance sheet matches total assets with total liabilities and equity. In order for the sheet to balance total assets should always be equal to total liabilities and equity. This is assured by the balance check at the end of the sheet. When the balance check is zero, total assets are equal to total liabilities and equity. Another important aspect of the balance sheet is the net working capital needed by the target each year. The change in net working capital is used in the cash flow statement in order to arrive at the free cash flow or ending cash balance of the firm. In order to arrive at the pro forma balance for 2010, certain adjustments have to be done from the opening balance of 2010. These adjustments are due to the restructuring of the target company during the LBO process. The largest adjustments are changes in the debt structure, shareholders equity and the creation of goodwill.

12

EBITDA is Earnings Before Interest, Taxes, Depreciation and Amortization. EBIT is Earnings Before Interest & Tax. It is sometimes referred to as “operating profit” or “operating income”. 13

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Figure 8: Adjustments to the balance sheet due to the financial restructuring of the target.

The LBO creates an increase in goodwill and intangible assets for the target company14.The added goodwill value is calculated as equity purchase price plus premium minus existing book value of equity. The created goodwill is added onto the existing goodwill in order to arrive at the new goodwill for the company. For Björn Borg, goodwill of 1 588.3 MSEK is created due to the LBO. This number assumes a premium of 20%. Other asset that is created from the restructuring of the company is deferred financing fees. These fees are added to the firm’s assets in the pro forma column. The debt structure of the post-LBO firm is completely different to the pre-LBO firm. In the balance sheet, adjustments to the debt structure are visible. New debt is added in the form of term loans, mezzanine and high-yield bonds depending on the used financing structure15. While new debt is issued, the old debt is paid off. Björn Borg has no existing utilized credit facilities. However, non14

If equity purchase price is less than existing book value no goodwill is created. However, this is not a normal scenario in an LBO. 15 This debt structure is just an example of how new debt can be issued. In an LBO analysis several debt structures are tested in order to find the most suitable debt structure for the target.

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current liabilities include a reported liability to the seller of the Björn Borg trademark totaling to 40.9 MSEK. This debt together with deferred tax amounting to 40.0 MSEK is paid off in the LBO. As seen in figure 8 these liabilities are zero in the pro forma column, this means that they are fully paid off. Also in the LBO, the pre-LBO shareholders equity is replaced with the newly issued equity of 1614.8 MSEK. This means that shareholders equity in the post-LBO firm equals to 1614.8 MSEK.

5.4 Cash Flow Statement Appendix I show the complete cash flow statement calculated in the LBO valuation model. The cash flow statement describes the projected cash flows for the company during the holding period. It describes how cash is used by the firm on a year-to-year basis. The company’s cash flow is used for net working capital, investing activities such as capital expenditures known as CAPEX16 and essentially financing activities which is repayment of debt. Often in an LBO transaction, management wants to keep the ending cash balance of the firm at a minimum level each year. The minimum cash level acts as a safeguard against unforeseen expenditures. In the constructed model, a function called “cash balance” uses cash from the balance sheet to repay debt. When cash balance is switched off, cash from balance sheet is not used to repay debt. Instead it is left untouched in the balance sheet. The cash balance function also allows for keeping a minimum ending cash balance each year even though the cash from the balance sheet is used for amortization. By enabling cash balance and entering a minimum cash level in the debt schedule, cash from the balance sheet minus min level of cash will be added to cash available for optional debt repayment. This assures that the ending cash balance of the cash flow statement will be kept above the min cash level each year even though cash from the balance sheet is utilized for paying down debt. Figure 9: Calculations of cash flow from operating activities.

16

CAPEX is funds used by the company to acquire or upgrade physical assets such as property, industrial buildings and equipment.

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The cash flow statement works its way down to ending cash balance each year during the projection period in the following way. First, cash flow from operating activities is calculated as shown in figure 9. Starting with net income, depreciation and amortization is added back. This is just an accounting principle in order to arrive at the actual cash flow into the firm. Amortization of financing fees is also a non-cash expense that is added back to the net income in the post-LBO cash flow statement. After that, changes in the net working capital NWC are presented. Here it is important to recognize if the change in NWC is expressed as a positive (decrease in NWC) or negative (increase in NWC) number. An increase in accounts receivable is expressed as a negative number in the cash flow statement. This is due to the fact that an increase in accounts receivable means the spending of cash which will increase the NWC. The same logic goes for inventories, prepaid and other current assets. Similar an increase in accounts payable, accrued liabilities or other current liabilities is a source of cash and gives a decrease in NWC. Therefore an increase in accounts payable, accrued liabilities or other current liabilities is presented as a positive number. The sum of all changes in the working capital items gives an increase in NWC of 1.2 MSEK in year 1. In order to arrive at cash flow from operating activities the increase in NWC is subtracted from the sum of operating activities. Figure 10: Calculations of ending cash balance.

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After the calculation of cash flow from operating activities, cash flow from investing and financing activities are calculated. This is done in order to find the ending cash balance. Investing activities consists of CAPEX as described above. To estimate yearly CAPEX during the projection period an assumption of CAPEX as a percentage of sales is calculated from financial statements. Financing activities are repayment of loans issued for the LBO. These repayments are only amortizations as the net interest expense is already included in the net income. Under financing activities posts for dividends and equity issuance/repurchase are also found. In the calculated scenario, both those posts are set to zero. This is a fair assumption given the fact that credit issuers often places demands on a non dividends policy in order to secure the repayment of their loans. At the end of the cash flow statement ending cash balance is calculated. If no minimum cash balance is set in the debt schedule and cash balance plus cash flow sweep is active, ending cash balance will be zero as long as the firm has unpaid debt. In such a case all of the free cash in the firm will be used for repayment of debt. If cash flow sweep is not active, only the mandatory fees including interest rates connected to the loans will be paid.

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5.5 Debt Schedule Appendix I show the complete debt schedule of the LBO valuation model. The debt schedule describes the different issuances of debt that the target firm has done in order to finance the LBO. It typically consists of a revolving credit facility, term loan facilities, mezzanine debt and the issuance of corporate bonds. In the developed LBO valuation model a SWAP rate of 10 years is used in order to hedge the debt from fluctuations in STIBOR. Another benefit from using a SWAP instrument instead of STIBOR is that no assumptions of the future STIBOR curve has to be made. This further increases the accuracy of the model. For spreads, terms, coupons, fees and other vital information associated with each debt instance see chapter 6 input & assumptions. Figure 11: Calculations of cash available for optional debt repayment.

Figure 11 shows the SWAP rate used in the calculations and the cash available for optional debt repayment year 1 and 2. The 10 year swap rate is taken from (SEB 2010) in order to capture the current market conditions. In the beginning of the debt schedule, cash available for debt repayment is calculated. This is done by subtracting cash flow from investing activities (a negative post) from cash flow from operating activities. After that, total mandatory repayments are subtracted from the post cash available for debt repayment. Notice how interest rates as well as the commitment fee on unused revolver are accounted for when arriving at cash available for debt repayment. As interest rates and fees are paid before tax, they are already deducted in the net income and therefore also in the cash flow from operating activities. Total mandatory repayments are the sum of all mandatory debt repayments excluding interest rates and fee on unused revolver. Mandatory debt repayments are done on debt instances such as the term loan facilities. Making mandatory repayments is a demand from the credit provider in order for them to supply financing.

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After subtracting total mandatory repayments, cash from balance sheet minus min cash is added before arriving at cash available for optional debt repayment. The min cash cell can be changed in order to secure a suitable minimum ending cash balance of the target. Cash from balance sheet is the amount of cash and cash equivalents stated in the pro forma column of the income statement. If there is any cash in the post-LBO firm this capital can be used for debt repayments during the projection period. However, in many LBO’s the cash available in the firm is used to finance the buyout. In those cases a bridge loan facility or similar could be used. Doing so will decrease the amount of debt needed to complete the transaction and can in some cases give more positive key figures when presenting a deal to investors. This is a somewhat risky approach due to the fact that it leaves the post-LBO firm with a low ending cash balance therefore it will be more exposed to financial distress. The previous argument explains why the constructed model in this thesis does not use the cash available in the firm as a source of funding for the LBO. When calculation of cash available for debt repayment is done, each credit facility is calculated on its own. Interest rates are calculated as SWAP rate plus spread. An option cell in the transaction summary makes it possible to calculate interest expense in two ways. If the “toggle bit” is set to 1, the average interest method is used. If toggle is 0, interest expense is calculated as interest rate multiplied with ending balance. This is a simplified way to calculate interest expense and does not reflect reality as good as the average interest calculation. Due to the fact that interest is paid continuously during the year17, the average interest method is a more accurate way to calculate interest expense. 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝐸𝑥𝑝𝑒𝑛𝑠𝑒 = 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑅𝑎𝑡𝑒 ×

𝐵𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔 𝐵𝑎𝑙𝑎𝑛𝑐𝑒 + 𝐸𝑛𝑑𝑖𝑛𝑔 𝐵𝑎𝑙𝑎𝑛𝑐𝑒 2

In the average interest method, average interest expense is calculated as interest rate multiplied with the mean value of beginning- and ending-balance. 𝐶𝑜𝑚𝑚𝑖𝑡𝑚𝑒𝑛𝑡 𝐹𝑒𝑒 = 𝐹𝑒𝑒 𝑜𝑛 𝑈𝑛𝑢𝑠𝑒𝑑 𝑃𝑜𝑟𝑡𝑖𝑜𝑛 × 𝑆𝑖𝑧𝑒 −

𝐵𝑒𝑔𝑖𝑛𝑛𝑖𝑛𝑔 𝐵𝑎𝑙𝑎𝑛𝑐𝑒 + 𝐸𝑛𝑑𝑖𝑛𝑔 𝐵𝑎𝑙𝑎𝑛𝑐𝑒 2

Further, commitment fee on unused revolver is calculated as stated above. Credits are repaid during the projection period as shown in the debt schedule. Ending balance each year equals beginning balance next year and yearly repayments are derived from cash available for optional debt repayment. As available cash is used up, optional repayment of the loans are prioritized according to their seniority over each other. In the constructed LBO model, junior loans are amortized after more senior credits. Repayment schedules differ between the loans. The revolver can be borrowed and repaid freely until its maturity. However, it is usually undrawn at maturity. Term loan A has a repayment schedule with fixed amortization rates each year until its closing, while TLB and TLC has a percentage of their size as annual amortization with a bullet18 at maturity. As described above, when repaying debt, TLA is prioritized over TLB, TLB is prioritized over TLC and TLC is prioritized over 2nd lien etc.

17

In a real life scenario, interest rates is paid monthly not yearly as the simplified interest calculation method assumes. 18 A bullet repayment or “bullet” is a single payment of the entire existing loan amount, which is paid at maturity.

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As seen under financing structures in assumptions page 3 of the LBO valuation model, appendix I, the revolver is not used as a funding of the LBO. Instead the revolving line of credit acts as a backup for ongoing liquidity as well as support for seasonal working capital needs. This is done with so called revolver draws. In the constructed model no revolver draws are utilized as it is hard to prognosticate future working capital fluctuations without having a detailed insight into the targets business. In the created valuation model existing term loans are fully paid back with the pro forma adjustments in the balance sheet. Therefore no payments are stated under the existing term loan facility. However the model allows for existing term loans from the pre-LBO firm. Amortization of 2nd lien debt is prioritized after TLC and repayments are calculated in the same way as with TLB and TLC. As mezzanine is a flexible debt instrument its repayment plan depends on how it is negotiated. In the constructed model interest on mezzanine is paid yearly while optional amortization is free during the term. However, the loan must be fully funded at its closing. Issuance of High-Yield bonds is paid off as a coupon each year19 until maturity. At maturity the principal is paid back. As bonds are a regulated financial instrument, coupons and principal has to be paid on time. In the case of financial distress, senior notes are prioritized over senior subordinated notes.

19

In practice, bonds generally pay interest on a semiannual basis.

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5.6 Returns Analysis Appendix I show the complete returns analysis from the LBO valuation model. The returns analysis contains calculated return of the LBO. It reveals key figures such as enterprise- and equity-value for each year during the projection period. From the equity value, cash return and IRR are calculated and forms the output of the model. In order to derive enterprise value at exit, the exit EBITDA multiple is used. In contrast to other multiples such as the P/E ratio, an exit EBITDA multiple looks at the firm’s value from a potential acquirer’s perspective as it takes debt into account. The exit EBITDA multiple is calculated as below. 𝐸𝑥𝑖𝑡 𝐸𝐵𝐼𝑇𝐷𝐴 𝑚𝑢𝑙𝑡𝑖𝑝𝑙𝑒 =

𝐸𝑛𝑡𝑒𝑟𝑝𝑟𝑖𝑠𝑒 𝑉𝑎𝑙𝑢𝑒 𝑎𝑡 𝐸𝑥𝑖𝑡 𝐸𝐵𝐼𝑇𝐷𝐴 𝑎𝑡 𝐸𝑥𝑖𝑡

The returns analysis starts with derived EBITDA for each year during the projection period. It then shows enterprise value each year. Given the formula above, enterprise value each year is calculated as the exit EBITDA multiple multiplied with EBITDA for the year. After that, total debt less cash and cash equivalents are subtracted from the enterprise value in order to arrive at equity value. Cash return is calculated as equity value divided by initial equity investment. Last key figure to be calculated is IRR. The IRR can be translated to the growth rate of sponsor invested capital in the LBO. IRR together with cash return are essential measures of the transactions profitability. In order to attract source of funds, projected IRR and cash return must at least equal to investors demands on return.

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6 Input & Assumptions 6.1 Historical Income Statements The complete income statement from the LBO model is attached in appendix I. Numbers for the historical period in the income statement are taken from Björn Borg´s year end reports. Drafts from these reports are attached in appendix V. Figure 12: Historical financial data in the income statement.

Sales and cost of goods sold figures are taken directly from the annual reports. The Selling, general & administrative post is calculated as the sum of distribution-, administrative- and developmentexpenses. As the figures for distribution-, administrative- and development- expenses in the annual income statement are adjusted for depreciation & amortization, depreciation & amortization has to be added back in order to arrive at the pre depreciation & amortization SG&A expense. Figures for this are taken from note 9 in the annual reports. Total depreciation & amortization for each year in the historical period is also given from note 9. Figures 13 and 14 show the exact numbers. As Björn Borg has no other expense, income or amortization, these fields are left blank in the model.

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Figure 13: Depreciation & amortization on SG&A expenses for 2007 and 2008.

Source: (Björn Borg AB 2009) Figure 14: Depreciation & amortization on SG&A expenses for 2008 and 2009.

