Description
Use the Attachments:
M3 Enterprises Financials.xls
CIM – M3 Enterprises.pdf password 1234
For supporting read: Valuation White Paper
Suppose you are first-year associate at a relatively small Midwest-based private equity firm. The firm has raised approximately $125 million across 3 funds, the most recent of which is $50 million. Funds I and II are fully invested. Fund III is expected to make 2-3 additional new investments over the next approximately 24 months before being considered fully invested (with prudent follow-on reserves for the existing portfolio).
One of your fund’s partners forwards you an email from Nexus Capital Advisors, with an attached confidential business review. Nexus is a regional investment bank serving middle market clients, and has assisted M3 Enterprises in preparation of the business review. M3 and Nexus have now identified a firm that intends to lead a transaction to acquire the company, Avian Equity Partners. This fund is seeking a second firm to take the remaining 1/3 of the total required equity investment. Your partner is asking for your initial reactions to the business plan and the investment opportunity.
After meeting with your fund’s partner to review the M3 Enterprises business plan, your fund has decided to schedule a site visit to view company facilities and meet with the management team. Nexus will also be in attendance to facilitate the meeting.
Based on your fund’s positive initial reaction, after execution of Confidentiality Agreement, Nexus has provided the detailed historical and projected financial statements attached here. In preparation for the site visit,
Your site visit to meet with management, as well as your initial diligence investigations, have gone well so far. Nexus and the company are pressing prospective bidders, including Avian, for firm indications of interest. Avian is finalizing their investment case and a proposed valuation for the transaction, which they will share with your firm upon completion. In the meantime, they have asked for your input on any terms and conditions that you view as critical, so that they can also draft a termsheet for the transaction. They have also asked for your input on the optimal amount of leverage for the transaction.
Now
Answer questions 1-3 in the following context:
Your joint proposal with Avian to acquire M3 was initially accepted. However, the Blakeney family is very focused on the legacy of their business and the impact of the sale on their community. The reference checks they conducted as part of their seller’s due diligence on Avian turned up some information that might be considered minor, but which they viewed highly unfavorably. They refuse to move forward with Avian at this point.
Your firm, though, passed their seller’s due diligence with flying colors, and your firm’s lead partner on the deal believes there is a narrow window of opportunity to convince the Blakeney family to move forward on a restructured transaction involving solely your firm. You are preparing for a make-or-break meeting with the Blakeneys to save or kill the deal.
The broad outline of a possible deal is for your firm to invest more of your own equity and the Blakeney family to retain a much greater percentage equity (all to make up for the displacement of Avian). You would need to close on the same terms initially indicated in the joint proposal with Avian. You may assume that the terms you proposed in the preceding work were accepted.
The valuation is open for negotiation, within reason. Avian’s original proposal envisioned only a small equity stake for the Blakeneys. With the Blakeneys retaining more ownership, it is possible they can be more flexible on valuation because they will now get a second payout in the future.
Questions:
Please read Valuation White Paper attached to give you an idea of how to solve the following questions:
1. Estimate the enterprise value of M3?
2. What amount of equity would you invest, at what valuation, and for what percent ownership?
3. What methodologies – and summarize with quantitative table(s) – were utilized to discern your answers to 1-2?
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