Solution
Robert answered on
Dec 27 2021
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Introduction
A private equity firm is keen in acquiring an ASX 100 company for
improving their overall value in the market. Leveraged Buyout is the strategy that
will be used by the private equity firm to materialize the transaction. The chosen
company by the private equity is AGL Energy Limited. In this paper, there is a
detailed analysis of the AGL Energy, valuation of the company, sources of funds
to raise the required debt to fund the LBO, the potential risks and exit strategies in
detail.
Business Overview
AGL Energy Ltd is an Australian energy company involved in buying and
selling of electricity and gas and other related products and services. AGL Energy
is involved in construction and operation of power generation, the operation of
natural gas, storage, production, extraction, and sale of the natural gas in the
market (Reuters Editorial, n.d.). They are involved in the energy processing
infrastructure development. AGL Energy business involves the selling of
distribution technology related to energy generation, they sell digital meters,
solar, storage and provides energy services to both business and residential
customers (Reuters Editorial, 2017).
AGL Energy has three major operating segments they are energy markets,
investment, and group operations. Energy markets involve in selling gas,
electricity and all other energy-related products to their customers, business and
the wholesalers (AGL, 2017, p. 6). Group operations segment includes the AGL’s
power generating portfolio and other sites and operating facilities. This segment
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includes the Newcastle Gas Storage Facility of the company. Investment is
another business segment that reports about the Powering Australian Renewables
Fund, Sunverge Energy, ActewAGL Retail Partnership, and Energy Impact
Partners’ Fund (AGL, 2017, p. 6).
The main reason for selecting AGL Energy is that there is always
continuous demand for various energy products and electricity in the world. AGL
Energy is proactive in understanding the change in the global preference and
perspective about the energy generation. AGL is focusing on solar energy
generation and natural gas that will provide them a competitive edge in the long-
un. AGL mainly focuses on long-term sustainability that yields them a great
enefit and will provide more benefit to the acquiring company.
Leveraged Buyout
A leveraged buyout is the concept of bo
owing more funds to acquire a
company instead of issuing shares or spending the cash of the acquirer over the
target. A leveraged buyout is mainly used to obtain entire control over the target,
and there will be no dilution of share capital. LBO provides more advantage of
the acquirer of the business (Commercial Capital LLC, n.d.). They will be in a
position to make corporate restructuring that will be beneficial for the growth and
development of the business. There will be no agency problem associated with the
decision making of the management. For the private equity firm, there are more
opportunities for them to make their shareholders to earn a more abnormal return
from the investment.
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There will be the better transportation of wealth from the target to the
acquirer’s shareholders. For a private equity firm, the main aim is to involve in
more profitable investment that will provide an excess return to the shareholders
of the company (Commercial Capital LLC, n.d.). The energy business is a highly
demanding business and has more potential for growth. It will be a great
opportunity to invest in such companies to get a stronghold in the energy sector.
The demand in this sector is increasing, and there is more potential to expand the
usiness across the globe and management will have a higher level of
independence in deciding for the company. Similarly, it will provide a better tax
shield to the acquirer.
Reason for Targeting AGL
The performance of AGL over the period has significantly improved.
There were more challenges faced by the company in the past, but the company
egan to generate profit from 2015 continuously. The energy sector of the
company has grown significantly that resulted in boosting the overall revenue for
the company. The growth in the energy segment was significant at 6.1% (AGL,
2017, p. 13). There was a slight decrease in the gas consumption from the
customer market, but there was a considerable increase the consumer electricity
margin for the company. AGL was able to reduce their operating expenses that
esulted in improving their profit margin from the energy segment.
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Fiscal year is July-June.
All values AUD Millions. 2013 2014 2015 2016 2017
Sales/Revenue 9,715 10,445 10,678 11,150 12,584
Sales Growth - 7.51% 2.23% 4.42% 12.86%
EBIT 0 0 1,278 1,631 1,994
Growth rate
27.62% 22.26%
EBIT Margin
11.97% 14.63% 15.85%
Total expenses 9,180 10,039 9,483 9,832 10,917
Percentage of sales 94.49% 96.11% 88.81% 88.18% 86.75%
`-Increase in Working
capital -399 -201 14 -201 -766
% of sales -4.11% -1.92% 0.13% -1.80% -6.09%
Net operating cash flow 602.00 699.00 1068.00 1320.00 891.00
Net Operating Cash Flow
Growth
0.16 0.53 0.24 -0.33
Net Operating Cash Flow
Sales 0.07 0.12 0.10 0.07 0.06
`-Capital Expenditure -614 -723 -806 -546 -498
Capital Expenditures /
Sales -6.32% -6.92% -7.55% -4.90% -3.96%
Total Free Cash Flow 73.00 29.00 296.00 781.00 393.00
Source: (WSJ, n.d.)
From the above table, it is clear that AGL is stable financial company and
it is worth to consider for investing.
The gross electricity requirement is expected to be 332erawatt hours
during 2049 to 2050, the contribution made by the renewable sources of energy is
expected an increase from 15.3% in 2014 to 2015 to 22% by 2022 (BREE, 2014,
p. 9). The demand for the renewable energy will be greater than 30.6 TWh by
2018, and it is expected to reach to 41 TWh by 2020 (BREE, 2014, p. 18). The
elow graph indicates the growth in the energy costs.
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Source: (BREE, 2014, p. 27).
From the above graph, it is clear that there is more potential to generate
more profit from the AGL investment as it will provide a long-term sustainable
growth to the investors. The below graph indicates the potential for energy export
from Australia to the other part of the world which is essential for improving the
overall profitability of the business.
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Source: BREE, 2014, p. 42.
Strong financial position and performance of the company with more
potential for future growth is the primary motivating factor for the private equity
firm to target AGL Energy.
Sources 0f Capital
The market capitalization of the company is based on the 4th October
2017 trading price of $22.67 per share. The ascertained market capital for AGL
Energy is $14,870 million. It is an LBO, and therefore various sources of debt
will be used for financing the deal. Convertible debentures are the main source of
capital for funding the business. Convertible debentures will ca
y an option to
convert to equity as per the agreement. Convertible debentures will be issued with
20 years of maturity. For the first ten years, the debenture holders will be
eceiving the interest of Prime rate plus 4%...