Source: (Björn Borg AB 2010)

6.2 Income Statement Assumptions In the 2009 annual report (Björn Borg AB 2010), the board of directors has established financial objectives for the period of 2010-2014. Among the objectives are an average annual organic growth of at least 10% and an average annual operating margin of at least 20%. CAPEX for the same period is estimated annually at 2-5% of net sales depending on whether any new Björn Borg stores are opened. The growth rate objective for the period 2010-2014 is significant lower than the objective from the 2008 annual report where the board had a goal of at least 20% annual sales growth rate (Björn Borg AB 2009). The big difference should be explained by the financial downturn and the general state of the economy. Consumption during the recent turbulence has been extremely low. This is reflected in the more modest growth objectives in the latest report. However, as late 2009 and Q1 in 2010 indicates that the economy regains strength it could be that a 10% sales growth is a bit low. Also as an LBO means that Björn Borg will have a new and more growth focused owner in the form of a PE firm, it is natural to assume that the actual growth rate during the holding period will be closer to 20%. As Björn Borg is a CAPEX light company it should be possible to increase sales with limited operating risk and capital investment. Here the franchise model already adopted by the company should facilitate a strong and stable growth during the next years. The above arguments explain the sales growth used for each case in the LBO model. The base case account for 15% annual sales growth as it is between 10-20%. Management case is somewhat more optimistic and assumes a growth of 20%. The ambition case which is also the best case scenario calculates with a 25% sales growth. In order to ensure that the target can fulfill demands on covenants from debt lenders even if the growth are lower than expected, the bank case presented to debt providers has a growth of 10%.

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Cost of goods sold has during the last three years been between 46-49% of sales. Therefore it is reasonable to assume that production costs in the future will be somewhere close to these figures. As cost of goods sold vary with exchange rates, trade barriers, material- and labor- costs it can be hard for Björn Borg to affect these numbers. Therefore the variations in cost of goods sold are quite small between the different scenarios used in the LBO model. However, in theory it should be possible to shrink the costs by negotiating contracts with suppliers, enhance procurement and buy larger quantities. The base case assumes a slight improvement in cost of goods sold as it amounts to 46% of sales. In the management case the number is 43%. The ambition case assumes that the PE firm is able to decrease cost of goods sold down to 40% of sales as a result of cost effective measures. In the bank case cost of goods sold are assumed to be 49%, this figure means that no cost improving activities are implemented. Historically, selling general and administrative expenses for Björn Borg has been between 24-28% of sales. This post consist of distribution- administrative- and development- costs. In order to decrease those expenses, the PE firm is assumed to create a more efficient chain of logistics and cut development costs. Off course there is a tradeoff between decreasing development costs and strong growth. But in Björn Borg, it should be some room for expense reduction and in the same time keeping the prognosticated growth. The following SG&A scenarios are used in the calculations, base case 24%, management case 22%, ambition case 20% and bank case 26%. Depreciation & amortization has been between 0.8-1.4% last three years. As depreciation & amortization is done on SG&A and SG&A has been reduced in all cases except the bank case. Depreciation & amortization has to be reduced in three of the scenarios. The assumed Depreciation & amortization levels are base case 0.8%, management case 0.6%, ambition case 0.4% and bank case 1.4%. The interest income is reflected by the general state of the bond market and the interest rates on bank accounts. Therefore this number is the same in the base, management and ambition case. In the bank case the interest income is set a bit lower as a safety margin for decreasing interest rates. Interest income in the base, management and ambition case is assumed to be 1%. Interest income in the bank case is set to 0.8%. The tax rate used in the LBO model is the Swedish corporate tax rate which amounts to 26.3% (Skatteverket 2010).

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6.3 Opening 2009, In the Balance Sheet The balance sheet from the LBO model is attached in appendix I. Inputs to the balance sheet in the column “opening 2009” are taken from the 2009 annual report (Björn Borg AB 2010). Opening 2009 Cash and cash equivalents in the balance sheet are cash and bank balances in the annual report and amounts to 296.484 MSEK. Accounts receivable are 38.032 MSEK. Inventories translate to trading book, trading book is 26.455 MSEK. Prepaid and other current assets are the sum of tax assets, other current receivables and prepaid expenses & accrued income. This makes prepaid and other current assets = 7.370+3.227+17.090 = 27.687 MSEK. Property, plant and equipment have its own post in the annual report and are declared to 11.150 MSEK. Goodwill and intangible assets are goodwill, trademarks and other intangible assets added together. This makes goodwill and intangible assets 13.944+187.532+3.437 = 204.913 MSEK. As Björn Borg has no other assets or deferred financing fees these fields are left blank. Accounts payable are 15.480 MSEK. Accrued liabilities are accounted for as accrued expenses and deferred income. Accrued liabilities are therefore 33.387 MSEK. Other current liabilities amount to 13.997 MSEK. Björn Borg has pre-LBO debt in the form of deferred tax liabilities and non-current liabilities due to purchase of the Björn Borg trademark. Deferred tax liabilities are 40.011 MSEK and non-current liabilities are presented as 40.889 in the annual report. This makes the total amount of debt repaid in the LBO, 80.900 MSEK. Shareholders’ equity in the pre-LBO firm is 460.842 MSEK and is declared as the sum of share capital, other paid-in capital, reserves and retained earnings. Minority interests or non-controlling interests are accounted for 0.114 MSEK in the annual report. This makes total shareholder’s equity in the preLBO firm 460.956 MSEK.

6.4 Balance Sheet Assumptions The balance sheet assumptions are visible in appendix I. Figure 15: Historical levels compared to sales.

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Figure 15 show historical levels on balance sheet inputs compared to sales. In order to decide on reasonable balance sheet input assumptions historical levels are used as a guideline. In reality, the PE firm would take a deeper look into the financial statements of the target and look for possibilities to shrink the net working capital. After a thorough review of the data they would be able to derive input assumptions backed up by their assessments. In this thesis, input assumptions are formed from looking at previous levels compared to sales. This is a simplification. However, for the purpose of this thesis these assumptions are sufficient. In the base case the 3 year mean value is used for all of the balance sheet inputs. This makes accounts receivable 11.7%, inventories 5.5%, prepaid & other current receivables 4.5%, accounts payable 5.4%, accrued liabilities 5.9% and other current liabilities 5.2%. The management case has a more opportunistic view and assumes a certain decrease in the net working capital. Here accounts receivable are expected to be 10%, inventories 5.3%, prepaid & other current receivables 4.3%, accounts payable 5.7%, accrued liabilities 6% and other current liabilities 5.5%. In the ambition case net working capital is expected to shrink substantially. This makes accounts receivable 9%, inventories 5.1%, prepaid & other current receivables 4%, accounts payable 6%, accrued liabilities 6.2% and other current liabilities 5.8%. In order to create a more negative scenario the bank case figures are accounts receivable 15.2%, inventories 6.4%, prepaid & other current receivables 5.3%, accounts payable 3%, accrued liabilities 5.4% and other current liabilities 2.7%. This case reflects a larger net working capital than the others.

6.5 Cash Flow Statement Assumptions In the 2009 annual report (Björn Borg AB 2009), Björn Borg’s financial goals for the period 2010-2014 states that the capital expenditures are estimated annually at 2-5% of net sales. This figure depends to a great extent on the number of stores opened during the year. In order for the company to grow it is assumed that the number of stores are increasing and thereby increasing CAPEX. However parts of a stable growth could be achieved by the help of franchise stores and increased revenues from licensed products. These areas do not affect the CAPEX of the group. Therefore a stable growth should be realizable without large increases in CAPEX. Also, the PE firm is assumed to shrink CAPEX with a certain amount as part of their value adding activities. Historically, CAPEX have ranged from 0.3-3.1% of sales during 2007-2008. Input for CAPEX in the LBO model are base case 3%, management case 4%, ambition case 5% and bank case 3%.

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6.6 Financing Structures, Margins and Base-Rate The financing structures used in the LBO model are derived from the study on Swedish PE firms. The interviews revealed that PE firms, active on the Nordic market today, uses a revolving credit facility, term loans and sometimes mezzanine in order to finance their LBO’s. Therefore the financing structures in the LBO model are combinations of a revolving credit facility, term loan A facility, term loan B facility, term loan C facility and mezzanine. Structure 3 and 4 also includes high-yield bonds, reasons for this are explained below. Commitment fee on unused portion of revolver as well as terms and margins on the debt instances are also derived from the study. Each financing structure is unique in order to evaluate different debt structures impact on the return. The model allows for 5 different structures but only 4 are used as this is enough to evaluate the Björn Borg case. Revolving credit facility has a term of 10 years, a margin on 2.50% and commitment fee on unused portion is 0.50%. Term loan A has a term of 5 years, margin on 2.50% and straight amortization until maturity. Term loan B has a term of 6 years, margin on 2.65%, mandatory repayment of 1.00% per annum and bullet at maturity. Term loan C has a term of 7 years, margin on 2.80%, mandatory repayment of 1.00% per annum and bullet at maturity. Mezzanine has a term of 10 years and a margin on 15%. Interest is paid as 100% cash contribution. As mezzanine is an over the counter instrument with transaction specific repayment agreements, this payback plan is realizable. However, often mezzanine interest is paid as one part cash contribution with the rest paid as a payment in kind. Payment in kind is referred to as PIK. PIK means that the interest is accumulating during the holding period and is paid off at the end of maturity. A normal scenario is to have interest payments as 50% cash contribution and 50% PIK. Björn Borg has no existing term loans and as deferred tax liabilities together with liabilities from the purchase of the Björn Borg trademark is repaid in the LBO, no existing term loan is used in the financing structures. Even though 2nd lien and high-yield bonds are not used as a part of the financing structure of a mid cap LBO in Sweden today, the issuance of high-yield bonds are used in financing structures 3 and 4. This is done in order to investigate the impact on return from a higher leverage level. Another reason for including bonds in the structure is that some of the interviews revealed that a use of high-yield bonds on the Swedish mid-market will emerge in the future. High-yield bonds are assumed to have a maturity of 10 years and give the investors a yearly coupon of 20%.

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The base rate used in calculations is a 10 year swap instrument from SEB. Figure 16 show swap rates with different maturities. The 10 year swap rate used in the LBO model is 3.16%. Figure 16: Swap rates in SEK.

Source: (SEB 2010)

All of the used financing structures have a revolving credit facility size of 65 MSEK. The revolver acts as a safety for increase in working capital needs. As the bank case has the largest working capital. A revolver of 65 MSEK should be sufficient as it approximates 50% of the projected working capital needs in year 5 of the bank case. It should be stated that 65 MSEK in revolver size could be a bit high for the other cases but as the commitment fee on unused revolver is such a small part of the yearly costs. It does not affect the result considerably. Financing structure 1 assumes a revolver size of 65 MSEK, term loan tranche A of 420 MSEK and Mezzanine debt of 120 MSEK. This is the most probable debt structure in an LBO of Björn Borg today as banks seldom lend over 3.5X EBITDA in senior debt. Mezzanine is added in order to increase the total debt to 4.5X EBITDA. These covenants are reasonable given the result from the study conducted. Financing structure 2 assumes a revolver size of 65 MSEK, term loan tranche A of 420 MSEK, term loan tranche B of 60 MSEK, term loan tranche C of 60 MSEK and Mezzanine debt of 120 MSEK. This structure has higher senior-debt/EBITDA multiple than structure 1. In order to achieve this trance B and C instances are placed on top of tranche A. This is a reasonable debt structure given the fact that tranche B and C has a higher margin than tranche A. Structure 2 increases the realizable accumulated senior-debt/EBITDA multiple to 4.5X. Total-debt/EBITDA multiple in structure 2 is 5.5X. Financing structure 3 assumes a revolver size of 65 MSEK, term loan tranche A of 420 MSEK, term loan tranche B of 60 MSEK, term loan tranche C of 60 MSEK, mezzanine debt of 120 MSEK and highyield bonds of 120 MSEK. This structure further increases the leverage level of the target with 1X EBITDA compared to structure 2, by adding 1X EBITDA in high-yield bonds. Structure 3 has a totaldebt/EBITDA multiple of 6.5X. This scenario is not probable due to the fact that high-yield is not used as a part of the financing structure in an LBO in Sweden. Also, a total-debt/EBITA multiple of 6.5X would be hard to realize due to the inherent uncertainty in the prognosticated growth rate.

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However, structure 3 has a value for this thesis as it investigates the higher leverage levels impact on IRR and cash return. Financing structure 4 assumes a revolver size of 65 MSEK, term loan tranche A of 420 MSEK, term loan tranche B of 60 MSEK, term loan tranche C of 60 MSEK, mezzanine debt of 240 MSEK and highyield bonds of 240 MSEK. It makes the total-debt/EBITDA multiple 8.5X and is therefore not realizable in practice. This case is used for academic purpose and reveals how return of the LBO would be if it was possible to increase debt/equity ratio close to 50%.

6.7 Financing Fees and Other Expenses In a monthly loan market update from May 201020, debt capital markets at a leading investment bank in the Nordic region reveals that arrangement fees of leveraged loans are between 4-4.5%. This information gives the following financing fees used in the LBO model. Revolving credit facility financing fee 4.0%, term loan A financing fee 4.0%, term loan B financing fee 4.0%, term loan C financing fee 4.0%, mezzanine financing fee 4.5% and high-yield bonds financing fee 4.5%. 2nd lien-, senior bridge facility-, senior subordinated bridge facility-financing fees and other financing fees & expenses are left blank as there are no such fees in the Björn Borg case. Besides the financing fees there are other costs associated with the LBO. The post “other fees and expenses” are payments for services such as M&A advisory, legal, accounting and consulting. These fees are estimated to 15 MSEK. Also an administrative agent fee is paid annually to the bank that monitors the credit facilities including the tracking of lenders, handling of interest payments, principal payments and associated back-office administrative functions. The administrative agent fee is set to 1 MSEK annually.

20

Due to the confidential character of this information no further reference can be made.

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6.8 Equity Purchase Price and Premium Figure 17 show Björn Borg’s share price from the 12th of May 2009 to the 12th of May 2010. As the calculation assumes that the LBO is done on the 1st of January 2010, the share price of 67.00 SEK (Avanza 2010) at that time is used as the offer price per share. th

th

Figure 17: Björn Borg share price in SEK between 12 of May 2009 – 12 of May 2010.

Source: (Avanza 2010)

Basic shares outstanding at the end of 2009 are 25 148 384 (Björn Borg AB 2010). Figure 18 show outstanding warrants at the end of 2009. In warrant scheme 2008:1 the outstanding warrants carry the right to subscribe for 155 300 shares for 74.60 SEK per share. Warrant scheme 2008:2 has 1 250 000 outstanding warrants which translates to the right to subscribe for 1 250 000 shares for 48.84 SEK per share. With an offer price per share of 67.00 SEK only warrants in scheme 2008:2 are exercised. This makes the total number of in-the-money shares from warrants 1 250 000, proceeds from these shares are 61.050 MSEK. Net new shares from warrants are calculated to 338 806. As there are no shares from convertible securities, fully diluted shares outstanding are basic shares outstanding plus net new shares from warrants. Fully diluted shares outstanding amount to 25 487 190. With an offer price per share of 67.00 SEK equity purchase price is 1 707.6 MSEK. Figure 18: Outstanding warrants at the end of 2009.

Source: (Björn Borg AB 2010)

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According to the interviewed PE firms, premiums today are in general 20-30% of the share price. When looking at Björn Borg’s share price in the past, it is clear that 67.00 SEK is not close to its alltime high over the last three years average, nor is the company’s earnings low compared to historical levels. This indicates that the bidding premium should be on a somewhat normal level. Therefore it should not be necessary with an exceptional bidding premium in order to acquire Björn Borg. Hence, a premium of 20% is used in the valuation model. As figure 19 reveals, 86 shareholders own 81.5% of the company. This strong owner structure with few major stock holders makes it essential to reach accept from the big investors. None of the smaller owners has a corner position on its own. Therefore, if the major players agree on the bid price it is very likely that the deal goes through. A premium of 20% gives the Björn Borg shareholders 80.4 SEK for each share. This makes the total call premium 341.5 MSEK. Figure 19: Shareholder structure.

Source: (Björn Borg AB 2010)

6.9 Exit Multiple The study on Swedish PE firms revealed that all of the respondents used the entry multiple as exit multiple in their LBO models. As Björn Borg is not valued at an extremely low EV/EBITDA entry multiple, this is a reasonable assumption. Therefore the exit EBITDA multiple in the calculations is set to the same level as the entry EBITDA multiple. The exit EBITDA multiple is 12.5X.

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7 Analysis 7.1 Björn Borg’s Suitability for an LBO Björn Borg is a Swedish company that owns and develops the Björn Borg brand. Fashion underwear is their core business and largest product area. They also offer adjacent products as well as footwear, bags, fragrances and eyewear. Björn Borg is currently represented in nearly 20 markets, the largest of which are the Netherlands and Sweden. Figure 20: Björn Borg 2009 percentage of brand sales per country and product area.

Source: (Björn Borg AB 2010)

The following text is taken from the company’s latest annual report (Björn Borg AB 2010). The Björn Borg brand was established in the Swedish fashion market in the first half of the 1990s. Continuity has helped the brand to carve out a strong position in its established markets, particularly for its largest product group, underwear. In the last four years Björn Borg has expanded to several new markets, where the brand is in a start-up phase. The brand is recognized for quality products and distinctive and innovative design. Their patterns and colors stand out, and a large variety of models creates an exciting product range. Björn Borg is seen as a liberated Swedish brand of fashion underwear, which is underscored by their motto: Playful, Vibrant, and Daring. A passion for underwear and the courage to challenge the industry is clearly evident in their marketing communications and product development. Björn Borg’s vision is to be The World Champion of Fashion Underwear. In 2009 Björn Borg signed agreements to launch its products in four new markets – Italy, Greece, Portugal and Chile – through outside distributors (Björn Borg AB 2010). In the U.S. market the aim is to find an outside partner to further develop operations (Björn Borg AB 2010). During the holiday 2009 shopping season Björn Borg offered a sneak preview in Sweden of a collection of boys’ underwear. Björn Borg is confident that a specially designed kid’s line for both girls and boys will serve as an excellent complement to its other categories and create opportunities for growth in both new and established markets (Björn Borg AB 2010).

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7.1.1 Strong and Predictable Cash Flows Björn Borg’s historical financial data from 2002 to 2009 (Dagens Industri 2010) shows a significant year-over-year increase in the net income from 2002 to 2007. Starting at approximately 5 MSEK in 2002, net income increases up to 102 MSEK at the end of 2007. During 2008 and 2009 net income has a small drop which makes it around 81 MSEK at the end of 2009. The small loss in net income during the last two years could be explained by the general state of the economy where lower general consumption patterns in the retail industry led to a decrease in sales among most of the fashion companies. The growth trend from 2002 to 2009 reveals that Björn Borg’s net income has gone from 5 to 81 MSEK in 7 years with a stable net income each year. As net income is the input for deriving free cash flow of the firm. These figures could be translated into the historical cash flows of Björn Borg. Figure 21 show that Björn Borg has strong and predictable cash flows and gives a first indication that the company could be a suitable LBO target. Figure 21: 2002-2009 net income of Björn Borg.

Source: (Dagens Industri 2010)

7.1.2 Leading and Defensible Market Position As stated in Björn Borg’s latest annual report the brand is recognized for quality products with distinctive and innovative design. They have a strong market position in established markets with their current line of fashion underwear. Through innovative design and aggressive marketing it should be possible for the company to maintain its leading market position and stay ahead of their competitors. However, their business model contains a fashion risk component. It is always hard to prognosticate the success of future products. Therefore, diversification of risk through expanding other product areas and establishing new markets are important in order to assure a strong market position in the future. Entry barriers for competitors are somewhat small as no heavy investments are needed in order to launch a competing brand. Here, marketing and brand name are the two most distinguished features that need to be administered in order to defend the current market position. Assuming the new owner of the company is able to conserve the strong brand name and leading market position in its niche, Björn Borg is a suitable LBO candidate in regards to its leading defensible market position.

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7.1.3 Realizable Growth Opportunities The base case in the LBO valuation model assumes a yearly sales growth of 15%. This should be realizable as Björn Borg plan to enter several new markets. Signed agreements to launch Björn Borg products in, Italy, Greece, Portugal and Chile indicates an expansion throughout the next years. Ambitions to penetrate the large U.S market further underpin the growth opportunity for the company. An emerging trend that should be possible to benefit from is the current development in China. Most high-end fashion brands are already present in China and as people living there are eager to adapt to European fashion such a huge market could be a presumptive expansion possibility in the future. New products in pipeline such as the kid’s collection together with a constantly changing product range also argue for realizable growth opportunities. Expected growth for Björn Borg is quite high and the above arguments provide an explanation to how growth targets should be realized. Therefore, realizable growth opportunities indicate that Björn Borg could be a suitable LBO candidate. 7.1.4 Efficiency Enhancement Opportunities It is hard to pinpoint exact efficiency enhancement opportunities without extensive knowledge about the company’s day-to-day operations. In general for retail companies, focus should be on cost cutting activities such as negotiating supplier contracts, decreasing CAPEX and streamlining production. However, in the case of Björn Borg, prognosticated CAPEX levels are already extremely low and most of the production is outsourced. As overhead cost such as salaries are hard to influence one alternative is to decrease the headcount in the organization. This is a dangerous approach that could affect the ability to achieve growth targets. Therefore it is not recommended, unless the organization has an excess in labor. Instead an increase in franchise stores could be the solution, as these stores provides a source of revenue while not increasing the company’s costs to the same extent as wholly owned boutiques do. Also, there should be some room for Björn Borg to lower their cost of goods sold as historical seen levels are quite high at almost 50% of sales. By negotiating supplier contracts and buying larger quantities it should be reasonable to lower COGS in order to enhance the efficiency of the firm. Looking at efficiency enhancement opportunities on its own provide no clear indication that Björn Borg is suitable for an LBO. But in a broader context, efficiency enhancement opportunities should be enough for the firm to deliver expected return in such a transaction. 7.1.5 CAPEX Light, Small Initial Investments Traditionally, companies in the fashion industry are very CAPEX light as they have no expensive production plants or other type of advanced technical equipment. Björn Borg is no exception. CAPEX goal in the pre-LBO firm is 2-5% of net sales (Björn Borg AB 2010) and the range 3-5% is used as an input to the LBO valuation model. These are very small capital expenditures compared to industrial companies and companies with massive investments in R&D, such as technology and medical companies. In the case of Björn Borg, CAPEX should be used for opening new stores, designing new collections and marketing research. Further, no large initial investments are needed in order to realize an expansion of the company. As such, when looking at CAPEX, Björn Borg is a suitable LBO candidate.

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7.1.6 Strong Asset Base The same arguments that made Björn Borg a good LBO candidate due to its small capital expenditures makes it somewhat worse when looking at its asset base. Björn Borg has no expensive plants or equipment. In fact, most of its non-current assets are goodwill, which off course cannot be used as collateral for debt. This makes Björn Borg less suitable for an LBO judging by its asset base. In reality, their ability to raise debt capital is more dependent on debt/EBITDA covenants than their liquid assets. It could be that the weak asset base slightly raises the companies cost of debt. However, Björn Borg’s lack of a strong asset base should not make them an inappropriate LBO target. 7.1.7 Low Entry Multiples Deriving entry multiples based on 2009 year-end result and share price, gives Björn Borg an EV/EBITDA of 12.5X, EV/Sales of 2.9X and an EV/Cash flow of astonishing 31X. The EV/EBITDA of 12.5X is above guidelines from the study on Swedish PE firms, saying that EV/EBITDA should be below 10.0X in order for the target to be an attractive investment. EV/Sales of 2.9X are also above the recommended maximum multiple of 2.0X. Even though these multiples are both above what is seen as fairly priced in the PE industry today, it is not much and should therefore not exclude the idea that Björn Borg could be suitable for an LBO. When looking at the EV/Cash flow multiple it is far above the maximum recommended level of 10X. This gives a signal that the company is too expensive for an LBO and might not be able to meet demands on return within a reasonable holding period. However, when taking a closer look at the numbers it became evident that the wrong cash flow was used. In order to arrive at an EV/Cash flow of 31X, total cash flow for the year was used. This is not correct due to the fact that cash flow for the year in the year-end report consists of investing activities and financing activities. As investing activities is acquisition of tangible noncurrent assets and financing activities are new share issues and dividend, these negative cash flows should not be included in the cash flow used for calculating the entry multiple. Instead, cash flow from operating activities should be used. This is due to the fact that non-current investments, new share issues and dividends are not part of the post-LBO firm’s cash flow. When using cash flow from operating activities as a base for calculating EV/Cash flow, the entry multiple drops to 18X. This is still too high and gives a hint that Björn Borg could be an unsuitable LBO candidate.

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7.1.8 Competent Management The senior management of Björn Borg has extensive experience from the fashion industry. The current president Arthur Engel has a background as president of Gant and Leo Burnett. During his time at Gant, Mr. Engel was part of the 2006 IPO (SEB Enskilda & ABG Sundal Collier 2006) where the company went from private to public. During 2008, when Arthur joined Björn Borg, Gant was the target of an LBO (GANT 2008) and brought back to the private equity setting. It could therefore be assumed that the current president of Björn Borg is a suitable leader of Björn Borg through the holding period. His previous experience from working for PE owners should demonstrate the possibility to align Björn Borg’s future management strategy with the interests of the PE firm. Further, Björn Borg’s product manager Malin Wåhlstedt has a background as section manager for H&M underwear. Their vice president and international sales director, Henrik Fischer is a former president of Polarn o. Pyret. This should benefit Björn Borg in their expansion into kids’ underwear. Also, the creative director Magnus Ehrland has been working as design director for J. Lindeberg and menswear designer at Diesel, Italy. In addition to this, other members of the senior management team has a proven track record in leading positions at well known companies such as Axfood AB, Öhrlings PWC and H&M. Therefore, Björn Borg’s current management team has to be considered as highly competent and should provide for a successful expansion of the company in the future. 7.1.9 Moderate Leverage Level Björn Borg’s current low debt gives the company a debt/equity ratio of 0.18X. This is a moderate leverage level that gives room for increased debt in the capital structure of the post-LBO firm. 7.1.10 Strong Owner Structure As shown in figure 19 it is evident that Björn Borg has a strong owner structure. None of the smaller shareholders has a corner position in the company and should therefore not be able to affect the premium of the deal. This makes Björn Borg a suitable LBO candidate in regards to the owner structure. 7.1.11 Exit after the Holding Period As Björn Borg has a market cap of 1 707 MSEK and is listed on NASDAQ OMX today, it is off course suitable for an IPO at the time of an exit. Its stable cash flows further underpin the possibility to exit the investment through an IPO. It should also be possible to divest through an industrial or financial sale where buyers should be able to achieve synergy effects from the acquisition. Here, smoothness of the process and received premium should be the guiding factors when choosing an exit strategy. Björn Borg should be possible to sell through all of the most frequently used exit strategies. This fact provides strength to the argument that the company is a suitable LBO candidate.

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7.2 Result of the Björn Borg LBO The study on Swedish PE firms revealed that the typical holding period in an LBO today is between 37 years. Respondents also stated that a holding period of 5 years is used for calculation purposes, in order to evaluate transaction return. Return is expressed as IRR and cash return. Here, PE firms need to see an IRR of at least 20% and a cash multiple of 2-3X. However, for an investment to qualify as truly attractive, IRR should be around 30% with cash multiple above 4X. In order to provide a complete evaluation of the Björn Borg LBO, IRR and cash return are analyzed through the different financing structures and operating scenarios. In addition to this several sensitivity analyses are conducted in order to determine how exit multiple, offer price per share and holding period affects IRR and cash return. In all of the results presented below, cash flow sweep, cash balance, average interest and financing fees functions are enabled in order to assure that the output is as close to reality as possible. 7.2.1 Base Case & Financing Structure 1 Financing structure 1 seen in figure 22 consists of 420 MSEK in term loan A and 120 MSEK in mezzanine. It is the most realistic approach as this structure gives a total-debt/EBITDA multiple of 4.5X. As the base case operating scenario use the most achievable input assumptions, a combination of financing structure 1 and the base case should provide the most realistic return of the LBO. Financing structure 1 and the base case gives an IRR of 22.38% and a cash return of 2.7X given an exit in year 5, see figure 23. This is an acceptable return for PE investors today. However, it is close to the lowest acceptable limit and with the inherent uncertainty in the input assumptions. Many PE firms would hesitate before engaging in an LBO of Björn Borg, if they believed that the base case was the most probable scenario. Figure 22: Financing structure 1.

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Figure 23: IRR & cash return, exit in year 5 with financing structure 1 as the source of funds.

7.2.2 Base Case & Financing Structure 2 Combining the base case with financing structure 2 reveals that a higher leverage level increases both IRR and cash return. It should be noticed though, that increasing the leverage level of Björn Borg might not be possible in reality, as banks have strict debt/EBITDA covenants for providing debt capital. Capital structure 2 has a total-debt/EBITDA multiple of 5.5 and should be able to realize in the current debt market. However, this is a negotiation issue and depends on the banks willingness to take on risk. Figure 25 shows that the base case in combination with financing structure 2 gives an IRR of 23.37% and cash return of 2.9X. Figure 24: Financing structure 2.

Figure 25: IRR & cash return, exit in year 5 with financing structure 2 as the source of funds.

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7.2.3 Base Case & Financing Structure 3 As in the case of financing structure 2, further increase of the leverage level means a higher return. When applying financing structure 3, IRR goes up to 24.03% and cash multiple remains at 2.9X. Financing structure 3 has a total-debt/EBITDA multiple of 6.5. This is above the total-debt/EBITDA multiples provided by the current debt market. As Björn Borg has relatively weak liquid assets that could act as collateral, this financing structure is probably not realizable. However, financing structure 3 helps analyzing the LBO valuation model as it show how increasing debt translates into a higher transaction return. Figure 26: Financing structure 3.

Figure 27: IRR & cash return, exit in year 5 with financing structure 3 as the source of funds.

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7.2.4 Base Case & Financing Structure 4 Financing structure 4 has too much debt for Björn Borg but in accordance with the discussion in chapter 7.2.3 it has a value for the analysis of the LBO valuation model. Financing structure 4 gives an IRR of 25.79% and cash return of 3.1X. Again, increasing the debt in the LBO creates a higher return for investors. Figure 28: Financing structure 4.

Figure 29: IRR & cash return, exit in year 5 with financing structure 4 as the source of funds.

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7.2.5 Management Case As financing structure 1 is the most realistic source of funds it is the only one used for evaluating the management case. The management case has an opportunistic view of Björn Borg’s development during the holding period. This is reflected in a stronger growth rate and smaller expenditures than the base case. Due to this, the management case creates a higher return compared to the base case. In the management case, an LBO of Björn Borg gives a return of 32.12% IRR and 4.0X cash return. This is in-line with the demands from PE firms and makes Björn Borg a suitable LBO target if it develops according to the management case. Figure 30: IRR & cash return, exit in year 5 with financing structure 1 as the source of funds.

7.2.6 Ambition Case As in the management case, financing structure 1 it is the only one used for evaluating the ambition case. A yearly sales growth of 25% and further decline in expenditures gives an IRR of 41.60% and cash return 5.7X in the ambition case. This is far above a truly attractive investment which is said to have an IRR around 30% and cash return above 4X. If Björn Borg’s development during the holding period meets the projections of the ambition case, the investors will realize a substantial profit. Figure 31: IRR & cash return, exit in year 5 with financing structure 1 as the source of funds.

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7.2.7 Bank Case Also in the bank case, only financing structure 1 is used for evaluation. The bank case has a safe approach to the company’s future development. It assumes a low sales growth and almost no cutting of costs during the holding period. It could be that the bank case is too pessimistic but it provides useful information about the return of the LBO in a worst case scenario. The bank case gives an IRR of 10.98% and cash return of 1.7X. This is far too low for PE investors and indicates that Björn Borg is not such a good LBO target as minimum demand on return will not be fulfilled in a worst case scenario. Figure 32: IRR & cash return, exit in year 5 with financing structure 1 as the source of funds.

7.2.8 Sensitivity analysis Figures 33-36 shows how IRR and cash return shifts with changing input assumptions of exit multiple, offer price per share and exit year. All of the figures below are based on the base case in combination with financing structure 1. From figure 33, it is visible that an increase in the exit multiple to 13,5X together with a share price drop to 64.00 SEK gives an IRR of 25.29%. Similar, the same changes in exit multiple and share price increase the cash return to 3.1X as seen in figure 35. Naturally, both a lower share price and a higher exit multiple increases the return of the LBO. Figure 34 visualize how IRR decreases with a longer holding period and vice versa. This is in contrast to the cash return which actually increases with a longer holding period, see figure 36. As changes in IRR are relatively small when extending the holding period, the sensitivity analysis reveals that it should be beneficial to prolong the holding period to 7 years and thereby realize an IRR of 21.24% and a cash return of 3.9X without changing the exit multiple or share price assumptions. Figure 33: Sensitivity of IRR against changes in exit multiple and offer price per share.

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Figure 34: Sensitivity of IRR against changes in exit year and exit multiple.

Figure 35: Sensitivity of cash return against changes in exit multiple and offer price per share.

Figure 36: Sensitivity of cash return against changes in exit year and exit multiple.

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8 Conclusion The complete LBO valuation model created in this thesis is attached in appendix I. The framework below should be used as a complement to the valuation model in order to find a suitable LBO target. This framework contains the essential characteristics of a suitable LBO target.           

Strong and predictable cash flows. Leading and defensible market position. Realizable growth opportunities. Efficiency enhancement opportunities. CAPEX light, small initial investments. Strong asset base. Low entry multiples. Competent management whose objectives are aligned with the strategy of the PE firm. Moderate leverage level. Strong owner structure. Exit should be possible after the holding period.

The fashion retail company Björn Borg listed on NASDAQ OMX was chosen in accordance with the framework above. Analyzing Björn Borg’s characteristics reveals that the company conforms to a certain extent with all the aspects of the framework, except the low entry multiples. Björn Borg was chosen even though its entry multiples indicated that it could be an inappropriate LBO candidate. The reason for this is explained as follows. The completion of the LBO valuation model required historical financial data, prognosticated future growth rates and general information on the analyzed company. In order to assure this, NASDAQ OMX was chosen as the sample base for finding a suitable target. At the current time of selection, it was hard to find companies from the sample base that fulfilled the demands on entry multiples. There were just no low-priced companies listed on the market at that time. Therefore, as Björn Borg fulfilled all other aspects of the framework to some extent, it was judged to be the most suitable company for an LBO at that time. Evaluating Björn Borg against the derived framework gave an indication that an LBO of the company should fulfill the demands on return held by private equity firms today. Even though the analysis estimates the LBO as realizable it should be noticed that it reveals weaknesses in Björn Borg’s efficiency enhancement opportunities, asset base and entry multiples. Taking these facts into consideration, the return of the LBO should be close to the lower limit set up by PE investors. Bottom line, the derived framework indicates that an LBO of Björn Borg is realizable but with moderate return to investors. Applying the developed LBO valuation model on Björn Borg based on a realizable financing structure, achievable future development, and an exit in year 5, gave an IRR of 22.38% and cash return 2.7X. This is a moderate return but it meets the demands from PE firms today. Hence, an LBO of a company chosen according to the derived framework fulfills the demands on return held by private equity firms today.

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9 Discussion The derived framework in this thesis is deemed accurate due to the fact that a company chosen according to the framework is able to meet demands on return held by PE investors. As Björn Borg did not clearly fulfilled all of the aspect in the framework the analysis indicates that an LBO of the company will not create an extremely profitable return. This is in-line with the results from the LBO valuation model and makes the derived framework reliable as a guideline for finding suitable LBO targets on the market. When buying out a public company, the current market environment has a large impact on the result of the LBO. As offer price per share is assumed to be the current market price of a company’s stock, the general state of the stock market is directly affecting the profit of an LBO. A decrease in market prices similar to the plummet of OMXSPI seen in May 2010 will adjust share prices downward for most of the listed companies. In the case of Björn Borg, the stock has fallen to 60.00 SEK as of May 21st (Avanza 2010). Assuming that the projections and historical data used in the valuation model holds for an LBO at that date, the return of the transaction would be IRR 25.36% and cash return 3.1X. This is a substantial increase in return and makes Björn Borg a profitable LBO candidate. Therefore the timing of the buyout is essential for optimizing return. This adheres to the findings in the conducted study, where PE firms stated that buying at attractive multiples is a key issue in order to profit from a deal. Further, as buying cheap is important, exiting at a high multiple is also crucial. Being able to divest Björn Borg at an exit multiple of 14.0X instead of 12.5X would mean an IRR of 24.85% and cash return of 3.0X. As most PE firms claim that they add value to their portfolio companies, such an increase in the exit multiple would not be unlikely. The holding period is also affecting return. As shown in the sensitivity analysis, chapter 7.2.8, increasing the holding period from 5 to 7 years will shift cash return from 2.7X to 3.9X. This is a significant lift of the money multiple and as PE firms puts greater weight to the cash return in their investment decisions, extending the holding period would make Björn Borg a truly profitable LBO target. The calculated return from the LBO valuation model is extremely dependant on the inputs. This makes it hard to predict the actual profit of an LBO. In order to make a sound investment decision a professional approach is vital. A thorough due diligence in combination with extensive research in regards to prognosticated development scenarios is a must for actors in the buyout industry. Therefore it is often hard for an amateur to make accurate predictions regarding the input to the model. However, as the main purpose of this thesis is to create an accurate LBO valuation model, the input assumption research has been ranked second to the efforts of finding a working valuation technique. As the output from the valuation model adheres to the theory research of the thesis, it should be beyond all doubt that the created LBO valuation model is correct and applicable in a professional setting.

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10 Future Research Below are some suggestions to future research that would fortify the conclusion of this thesis and broaden the understanding of the topic. In order to strengthen credibility of the derived framework, successfully exited targets in conducted LBO’s should be analyzed. Being able to show an alignment between the characteristics of those firms and the derived framework will further confirm its accuracy. It would also reveal if the framework contains any gaps or lacks vital features of a suitable LBO target. To further test the LBO valuation model, input assumptions and calculated return for a certain target should be acquired from a PE firm. These inputs should then be used in the created model in order to compare the output to the result calculated by professional investors. Even if PE firms often treat this type of information as confidential it should be possible to get a hold of assumptions and returns from old deals. This approach would confirm if the created model delivers the same return as those used by PE firms. If so, the validity of the model would be verified. Another way to verify the model could be asking an independent professional firm to take a closer look at it in order to express their opinion. The input assumptions to the valuation model are based on Björn Borg’s last three years performance. Tracking historical financial statements longer back in time would increase the accuracy of input assumptions. Therefore, analyzing data before 2007 is suggested as future research. Conducting a thorough comp’s analysis, would provide for a deeper understanding regarding the pricing of Björn Borg. Here, both transactions and peers should be included in order to determine the accuracy of the premium used in the valuation model. A comp’s analysis would also indicate whether the EV and entry multiple of the company is reasonable. Repeating the steps in this thesis with another company instead of Björn Borg would also be an interesting proposal for further work.

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11 Reliability & Validity The LBO valuation model created in this thesis inherits from discussions with the “Debt Capital Market” division at one of the leading investment banks in the Nordic region21. As such, it should be similar to the ones used by professional investors today. Also, the genuine source used for deriving the model assures that it provides suitable key figures appropriate for deciding upon an investment scenario. As the framework derived in this thesis is a result from interviews with seven of the most distinguished PE firms in Sweden, it should reflect all of the important characteristics that a suitable LBO target needs. The fact that all of the respondents gave similar answers confirms the reliability of the study. Further, the large number of interviews underpins the validity of the framework. The obvious uncertainties in this thesis are the input assumptions. In order to predict the future development of Björn Borg, prognosticated sales growth and future expenditure levels are estimates based on the company’s financial goals and historical expenditure levels. These estimates have an inherent uncertainty and therefore affect the validity of the conclusion. In order to increase the accuracy of the input assumptions, consensus estimates from several professional analysts should be gathered. These estimates should then be analyzed and together with a deeper study of Björn Borg form better input assumptions. Doing so would increase the validity of the result. Another assumption that affects the result of the LBO to a great extent is the premium associated with the buyout of Björn Borg. In line with the study on PE firms active in Sweden, a premium of 20% was used in calculations. It is uncertain whether this is enough to acquire the company or if a higher premium is needed. To secure a better estimate of the premium, a comparable transactions analysis should be conducted. Studying the premium levels in LBO’s of similar companies would further increase the validity of the buyout scenario.

21

Due to strict secretes policy a more detailed reference cannot be published.

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12 References Avanza. (2010). Avanza stock watch. [Online] Available from: https://www.avanza.se/aza/aktieroptioner/kurslistor/aktie.jsp?orderbookId=216840 [201005/12]. Baker, G.P. & Wruck, K.H. (1989). ORGANIZATIONAL CHANGES AND VALUE CREATION IN LEVERAGED BUYOUTS: The Case of The O.M. Scott & Sons Company. Journal of Financial Economics, 25 (2), 163-190. Björn Borg AB. (2010). Björn Borg Annual Report 2009. [Online] Available from: http://cms.bjornborg.com/upload/%C3%85rsredovisningar/BB%20Annual%20Report%202009.p df [2010-03/18]. Björn Borg AB. (2009). Björn Borg Annual Report 2008. [Online] Available from: http://feed.ne.cision.com/wpyfs/00/00/00/00/00/0E/E7/51/wkr0012.pdf [2010-03/18]. Citigroup corporate and investment banking. (2006). Everything You Always Wanted To Know About LBOs. [Online] Available from: http://www.kueichstaett.de/Fakultaeten/WWF/Lehrstuehle/LFB/download/HF_sections/content/citigroup.pdf [2010-02/22]. Dagens Industri. (2010). Stockwatch Björn Borg. [Online] Available from: http://di.se/ [2010-05/20]. Denis, D.J. (1994). Organizational form and the consequences of highly leveraged transactions Kroger's recapitalization and Safeway's LBO. Journal of Financial Economics, 36 (2), 193-224. GANT. (2008). Investor Relations. [Online] Available from: http://investors.gant.com/ [2010-05/21]. Giddy, I. (2009). Resources in finance. [Online] Available from: http://giddy.org/ [2010-02/21]. Jensen, M.C. (1991). Eclipse of the public corporation. McKinsey Quarterly, (1), 117-144. Jensen, M.C. (1986). Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers. American Economic Review, 76 (2), 323. Kaplan, S. (1989). The Effects of Management Buyouts on Operating Performance and Value. Journal of Financial Economics, 24 (2), 217-254. Kaplan, S.N. & Strömberg, P. (2009). Leveraged Buyouts and Private Equity. Journal of Economic Perspectives, 23 (1), 121-146. LEHN, K. & POULSEN, A. (1989). Free Cash Flow and Stockholder Grains in Going Private Transactions. Journal of Finance, 44 (3), 771-787. Mellqvist, G. (2010). Spirande optimism inom riskkapitalet . di.se. 2010-02-17. Available: http://di.se/Avdelningar/Artikel.aspx?ArticleID=2010\02\17\370886§ionid=Ettan.

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Moody's. (2009). Rating Symbols & Definitions. [Online] Available from: http://v3.moodys.com/sites/products/AboutMoodysRatingsAttachments/MoodysRatingsSymbo lsand%20Definitions.pdf [2010-05/14]. Neurath, C. (2010). På väg uppåt för riskkapitalbolag. SvD. 2010-02-17. Available: http://www.svd.se/naringsliv/nyheter/pa-vag-uppat-for-riskkapitalbolag_4277687.svd. SEB (2010). SWAP Rates. (Analysis edn.). Intranet: SEB. SEB Enskilda & ABG Sundal Collier. (2006). Gant noteringsprospekt. [Online] Available from: http://investors.gant.com/files/press/gant/Noteringsprospekt_Gant_2006.pdf [2010-05/21]. Skatteverket. (2010). www.skatteverket.se. [Online] Available from: http://www.skatteverket.se/privat/skatter/beloppprocent/2009.4.6d02084411db6e252fe80007 428.html#Statliginkomstskattjuridiskapersoner [2010-03/15]. Smith, A.J. (1990). Corporate ownership structure and performance: The case of management buyouts. Journal of Financial Economics, 27 (1), 143-164. Standard & Poor's. (2009). Understanding Standard & Poor's Rating Definitions. [Online] Available from: http://www2.standardandpoors.com/spf/pdf/fixedincome/Understanding_Rating_Definitions.p df [2010-05/14]. Svenska Riskkapitalföreningen (2009). Riskkapitalbolagens aktiviteter och finansiering i tidiga skeden, Kvartal 1 & 2, 2009. Stockholm: Svenska Riskkapitalföreningen. Swedish Private Equity & Venture Capital Association. (2009). Den svenska private equity-marknaden. [Online] Available from: http://www.svca.se/home/index.asp?sid=337&mid=1 [2010-02/18]. Wruck, K.H. (1994). Financial policy, internal control, and performance Sealed Air Corporation's leveraged special dividend. Journal of Financial Economics, 36 (2), 157-192.

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13 Appendix I - The LBO Valuation Model

LBO Valutation Model Leveraged Buyout of Björn Borg from NASDAQ OMX As Part of the Finance Master's Thesis

Leveraged Buyouts By

Carl-Johan Strandberg

1

Carl-Johan Strandberg Leveraged Buyout Analysis of Björn Borg, NASDAQ OMX (Sek in millions, fiscal year ending December 31)

Transaction Summary Sources of funds % of Total Amount -

Revolving Credit Facility

420,0

Term Loan A

Uses of Funds

Multiple of EBITDA

Sources 31/12/2009Cumulative -% 19,36%

Purchase Price

Return Analysis

% of Total Offer Price per Share Pricing

Amount

0,0x

0,0x L+250 bps Purchase ValueCo Equity

3,5x

3,5x L+250 bps Repay Existing Debt

1 707,6 80,9

Uses 78,70%

67,0Sek Exit Year

Fully Diluted Shares

5

25 487 190,0 Entry Multiple

Equity Purchase Price

1 707,6Sek Exit Multiple

3,73% Plus: Existing Net Debt

(215,5)

22,38%

-

-%

0,0x

3,5x L+265 bps Tender / Call Premiums

341,5

15,74%

Term Loan C

-

-%

0,0x

3,5x L+280 bps Financing Fees

24,8

1,14%

2nd Lien

-

-%

0,0x

3,5x

15,0

0,69%

1,0x

4,5x L+1500 bps

Enterprise Value / Sales

Financing Structure

1

0,0x

4,5x

LTM 31/12/2009

519,9

2,9x Operating Scenario

1

519,9

2,9x Cash flow Sweep

1

Cash Balance

1

120,0

Mezzanine

5,53%

-

High-Yield Bonds

1 629,8

-%

20,00%

Cash Return

Transaction Multiples

2,7x

Options

13,6x

18,1x

2009E

Rollover Equity

-

-%

0,0x

18,1x

Enterprise Value / EBITDA

Cash on Hand

-

-%

0,0x

18,1x

LTM 31/12/2009

119,6

12,5x Average Interest

1

18,1x

18,1x

2014

313,7

4,8x Financing Fees

1

Equity Contribution

Total Sources

2 169,8Sek

75,11%

Other Fees and Expenses

1 492,2Sek

12,5x

IRR

Term Loan B

NA

Enterprise Value

12,5x

100,00%

Total Uses

2 169,8

100,00%

Summary Financial Data Historical Period 2007

2008

2009

Projection Period LTM

Pro forma

Year 1

Year 2

Year 3

Year 4

Year 5

Year 6

Year 7

Year 8

Year 9

31/12/2009

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019 2 103,3

Sales % growth

494,9

NA

6,40%

(1,26%)

Gross Profit % margin

265,0 53,56%

283,5 53,84%

266,6 51,29%

266,6 51,29%

266,6 51,29%

EBITDA % margin

146,2 29,54%

135,7 25,78%

119,6 23,01%

119,6 23,01%

15,3 3,09%

2,9 0,55%

1,4 0,27%

1,4 0,27%

Capital Expenditures % sales

526,6

Cash Interest Expense Total Interest Expense

519,9

519,9

-%

519,9

Year 10

597,9

687,6

790,7

909,3

1 045,7

1 202,6

1 383,0

1 590,4

1 829,0

15,00%

15,00%

15,00%

15,00%

15,00%

15,00%

15,00%

15,00%

15,00%

15,00%

322,9 54,00%

371,3 54,00%

427,0 54,00%

491,0 54,00%

564,7 54,00%

649,4 54,00%

746,8 54,00%

858,8 54,00%

987,7 54,00%

1 135,8 54,00%

119,6 23,01%

179,4 30,00%

206,3 30,00%

237,2 30,00%

272,8 30,00%

313,7 30,00%

360,8 30,00%

414,9 30,00%

477,1 30,00%

548,7 30,00%

631,0 30,00%

1,4 0,27%

7,8 1,30%

8,9 1,30%

10,3 1,30%

11,8 1,30%

13,6 1,30%

15,6 1,30%

18,0 1,30%

20,7 1,30%

23,8 1,30%

27,3 1,30%

46,9 51,0

35,9 40,1

15,2 19,4

3,4 7,5

1,3 5,5

1,3 5,5

1,3 2,1

1,3 2,1

1,3 2,1

1,3 2,1

1,3 2,1

179,4 (35,9) 1,5 (35,5) (7,8) (1,2) 100,5 100,5

206,3 (15,2) 0,1 (47,4) (8,9) (4,6) 130,3 230,8

237,2 (3,4) 0,8 (58,5) (10,3) (5,3) 160,5 391,4

272,8 (1,3) 2,4 (68,5) (11,8) (6,1) 187,5 578,8

313,7 (1,3) 4,4 (79,5) (13,6) (7,0) 216,8 795,6

360,8 (1,3) 6,8 (92,9) (15,6) (8,0) 249,6 1 045,3

414,9 (1,3) 9,5 (107,4) (18,0) (9,2) 288,4 1 333,7

477,1 (1,3) 12,6 (124,0) (20,7) (10,6) 333,1 1 666,8

548,7 (1,3) 16,2 (143,2) (23,8) (12,2) 384,4 2 051,1

631,0 (1,3) 20,3 (165,2) (27,3) (14,0) 443,4 2 494,6

-%

Free Cash Flow EBITDA Less: Cash Interest Expense Plus: Interest Income Less: Income Taxes Less: Capital Expenditures Less: Increase in Net Working Capital Free Cash Flow Cumulative Free Cash Flow Capitalization Cash

296,5

10,0

10,0

147,8

335,3

552,1

801,7

1 090,2

1 423,2

1 807,6

2 251,1

Revolving Credit Facility Term Loan A Term Loan B Term Loan C Existing Term Loan 2nd Lien Other Debt Total Senior Secured Debt

420,0 0,0 420,0

33,0 0,0 33,0

0,0 0,0

0,0 0,0

0,0 0,0

0,0 0,0

0,0 0,0

0,0 0,0

0,0 0,0

0,0 0,0

0,0 0,0

Senior Notes Total Senior Debt

420,0

33,0

0,0

0,0

0,0

0,0

0,0

0,0

0,0

0,0

0,0

Mezzanine High-Yield Bonds Total Debt

120,0 540,0

120,0 153,0

22,7 22,7

0,0

0,0

0,0

0,0

0,0

0,0

0,0

0,0

1 614,8 2 154,9

1 714,2 1 867,2

1 847,0 1 869,7

2 011,0 2 011,0

2 203,1 2 203,1

2 425,8 2 425,8

2 686,3 2 686,3

2 987,2 2 987,3

3 334,9 3 334,9

3 736,1 3 736,1

4 199,1 4 199,1

92,15%

100,00%

100,00%

100,00%

100,00%

100,00%

100,00%

100,00%

100,00%

100,00%

25,06%

8,19%

1,22%

0,00%

0,00%

0,00%

0,00%

0,00%

0,00%

0,00%

0,00%

EBITDA / Cash Interest Expense (EBITDA - Capex) / Cash Interest Expense

2,6x 2,5x

5,0x 4,8x

13,6x 13,0x

70,0x 67,0x

205,9x 197,0x

236,8x 226,5x

272,3x 260,5x

313,1x 299,6x

360,1x 344,5x

414,1x 396,2x

476,2x 455,6x

EBITDA / Total Interest Expense (EBITDA - Capex) / Total Interest Expense

2,3x 2,3x

4,5x 4,3x

10,6x 10,2x

31,4x 30,1x

49,7x 47,6x

57,2x 54,7x

169,8x 162,4x

195,2x 186,8x

224,5x 214,8x

258,2x 247,0x

296,9x 284,1x

Senior Secured Debt / EBITDA Senior Debt / EBITDA Total Debt / EBITDA Net Debt / EBITDA

3,5x 3,5x 4,5x 2,0x

0,2x 0,2x 0,9x 0,8x

0,0x 0,0x 0,1x 0,1x

0,0x 0,0x 0,0x -0,6x

0,0x 0,0x 0,0x -1,2x

0,0x 0,0x 0,0x -1,8x

0,0x 0,0x 0,0x -2,2x

0,0x 0,0x 0,0x -2,6x

0,0x 0,0x 0,0x -3,0x

0,0x 0,0x 0,0x -3,3x

0,0x 0,0x 0,0x -3,6x

Shareholders' Equity Total Capitalization % of Bank Debt Repaid Credit Statistics % Debt / Total Capitalization

-%

2

(Sek in millions, fiscal year ending December 31) Income Statement Historical Period

Sales % growth

2007 494,9 NA

2008 526,6 6,4%

LTM Pro forma 2009 31/12/2009 2009 519,9 519,9 519,9 (1,3%) -

Cost of Goods Sold Gross Profit % margin

229,8 265,0 53,6%

243,1 283,5 53,8%

253,3 266,6 51,3%

253,3 266,6 51,3%

Selling, General & Administrative % sales

118,8 24,0%

147,8 28,1%

147,0 28,3%

Other Expense / (Income) EBITDA % margin

146,2 29,5%

135,7 25,8%

Depreciation & Amortization Amortization EBIT % margin

4,1 142,1 28,7%

7,0 128,8 24,5%

Year 2 2011 687,6 15,0%

Year 3 2012 790,7 15,0%

Year 4 2013 909,3 15,0%

253,3 266,6 51,3%

275,0 322,9 54,0%

316,3 371,3 54,0%

363,7 427,0 54,0%

418,3 491,0 54,0%

481,0 564,7 54,0%

147,0 28,3%

147,0 28,3%

143,5 24,0%

165,0 24,0%

189,8 24,0%

218,2 24,0%

119,6 23,0%

119,6 23,0%

119,6 23,0%

179,4 30,0%

206,3 30,0%

237,2 30,0%

7,0 112,6 21,7%

7,0 112,6 21,7%

7,0 112,6 21,7%

6,0 173,4 29,0%

6,9 199,4 29,0%

23,8 21,8 0,3 1,0 46,9 4,2 51,0

12,8 21,8 0,3 1,0 35,9 4,2 40,1 (1,5) 38,6

Interest Expense Revolving Credit Facility Term Loan A Term Loan B Term Loan C Existing Term Loan 2nd Lien Mezzanine High-Yield Bonds Commitment Fee on Unused Revolver Administrative Agent Fee Cash Interest Expense Amortization of Deffered Financing Fees Total Interest Expense Interest Income Net Interest Expense Earnings Before Taxes Income Tax Expense Net Income % margin Income Statement Assumptions Sales (% YoY growth) COGS (% margin) SG&A (% sales) Other Expense / (Income) (% of sales) Depreciation & Amortization (% of sales) Amortization (% of sales) Interest Income Tax Rate

NA 46,4% 24,0% 0,8% -

6,4% 46,2% 28,1% 1,3% -

Projektion Period Year 5 Year 6 2014 2015 1 045,7 1 202,6 15,0% 15,0%

Year 1 2010 597,9 15,0%

(1,3%) 48,7% 28,3% 1,4% -

48,7% 28,3% 1,4% -

48,7% 28,3% 1,4% 1,0%

Year 7 2016 1 383,0 15,0%

Year 8 2017 1 590,4 15,0%

Year 9 2018 1 829,0 15,0%

Year 10 2019 2 103,3 15,0%

553,2 649,4 54,0%

636,2 746,8 54,0%

731,6 858,8 54,0%

841,3 987,7 54,0%

967,5 1 135,8 54,0%

251,0 24,0%

288,6 24,0%

331,9 24,0%

381,7 24,0%

439,0 24,0%

504,8 24,0%

272,8 30,0%

313,7 30,0%

360,8 30,0%

414,9 30,0%

477,1 30,0%

548,7 30,0%

631,0 30,0%

7,9 229,3 29,0%

9,1 263,7 29,0%

10,5 303,3 29,0%

12,0 348,8 29,0%

13,8 401,1 29,0%

15,9 461,2 29,0%

18,3 530,4 29,0%

21,0 610,0 29,0%

0,9 13,0 0,3 1,0 15,2 4,2 19,4 (0,1) 19,3

2,1 0,3 1,0 3,4 4,2 7,5 (0,8) 6,8

0,3 1,0 1,3 4,2 5,5 (2,4) 3,1

0,3 1,0 1,3 4,2 5,5 (4,4) 1,0

0,3 1,0 1,3 0,8 2,1 (6,8) (4,6)

134,8 35,5 99,4 16,6%

180,1 47,4 132,8 19,3%

222,6 58,5 164,0 20,7%

260,6 68,5 192,1 21,1%

302,2 79,5 222,7 21,3%

353,4 92,9 260,5 21,7%

408,4 107,4 301,0 21,8%

471,7 124,0 347,6 21,9%

544,4 143,2 401,3 21,9%

628,1 165,2 462,9 22,0%

15,0% 46,0% 24,0% 1,0% 1,0% 26,3%

15,0% 46,0% 24,0% 1,0% 1,0% 26,3%

15,0% 46,0% 24,0% 1,0% 1,0% 26,3%

15,0% 46,0% 24,0% 1,0% 1,0% 26,3%

15,0% 46,0% 24,0% 1,0% 1,0% 26,3%

15,0% 46,0% 24,0% 1,0% 1,0% 26,3%

15,0% 46,0% 24,0% 1,0% 1,0% 26,3%

15,0% 46,0% 24,0% 1,0% 1,0% 26,3%

15,0% 46,0% 24,0% 1,0% 1,0% 26,3%

15,0% 46,0% 24,0% 1,0% 1,0% 26,3%

0,3 1,0 1,3 0,8 2,1 (9,5) (7,3)

0,3 1,0 1,3 0,8 2,1 (12,6) (10,4)

0,3 1,0 1,3 0,8 2,1 (16,2) (14,0)

0,3 1,0 1,3 0,8 2,1 (20,3) (18,2)

3

(Sek in millions, fiscal year ending December 31) Balance Sheet

Opening 2009 296,5 38,0 26,5 27,7 388,7

Cash and Cash Equivalents Accounts Receivable Inventories Prepaids and Other Current Assets Total Current Assets Property, Plant and Equipment, net Goodwill and Intangible Assets Other Assets Deferred Financing Fees Total Assets

11,2 204,9 604,7

Accounts Payable Accrued Liabilities Other Current Liabilities Total Current Liabilities

Adjustments + -

1 588,3 24,8

15,5 33,4 14,0 62,9

Revolving Credit Facility Term Loan A Term Loan B Term Loan C Existing Term Loan 2nd Lien Mezzanine High-Yield Bonds Other Debt (Deferred tax) Other Long-Term Liabilities (trademark) Total Liabilities

40,0 40,9 143,8

Noncontrolling Interest Shareholders' Equity Total Shareholders' Equity

0,1 460,8 461,0

Total Liabilities and Equity

420,0 120,0 (40,0) (40,9)

1 614,8

(460,8)

Pro Forma 2009 296,5 38,0 26,5 27,7 388,7

Year 1 2010 10,0 69,7 32,8 26,8 139,3

Year 2 2011 10,0 80,1 37,8 30,8 158,7

Year 3 2012 147,8 92,1 43,4 35,4 318,8

Year 4 2013 335,3 106,0 49,9 40,7 531,9

Projection Period Year 5 Year 6 2014 2015 552,1 801,7 121,9 140,1 57,4 66,1 46,8 53,8 778,2 1 061,8

Year 7 2016 1 090,2 161,2 76,0 61,9 1 389,2

Year 8 2017 1 423,2 185,3 87,4 71,2 1 767,1

Year 9 2018 1 807,6 213,1 100,5 81,9 2 203,1

Year 10 2019 2 251,1 245,1 115,5 94,2 2 705,8

11,2 1 793,2 24,8 2 217,8

12,9 1 793,2 20,6 1 966,1

15,0 1 793,2 16,5 1 983,4

17,4 1 793,2 12,3 2 141,7

20,1 1 793,2 8,2 2 353,4

23,2 1 793,2 4,0 2 598,7

26,9 1 793,2 3,2 2 885,0

31,0 1 793,2 2,4 3 215,8

35,8 1 793,2 1,6 3 597,7

41,3 1 793,2 0,8 4 038,4

47,6 1 793,2 4 546,6

15,5 33,4 14,0 62,9

32,5 35,1 31,2 98,8

37,3 40,4 35,8 113,6

42,9 46,5 41,2 130,6

49,4 53,4 47,4 150,2

56,8 61,5 54,5 172,7

65,3 70,7 62,7 198,6

75,1 81,3 72,1 228,4

86,4 93,5 82,9 262,7

99,3 107,5 95,3 302,1

114,2 123,6 109,6 347,4

420,0 120,0 0,0 602,9

33,0 120,0 0,0 251,8

22,7 0,0 136,3

0,0 130,6

0,0 150,2

0,0 172,7

0,0 198,7

0,0 228,5

0,0 262,7

0,0 302,1

0,0 347,4

0,1 1 614,8 1 615,0

0,1 1 714,2 1 714,3

0,1 1 847,0 1 847,1

0,1 2 011,0 2 011,1

0,1 2 203,1 2 203,2

0,1 2 425,8 2 425,9

0,1 2 686,3 2 686,4

0,1 2 987,2 2 987,4

0,1 3 334,9 3 335,0

0,1 3 736,1 3 736,2

0,1 4 199,1 4 199,2 4 546,6

604,7

2 217,8

1 966,1

1 983,4

2 141,7

2 353,4

2 598,7

2 885,0

3 215,8

3 597,7

4 038,4

Balance Check

0,00

-0,01

-0,01

-0,01

-0,01

-0,01

-0,01

-0,01

-0,01

-0,01

-0,01

-0,01

Net Working Capital (Increase) / Decrease in Net Working Capital

29,3

29,3

30,5 (1,2)

35,1 (4,6)

40,4 (5,3)

46,4 (6,1)

53,4 (7,0)

61,4 (8,0)

70,6 (9,2)

81,2 (10,6)

93,3 (12,2)

107,3 (14,0)

Balance Sheet Assumptions Current Assets Accounts Receivable (% of sales) Inventories (% of sales) Prepaid and Other Current Receivables (% of sales)

7,3% 5,1% 5,3%

7,3% 5,1% 5,3%

11,7% 5,5% 4,5%

11,7% 5,5% 4,5%

11,7% 5,5% 4,5%

11,7% 5,5% 4,5%

11,7% 5,5% 4,5%

11,7% 5,5% 4,5%

11,7% 5,5% 4,5%

11,7% 5,5% 4,5%

11,7% 5,5% 4,5%

11,7% 5,5% 4,5%

Current Liabilities Accounts Payable (% of sales) Accrued Liabilities (% of sales) Other Current Liabilities (% of sales)

3,0% 6,4% 2,7%

3,0% 6,4% 2,7%

5,4% 5,9% 5,2%

5,4% 5,9% 5,2%

5,4% 5,9% 5,2%

5,4% 5,9% 5,2%

5,4% 5,9% 5,2%

5,4% 5,9% 5,2%

5,4% 5,9% 5,2%

5,4% 5,9% 5,2%

5,4% 5,9% 5,2%

5,4% 5,9% 5,2%

Historical levels compared to sales Year Sales Accounts Receivable Accounts Receivable (% of sales) Inventories Inventories (% of sales) Prep. & Other C. Rec. Prep. & Other C. Rec. (% of sales) Accounts Payable Accounts Payable (% of sales) Accrued Liabilities Accrued Liabilities (% of sales) Other Current Liabilities Other Current Liabilities (% of sales)

2007 494,9 61,7 12,5% 24,6 5,0% 15,4 3,1% 23,1 4,7% 26,9 5,4% 35,2 7,1%

2008 526,6 79,9 15,2% 33,8 6,4% 26,3 5,0% 45,5 8,6% 30,4 5,8% 30,6 5,8%

2009 3Y Mean 519,9 38,0 7,3% 11,7% 26,5 5,1% 5,5% 27,7 5,3% 4,5% 15,5 3,0% 5,4% 33,4 6,4% 5,9% 14,0 2,7% 5,2%

4

(Sek in millions, fiscal year ending December 31) Cash Flow Statement

Year 1 2010 Operating Activities Net Income Plus: Depreciation & Amortization Plus: Amortization Plus: Amortization of Financing Fees Changes in Working Capital Items (Inc.) / Dec. in Accounts Receivable (Inc.) / Dec. in Inventories (Inc.) / Dec. in Prepaid and Other Current Assets Inc. / (Dec.) in Accounts Payable Inc. / (Dec.) in Accrued Liabilities Inc. / (Dec.) in Other Current Liabilities (Inc.) / Dec. in Net Working Capital Cash Flow from Operating Activities Investing Activities Capital Expenditures Other Investing Activities Cash Flow from Investing Activities

Excess Cash for the Period Beginning Cash Balance Ending Cash Balance

Historical levels compared to sales Year 2007 2008 Sales 494,9 526,6 CAPEX 15,3 2,9 CAPEX (% of sales) 3,1% 0,5%

Year 4 2013

Projection Period Year 5 Year 6 2014 2015

Year 7 2016

Year 8 2017

Year 9 2018

Year 10 2019

132,8 6,9 4,2

164,0 7,9 4,2

192,1 9,1 4,2

222,7 10,5 4,2

260,5 12,0 0,8

301,0 13,8 0,8

347,6 15,9 0,8

401,3 18,3 0,8

462,9 21,0 0,8

(31,6) (6,4) 0,9

(10,5) (4,9) (4,0)

(12,0) (5,7) (4,6)

(13,8) (6,5) (5,3)

(15,9) (7,5) (6,1)

(18,3) (8,6) (7,0)

(21,0) (9,9) (8,1)

(24,2) (11,4) (9,3)

(27,8) (13,1) (10,7)

(32,0) (15,1) (12,3)

17,0 4,9 5,6 6,4 7,4 8,5 1,8 5,3 6,1 7,0 8,0 9,2 17,2 4,7 5,4 6,2 7,1 8,2 (1,2) (4,6) (5,3) (6,1) (7,0) (8,0) 108,3Sek 139,2Sek 170,8Sek 199,3Sek 230,4Sek 265,3Sek

9,8 10,6 9,4 (9,2) 306,4Sek

11,3 12,2 10,8 (10,6) 353,7Sek

13,0 14,0 12,4 (12,2) 408,2Sek

14,9 16,1 14,3 (14,0) 470,8Sek

(18,0) (18,0Sek)

(20,7) (20,7Sek)

(23,8) (23,8Sek)

(27,3) (27,3Sek)

(8,9) (8,9Sek)

(10,3) (10,3Sek)

(387,0) (33,0) (97,3) (387,0Sek) (130,3Sek)

(22,7) (22,7Sek)

(286,5) 296,5 10,0

Cash Flow Statement Assumptions Capital Expenditures (% of sales)

Year 3 2012

99,4 6,0 4,2

(7,8) (7,8Sek)

Financing Activities Revolving Credit Facility Term Loan A Term Loan B Term Loan C Existing Term Loan 2nd Lien Mezzanine High-Yield Bonds Other Debt Dividends Equity Issuance / (Repurchase) Cash Flow from Financing Activities

Year 2 2011

1,3%

10,0 10,0

1,3%

137,8 10,0 147,8

1,3%

(11,8) (11,8Sek)

187,5 147,8 335,3

1,3%

(13,6) (13,6Sek)

216,8 335,3 552,1

1,3%

(15,6) (15,6Sek)

249,6 552,1 801,7

1,3%

288,4 801,7 1 090,2

1,3%

333,1 1 090,2 1 423,2

1,3%

384,4 1 423,2 1 807,6

1,3%

443,4 1 807,6 2 251,1

1,3%

2009 3Y Mean 519,9 1,4 0,3% 1,3%

5

(Sek in millions, fiscal year ending December 31) Debt Schedule

Swap 10Y

Pro forma 2009 3,16%

Cash Flow from Operating Activities Cash Flow from Investing Activities Cash Available for Debt Repayment Total Mandatory Repayments MinCash Cash From Balance Sheet 10,0 Cash Available for Optional Debt Repayment Revolving Credit Facility Revolving Credit Facility Size Spread Term Commitment Fee on Unused Portion

Year 1 2010 3,16%

Year 2 2011 3,16%

Year 3 2012 3,16%

Year 4 2013 3,16%

Projection Period Year 5 Year 6 2014 2015 3,16% 3,16%

Year 7 2016 3,16%

Year 8 2017 3,16%

Year 9 2018 3,16%

Year 10 2019 3,16%

108,3Sek 139,2Sek 170,8Sek 199,3Sek 230,4Sek 265,3Sek 306,4Sek 353,7Sek 408,2Sek 470,8Sek (7,8) (8,9) (10,3) (11,8) (13,6) (15,6) (18,0) (20,7) (23,8) (27,3) 100,5Sek 130,3Sek 160,5Sek 187,5Sek 216,8Sek 249,6Sek 288,4Sek 333,1Sek 384,4Sek 443,4Sek (84,0) 286,5 137,8 325,3 542,1 791,7 1 080,2 1 413,2 1 797,6 303,0Sek 130,3Sek 160,5Sek 325,3Sek 542,1Sek 791,7Sek 1 080,2Sek 1 413,2Sek 1 797,6Sek 2 241,1Sek

65,0 2,50% 10 years 0,50%

Beginning Balance Drawdown/(Repayment) Ending Balance

-

-

-

-

-

-

-

-

-

-

Interest Rate Average Interest Expense Commitment Fee

5,66% 0,3

5,66% 0,3

5,66% 0,3

5,66% 0,3

5,66% 0,3

5,66% 0,3

5,66% 0,3

5,66% 0,3

5,66% 0,3

5,66% 0,3

20,00%

20,00%

20,00%

20,00%

20,00%

-%

420,0Sek (84,0) (303,0) 33,0Sek

33,0Sek (33,0) -

5,66% 12,8

5,66% 0,9

Term Loan A Facility Size Spread Term Repayment Schedule Beginning Balance Mandatory Repayments Optional Repayments Ending Balance Interest Rate Interest Expense Term Loan B Facility Size Spread Term Repayment Schedule Beginning Balance Mandatory Repayments Optional Repayments Ending Balance Interest Rate Interest Expense Term Loan C Facility Size Spread Term Repayment Schedule Beginning Balance Mandatory Repayments Optional Repayments Ending Balance Interest Rate Interest Expense Existing Term Loan Facility Size Spread Remaining Term Repayment Schedule Beginning Balance Mandatory Repayments Optional Repayments Ending Balance Interest Rate Interest Expense

420,0 2,50% 5 years

-

-

-

-

-

-

-

-

5,66% -

5,66% -

5,66% -

5,66% -

5,66% -

5,66% -

5,66% -

5,66% -

2,65% 6 years 1,00% Per Annum, Bullet at Maturity -

-

-

-

-

-

-

-

-

-

5,81% -

5,81% -

5,81% -

5,81% -

5,81% -

5,81% -

5,81% -

5,81% -

5,81% -

5,81% -

2,80% 7 years 1,00% Per Annum, Bullet at Maturity -

-

-

-

-

-

-

-

-

-

5,96% -

5,96% -

5,96% -

5,96% -

5,96% -

5,96% -

5,96% -

5,96% -

5,96% -

5,96% -

3,00% 0 years 1,00% Per Annum, Bullet at Maturity -

-

-

-

-

-

-

-

-

-

6,16% -

6,16% -

6,16% -

6,16% -

6,16% -

6,16% -

6,16% -

6,16% -

6,16% -

6,16% -

6

2nd Lien Size Spread Term

-% 0 years

Beginning Balance Repayment Ending Balance Interest Rate Interest Expense Mezzanine Size Spread Term

-

-

-

-

-

-

-

-

-

3,16% -

3,16% -

3,16% -

3,16% -

3,16% -

3,16% -

3,16% -

3,16% -

3,16% -

3,16% -

120,0Sek 120,0Sek (97,3) 120,0Sek 22,7Sek 18,16% 18,16% 21,8 13,0

22,7Sek (22,7) 18,16% 2,1

18,16% -

18,16% -

18,16% -

18,16% -

18,16% -

18,16% -

18,16% -

120,0Sek 15,00% 10 years

Beginning Balance Optional Repayments Ending Balance Interest Rate Interest Expense High-Yield Bonds Size Coupon Term

-

20,00% 10 years

Beginning Balance Repayment at maturity Ending Balance

-

-

-

-

-

-

-

-

-

-

Interest Expense

-

-

-

-

-

-

-

-

-

-

7

(Sek in millions, fiscal year ending December 31) Returns Analysis

Pro forma 2009 Entry EBITDA Multiple Initial Equity Investment EBITDA Exit EBITDA Multiple Enterprise Value at Exit

Cash Return

IRR

Offer Price per Share

Offer Price per Share

2,7x 64,00 65,00 66,00 67,00 68,00 69,00 70,00

Year 4 2013

Projection Period Year 5 Year 6 2014 2015

Year 7 2016

Year 8 2017

Year 9 2018

Year 10 2019

1 629,8 179,4

206,3

237,2

272,8

313,7

360,8

414,9

477,1

548,7

631,0

2 242,1

2 578,5

2 965,2

3 410,0

3 921,5

4 509,7

5 186,2

5 964,1

6 858,7

7 887,5

33,0 120,0 0,0 153,0Sek 10,0 143,0Sek

22,7 0,0 22,7Sek 10,0 12,7Sek

0,0 0,0Sek 147,8 (147,8Sek)

0,0 0,0Sek 335,3 (335,3Sek)

0,0 0,0Sek 552,1 (552,1Sek)

2 099,1Sek

2 565,7Sek 1,6x

3 113,0Sek 1,9x

3 745,3Sek 2,3x

4 473,6Sek 2,7x

0,0 0,0 0,0Sek 0,0Sek 801,7 1 090,2 (801,7Sek) (1 090,2Sek) 5 311,5Sek 3,3x

6 276,4Sek 3,9x

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 2010 2011 2012 2013 2014 2015 2016 (1 629,8Sek) (1 629,8Sek) (1 629,8Sek) (1 629,8Sek) (1 629,8Sek) (1 629,8Sek) (1 629,8Sek) 2 099,1Sek 2 565,7Sek 3 113,0Sek 3 745,3Sek 4 473,6Sek 5 311,5Sek 6 276,4Sek

28,79%

22,38% 64,00 65,00 66,00 67,00 68,00 69,00 70,00

Year 3 2012

12,5x

1,3x

Initial Equity Investment Equity Proceeds

Year 2 2011

12,5x

Less: Net Debt Revolving Credit Facility Term Loan A Term Loan B Term Loan C Existing Term Loan 2nd Lien Mezzanine High-Yield Bonds Other Debt Total Debt Less: Cash and Cash Equivalents Net Debt Equity Value at Exit

Year 1 2010

IRR - Assuming; Exit in Year 5E Exit Multiple 11,5x 12,0x 12,5x 13,0x 21,82% 22,72% 23,60% 24,46% 21,41% 22,31% 23,19% 24,04% 21,01% 21,90% 22,78% 23,63% 20,61% 21,51% 22,38% 23,22% 20,22% 21,12% 21,99% 22,83% 19,84% 20,73% 21,60% 22,44% 19,47% 20,36% 21,22% 22,06% Cash Return - Assuming; Exit in Year 5E Exit Multiple 11,5x 12,0x 12,5x 13,0x 2,7x 2,8x 2,9x 3,0x 2,6x 2,7x 2,8x 2,9x 2,6x 2,7x 2,8x 2,9x 2,6x 2,6x 2,7x 2,8x 2,5x 2,6x 2,7x 2,8x 2,5x 2,6x 2,7x 2,8x 2,4x 2,5x 2,6x 2,7x

25,47%

13,5x 25,29% 24,87% 24,45% 24,05% 23,65% 23,26% 22,88%

13,5x 3,1x 3,0x 3,0x 2,9x 2,9x 2,8x 2,8x

24,07%

23,12%

Exit Multiple

Exit Multiple

21,24%

0,0 0,0 0,0Sek 0,0Sek 1 423,2 1 807,6 (1 423,2Sek) (1 807,6Sek) 7 387,3Sek 4,5x

8 666,4Sek

0,0 0,0Sek 2 251,1 (2 251,0Sek) 10 138,6Sek

5,3x

6,2x

Year 8 Year 9 2017 2018 (1 629,8Sek) (1 629,8Sek) 7 387,3Sek 8 666,4Sek 20,79%

Year 10 2019 (1 629,8Sek) 10 138,6Sek 20,40% 20,06%

22,38%

21,76%

22,38% 11,0x 11,5x 12,0x 12,5x 13,0x 13,5x 14,0x

IRR - Assuming; Offer Price per Share = 67,00 Exit Year 3 4 5 6 19,15% 19,61% 19,69% 19,60% 20,84% 20,82% 20,61% 20,34% 22,48% 21,99% 21,51% 21,06% 24,07% 23,12% 22,38% 21,76% 25,63% 24,23% 23,22% 22,44% 27,15% 25,31% 24,05% 23,10% 28,63% 26,36% 24,85% 23,75%

2,7x 11,0x 11,5x 12,0x 12,5x 13,0x 13,5x 14,0x

Cash Return - Assuming; Offer Price per Share = 67,00 Exit Year 3 4 5 6 1,7x 2,0x 2,5x 2,9x 1,8x 2,1x 2,6x 3,0x 1,8x 2,2x 2,6x 3,1x 1,9x 2,3x 2,7x 3,3x 2,0x 2,4x 2,8x 3,4x 2,1x 2,5x 2,9x 3,5x 2,1x 2,5x 3,0x 3,6x

7 19,45% 20,06% 20,66% 21,24% 21,81% 22,36% 22,89%

7 3,5x 3,6x 3,7x 3,9x 4,0x 4,1x 4,2x

8

Assumptions Page 1 - Income Statement and Cash Flow Statement

Income Statement Assumptions Sales (% growth) Base Management Ambition Bank

Cost of Goods Sold (% sales) Base Management Ambition Bank

SG&A (% sales) Base Management Ambition Bank

Year 2 2011

Year 3 2012

Year 4 2013

Year 7 2016

Year 8 2017

1 2 3 4 5

15,0% 15,0% 20,0% 25,0% 10,0% -%

15,0% 15,0% 20,0% 25,0% 10,0% -%

15,0% 15,0% 20,0% 25,0% 10,0% -%

15,0% 15,0% 20,0% 25,0% 10,0% -%

15,0% 15,0% 20,0% 25,0% 10,0% -%

15,0% 15,0% 20,0% 25,0% 10,0% -%

15,0% 15,0% 20,0% 25,0% 10,0% -%

15,0% 15,0% 20,0% 25,0% 10,0% -%

15,0% 15,0% 20,0% 25,0% 10,0% -%

15,0% 15,0% 20,0% 25,0% 10,0% -%

1 2 3 4 5

46,0% 46,0% 43,0% 40,0% 49,0% -%

46,0% 46,0% 43,0% 40,0% 49,0% -%

46,0% 46,0% 43,0% 40,0% 49,0% -%

46,0% 46,0% 43,0% 40,0% 49,0% -%

46,0% 46,0% 43,0% 40,0% 49,0% -%

46,0% 46,0% 43,0% 40,0% 49,0% -%

46,0% 46,0% 43,0% 40,0% 49,0% -%

46,0% 46,0% 43,0% 40,0% 49,0% -%

46,0% 46,0% 43,0% 40,0% 49,0% -%

46,0% 46,0% 43,0% 40,0% 49,0% -%

1 2 3 4 5

24,0% 24,0% 22,0% 20,0% 26,0% -%

24,0% 24,0% 22,0% 20,0% 26,0% -%

24,0% 24,0% 22,0% 20,0% 26,0% -%

24,0% 24,0% 22,0% 20,0% 26,0% -%

24,0% 24,0% 22,0% 20,0% 26,0% -%

24,0% 24,0% 22,0% 20,0% 26,0% -%

24,0% 24,0% 22,0% 20,0% 26,0% -%

24,0% 24,0% 22,0% 20,0% 26,0% -%

24,0% 24,0% 22,0% 20,0% 26,0% -%

24,0% 24,0% 22,0% 20,0% 26,0% -%

1 2 3 4 5

-% -% -% -% -% -%

-% -% -% -% -% -%

-% -% -% -% -% -%

-% -% -% -% -% -%

-% -% -% -% -% -%

-% -% -% -% -% -%

-% -% -% -% -% -%

-% -% -% -% -% -%

-% -% -% -% -% -%

-% -% -% -% -% -%

1 2 3 4 5

1,0% 1,0% 1,2% 1,4% 0,8% -%

1,0% 1,0% 1,2% 1,4% 0,8% -%

1,0% 1,0% 1,2% 1,4% 0,8% -%

1,0% 1,0% 1,2% 1,4% 0,8% -%

1,0% 1,0% 1,2% 1,4% 0,8% -%

1,0% 1,0% 1,2% 1,4% 0,8% -%

1,0% 1,0% 1,2% 1,4% 0,8% -%

1,0% 1,0% 1,2% 1,4% 0,8% -%

1,0% 1,0% 1,2% 1,4% 0,8% -%

1,0% 1,0% 1,2% 1,4% 0,8% -%

1 2 3 4 5

-% -% -% -% -% -%

-% -% -% -% -% -%

-% -% -% -% -% -%

-% -% -% -% -% -%

-% -% -% -% -% -%

-% -% -% -% -% -%

-% -% -% -% -% -%

-% -% -% -% -% -%

-% -% -% -% -% -%

-% -% -% -% -% -%

1 2 3 4 5

1,0% 1,0% 1,0% 1,0% 0,8% -%

1,0% 1,0% 1,0% 1,0% 0,8% -%

1,0% 1,0% 1,0% 1,0% 0,8% -%

1,0% 1,0% 1,0% 1,0% 0,8% -%

1,0% 1,0% 1,0% 1,0% 0,8% -%

1,0% 1,0% 1,0% 1,0% 0,8% -%

1,0% 1,0% 1,0% 1,0% 0,8% -%

1,0% 1,0% 1,0% 1,0% 0,8% -%

1,0% 1,0% 1,0% 1,0% 0,8% -%

1,0% 1,0% 1,0% 1,0% 0,8% -%

1 2 3 4 5

1,3% 1,3% 1,0% 0,5% 3,1% -%

1,3% 1,3% 1,0% 0,5% 3,1% -%

1,3% 1,3% 1,0% 0,5% 3,1% -%

1,3% 1,3% 1,0% 0,5% 3,1% -%

1,3% 1,3% 1,0% 0,5% 3,1% -%

1,3% 1,3% 1,0% 0,5% 3,1% -%

1,3% 1,3% 1,0% 0,5% 3,1% -%

1,3% 1,3% 1,0% 0,5% 3,1% -%

1,3% 1,3% 1,0% 0,5% 3,1% -%

1,3% 1,3% 1,0% 0,5% 3,1% -%

Other Expense / (Income) (% of sales)

Base Management Ambition Bank

Depreciation & Amortization (% sales) Base Management Ambition Bank

Amortization (% sales)

Base Management Ambition Bank

Interest Income

Base Management Ambition Bank

Projection Period Year 5 Year 6 2014 2015

Year 1 2010

Year 9 Year 10 2018 2019

Cash Flow Statement Assumptions Capital Expenditures (% sales)

Base Management Ambition Bank

9

Assumptions Page 2 - Balance Sheet Projection Period Year 4 Year 5 Year 6 2013 2014 2015

Year 1 2010

Year 2 2011

Year 3 2012

1 2 3 4 5

11,7% 11,7% 10,0% 9,0% 15,2% -

11,7% 11,7% 10,0% 9,0% 15,2% -

11,7% 11,7% 10,0% 9,0% 15,2% -

11,7% 11,7% 10,0% 9,0% 15,2% -

11,7% 11,7% 10,0% 9,0% 15,2% -

1 2 3 4 5

5,5% 5,5% 5,3% 5,1% 6,4% -

5,5% 5,5% 5,3% 5,1% 6,4% -

5,5% 5,5% 5,3% 5,1% 6,4% -

5,5% 5,5% 5,3% 5,1% 6,4% -

Prepaid + Other Current Assets (% sales) Base 1 Management 2 Ambition 3 Bank 4 5

4,5% 4,5% 4,3% 4,0% 5,3% -

4,5% 4,5% 4,3% 4,0% 5,3% -

4,5% 4,5% 4,3% 4,0% 5,3% -

1 2 3 4 5

5,4% 5,4% 5,7% 6,0% 3,0% -

5,4% 5,4% 5,7% 6,0% 3,0% -

1 2 3 4 5

5,9% 5,9% 6,0% 6,2% 5,4% -

1 2 3 4 5

5,2% 5,2% 5,5% 5,8% 2,7% -

Current Assets Account Receivable (% of sales) Base Management Ambition Bank

Inventories (% of sales) Base Management Ambition Bank

Current Liabilities Accounts Payable (% of sales) Base Management Ambition Bank

Accrued Liabilities (% sales) Base Management Ambition Bank

Other Current Liabilities (% sales) Base Management Ambition Bank

Year 7 2016

Year 8 2017

Year 9 2018

Year 10 2019

11,7% 11,7% 10,0% 9,0% 15,2% -

11,7% 11,7% 10,0% 9,0% 15,2% -

11,7% 11,7% 10,0% 9,0% 15,2% -

11,7% 11,7% 10,0% 9,0% 15,2% -

11,7% 11,7% 10,0% 9,0% 15,2% -

5,5% 5,5% 5,3% 5,1% 6,4% -

5,5% 5,5% 5,3% 5,1% 6,4% -

5,5% 5,5% 5,3% 5,1% 6,4% -

5,5% 5,5% 5,3% 5,1% 6,4% -

5,5% 5,5% 5,3% 5,1% 6,4% -

5,5% 5,5% 5,3% 5,1% 6,4% -

4,5% 4,5% 4,3% 4,0% 5,3% -

4,5% 4,5% 4,3% 4,0% 5,3% -

4,5% 4,5% 4,3% 4,0% 5,3% -

4,5% 4,5% 4,3% 4,0% 5,3% -

4,5% 4,5% 4,3% 4,0% 5,3% -

4,5% 4,5% 4,3% 4,0% 5,3% -

4,5% 4,5% 4,3% 4,0% 5,3% -

5,4% 5,4% 5,7% 6,0% 3,0% -

5,4% 5,4% 5,7% 6,0% 3,0% -

5,4% 5,4% 5,7% 6,0% 3,0% -

5,4% 5,4% 5,7% 6,0% 3,0% -

5,4% 5,4% 5,7% 6,0% 3,0% -

5,4% 5,4% 5,7% 6,0% 3,0% -

5,4% 5,4% 5,7% 6,0% 3,0% -

5,4% 5,4% 5,7% 6,0% 3,0% -

5,9% 5,9% 6,0% 6,2% 5,4% -

5,9% 5,9% 6,0% 6,2% 5,4% -

5,9% 5,9% 6,0% 6,2% 5,4% -

5,9% 5,9% 6,0% 6,2% 5,4% -

5,9% 5,9% 6,0% 6,2% 5,4% -

5,9% 5,9% 6,0% 6,2% 5,4% -

5,9% 5,9% 6,0% 6,2% 5,4% -

5,9% 5,9% 6,0% 6,2% 5,4% -

5,9% 5,9% 6,0% 6,2% 5,4% -

5,2% 5,2% 5,5% 5,8% 2,7% -

5,2% 5,2% 5,5% 5,8% 2,7% -

5,2% 5,2% 5,5% 5,8% 2,7% -

5,2% 5,2% 5,5% 5,8% 2,7% -

5,2% 5,2% 5,5% 5,8% 2,7% -

5,2% 5,2% 5,5% 5,8% 2,7% -

5,2% 5,2% 5,5% 5,8% 2,7% -

5,2% 5,2% 5,5% 5,8% 2,7% -

5,2% 5,2% 5,5% 5,8% 2,7% -

10

(Sek in millions)

Assumptions Page 3 Financing Structures and Fees Financing Structures 1 Sources of funds Structure 1 Revolving Credit Facility Size 65,0 Revolving Credit Facility Draw Term Loan A 420,0 Term Loan B Term Loan C 2nd Lien Mezzanine 120,0 High-Yield Bonds Equity Contribution 1 629,8 Rollover Equity Cash on Hand Total Sources of Funds 2 169,8 Equity(% Purchase Price) 95,44% Uses of Funds Equity Purchase Price 1 707,6 Repay Existing Bank Debt 80,9 Tender / Call Premiums 341,5 Financing Fees 24,8 Other Fees and Expenses 15,0 Total Uses of Funds 2 169,8

Structure 3

2 Structure 2

Structure 3

Purchase Price Public / Private Target Offer Price per Share

4

5

Structure 4

Status Quo

65,0 420,0 60,0 60,0 120,0 1 509,8 2 169,8 88,42%

65,0 420,0 60,0 60,0 120,0 120,0 1 389,8 2 169,8 81,39%

65,0 420,0 60,0 60,0 240,0 240,0 1 149,8 2 169,8 67,34%

-

1 707,6 80,9 341,5 24,8 15,0 2 169,8

1 707,6 80,9 341,5 24,8 15,0 2 169,8

1 707,6 80,9 341,5 24,8 15,0 2 169,8

24,8 24,8

Revolving Credit Facility Size Term Loan A Term Loan B Term Loan C 2nd Lien Mezzanine High-Yield Bonds Senior Bridge Facility Senior Subordinated Bridge Facility Other Financing Fees & Expenses Total Financing Fees

(%)

80,9 0,1 (296,5) 1 492,2

Calculation of Fully Diluted Shares Outstanding Offer Price per Share

67,00

Basic Shares Outstanding Plus: Shares from In-the-Money Options Less: Shares Repurchased Net New Shares from Options Plus: Shares from Convertible Securities Fully Diluted Shares Outstanding

25 148 384 1 250 000 -911 194 338 806 0 25 487 190

Outstanding Options/Warrants Tranche Tranche 1 Tranche 2 Tranche 3 Tranche 4 Tranche 5 Total

(Sek) 4,0% 4,0% 4,0% 4,0% -% 4,5% 4,5% -% -%

25 487 190St 1 707,6

Plus: Total Debt Plus: Preferred Securities Plus: Non-controlling Interest Less: Cash and Cash Equivalents Enterprise Value

Fees Size 65,0 420,0 120,0 -

67,00

Fully Diluted Shares Outstanding Equity Purchase Price

Financing Fees Structure 1

1

2,6 16,8 5,4 24,8

Number of

Exercise

Shares

Price

155 300 1 250 000 0 0 0 1 405 300

In-the-Money

Proceeds

Shares

74,60 48,84 0,00 0,00 0,00

0 0,00 1 250 000 61 050 000,00 0 0,00 0 0,00 0 0,00 1 250 000 61 050 000,00

Convertible Securities Amount

Issue 1 Issue 2 Issue 3 Issue 4 Issue 5 Total

Conversion

Conversion

New

Price

Ratio

Shares

0 0 0 0 0

0,00 0,00 0,00 0,00 0,00

0,00 0,00 0,00 0,00 0,00

0 0 0 0 0 0

Amortization of Financing Fees

Revolving Credit Facility Size Term Loan A Term Loan B Term Loan C 2nd Lien Mezzanine High-Yield Bonds Senior Bridge Facility Seni or Subordi na ted Bri dge Fa ci l i ty

Other Financing Fees & Expenses

Annual Amortization Administrative Agent Fee

Term 10 5 6 7 0 10 10 10 10 10

Year 1 2010 0,3 3,4 0,5 4,2

Year 2 2011 0,3 3,4 0,5 4,2

Year 3 2012 0,3 3,4 0,5 4,2

Year 4 2013 0,3 3,4 0,5 4,2

Year 5 2014 0,3 3,4 0,5 4,2

Year 6 2015 0,3 0,5 0,8

Year 7 2016 0,3 0,5 0,8

Year 8 2017 0,3 0,5 0,8

Year 9 2018 0,3 0,5 0,8

Year 10 2019 0,3 0,5 0,8

1,0

1,0

1,0

1,0

1,0

1,0

1,0

1,0

1,0

1,0

11

14 Appendix II – List of PE Firms with Presence in Sweden AAC Capital Partners, www.aaccapitalpartners.com Accent Equity Partners, www.accentequity.se Affärsstrategerna, www.astrateg.se Altor Equity Partners, www.altor.com Bure Equity, www.bure.se CapMan, www.capman.com CVC Capital Partners, www.cvc.com East Capital Partners, www.eastcapital.com EQT Partners, www.eqt.se EQVITEC Partners, www.eqvitec.com European Equity Partners, www.eeplp.com FSN Capital Partners, www.fsncapital.no Hakon Invest, www.hakoninvest.se IK Investment Partners, www.ikinvest.com Investor, www.investorab.com Montagu Private Equity, www.montagu.com Nordic Capital, www.nordiccapital.com Nordstjernan, www.nordstjernan.se Northzone Ventures, www.northzone.com Norvestor Equity, www.norvestor.com Novax, www.novax.se Priveq Investment, www.priveq.se Procuritas, www.procuritas.se Ratos, www.ratos.se SEB Venture Capital, www.foretagsinvest.seb.se Segulah, www.segulah.se

1

Sixth AP Fund, www.apfond6.se Spiltan Investment, www.spiltan.se

2

15 Appendix III - Interview Inquiry April 6th, 2010 To Whom It May Concern: This letter is an inquiry for an interview with someone at your organization. As a graduate student at Karlstad Business School, I am currently working on my master’s thesis. I write about private equity in general but more specifically Leveraged Buyouts. As part of my work I have been looking at valuation models used in the PE industry today. In my thesis I use different enterprise valuation models in order to find a suitable LBO target among the publicly traded companies on the Swedish stock market. The models I have been looking at are intrinsic valuation models such as DCF analysis and an LBO valuation model derived from investment professionals at UBS investment bank and Deutsche bank’s leveraged finance group. I also use more market focused valuation models such as comparable companies- and comparable transactions- analysis in the search for a target firm. The purpose of my thesis is to derive a framework for finding a suitable LBO target. My idea is to develop such a framework based on qualitative interviews with professional investors in the PE industry. The framework will be used when selecting a target company among publicly traded companies on the Swedish market. In order to verify the framework, the different valuation models described above will be applied on the target and calculated “expected return” will be compared to the demands on cost of capital held by PE firms active on the Swedish market. You have been sent this letter due to the fact that I think your organization has valuable knowledge that would enrich my thesis. Therefore I would like to conduct an interview with someone at your organization. The structure of the interview will be somewhat open. However, I will have some lead questions in order to develop our discussion. Some of the questions I would like to ask you are, your general outlook on the LBO market in the near future, what you as an investment professional look for in a suitable LBO target, and what kind of valuation models you use in order to arrive at an investment decision. I would also like to know what cost of capital you use when evaluating a business opportunity. You will off course have the option to remain anonymous. If that is the case, the source of information given by the interview will not be referred to in my written work. The information I receive will only be used by me for academic purpose. If you think that certain questions are of such character that they conflict with your interests I will accept that you cannot answer them. I am flexible regarding the practical aspect of the interview. It could be done face to face at your preferred location or conducted by phone if that is more suitable for you. In order to keep this letter as short as possible I do not provide a more detailed layout of the interview. However, you will receive an outline with questions that I would like to ask you, before the interview takes place. If you need such an outline in order to decide whether to take part in an interview, just let me know and I will send you one. I know that your time is valuable and would therefore like to keep the interview as short as possible. I estimate the interview session not to take longer than one hour of your time. I hope that you consider my inquiry and get back to me with an answer soon. Thank you for your time and consideration. Sincerely,

Carl-Johan Strandberg Grad. Student, Karlstad Business School

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16 Appendix IV - Interview Outline Thank you for taking the time to participate in this interview. I know that you and your organization have valuable knowledge regarding LBO’s. Therefore your answers will beyond all doubt enrich my thesis. This is an outline for the interview. If you think that certain questions are of such character that they conflict with your firm’s interests or if you feel that you cannot answer them, they will be skipped immediately. The interview will be a somewhat open discussion, so please feel free to discuss matters not highlighted by these questions if you feel that there are issues more important for you as a professional investor than those discussed below. The information received in this interview will only be used by Carl-Johan Strandberg for academic purpose. If you choose to be anonymous, the source of information given by this interview will not be referred to in my written work.

Company name: Short description of the firm: Date of the interview: Interview with: Position within the company: Do you want this interview to be anonymous?

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Have your firm done fewer acquisitions than usually, during the last two years?

If why, what are the main reasons for this? Cost of debt etc.

Didn’t the economical slump lower the EV’s? If that was the case wouldn’t it be a great opportunity to “buy low” during the downturn and “sell high” when the economy regains strength?

How large (%) is the “sweeteners” premiums when buying out a publicly traded company from the Swedish market today?

How long is your usual holding period before making an exit of a portfolio company?

Have your company postponed any exits of portfolio companies during the last two years due to the current market conditions? If yes, what are the main reasons for this?

What exit strategies do you prefer and why? Is there any exit strategies that are worse than others right now? What are the deciding factors that you look at when choosing an exit strategy?

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During the eighties, LBO’s with leverage levels as high as 80% could be observed. What are the typical leverage levels (Debt/Equity ratios) in your portfolio companies today? What would you say are the main reasons for the decrease in Debt/Equity ratios as time has gone by? Do you think we ever again will see leverage levels comparable with those during the eighties?

Which are the most value creating factors in an LBO, as you see it? Is it the leverage, creating increased earnings due to the tax-shield? Delisting of the public company creating less restriction on the owner? Change of management and better competence from the PE firm. Or is it maybe management incentives? Others?

What is your cost of capital used when evaluating investment decisions? What IRR do you need to have on an investment in order to take it on? What cash return do you need to have on an investment in order to take it on?

What factors, both financial but also others such as firm characteristics do you take into consideration when finding a suitable LBO target? Any specific key ratios that is more important than others? Such as stable cash flow, good prognosticated results, low EV/EBITDA entry multiples or others? What kind of multiples do you look at in a target?

Is there any industry that is especially good at producing suitable LBO candidates? I mean is there any industries where you are more likely to find suitable LBO targets? If that is the case, what characterizes such an industry?

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Which valuation models do you use when estimating the return of an LBO? Do you use DCF analysis, LBO valuation model, comparable companies’ analysis, comparable transactions analysis etc? If you use an LBO valuation model, have you developed this model on your own or is it a model that is used by several PE firms and Investment banks? Do you make all the calculations needed for an investment decision “in house”?

Is there any valuation model that has a greater importance?

How do you derive a reasonable exit multiple (used for valuation) in the end of the projection period for your targets? How much value do you assume to add from managerial and synergy effects to a portfolio company?

How long, back in time, do you track targets financial statements in order to make a reasonable valuation?

Can you shortly describe the due diligence process conducted by your company when evaluating a target? Where do you get consensus estimates and other forecasted numbers? What kind of data source services do you use? Bloomberg, Factset, Thomson ONE Banker, Ibbotson etc.

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What kind of debt instances do you usually use in an LBO? Revolving credit facility, Term loans, High-Yield bonds etc. Do you have any interest rates available for the different type of loans? If you use SWAP instruments instead of STIBOR in you calculations, do you have any interest rate levels for those SWAP’s?

Is it common for you to use the cash and cash equivalents in a target firm as part of the sources of funds for the buyout? Is that common in the industry or do you usually want to keep cash within the company? What are the min cash levels you strive to maintain in a portfolio company?

How is your future outlook on the LBO market?

Can you give an example of suitable LBO candidates on the Swedish market and on the world market?

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17 Appendix V – Björn Borg Annual Reports Figure 1: Income statement for Björn Borg, 2007 and 2008.

Source: (Björn Borg AB 2009)

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Figure 2: Income statement for Björn Borg, 2008 and 2009.

Source: (Björn Borg AB 2010)

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Figure 3: Balance sheet for Björn Borg, 2007 and 2008.

Source: (Björn Borg AB 2009)

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Figure 4: Balance sheet for Björn Borg, 2007 and 2008.

Source: (Björn Borg AB 2009)

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Figure 5: Balance sheet for Björn Borg, 2008 and 2009.

Source: (Björn Borg AB 2010)

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Figure 6: Cash flow statement for Björn Borg, 2007 and 2008.

Source: (Björn Borg AB 2009)

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Figure 7: Cash flow statement for Björn Borg, 2008 and 2009.

Source: (Björn Borg AB 2010)

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