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Deutsche Bank Securities: Financing the Acquisition of

Consolidated Supply S.A.


Group Members:

Mahesh Ogania (2018089)

Rashleen Arora (2018209)

Divyanshu Chaturvedi (2018172)

Januel Rocky James DeSouza (2018210)

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BACKGROUND:

 In 2003, the Hospital supply industry was fragmented in both the supply and demand
side. Europe and the US represented most of the market. The market was led by 3 main
distributors with 28% of the total market and CSSA alone accounted for 15%

 A private equity fund named Intercontinental Capital. Ltd (ICL) approached Deutsche
Bank (DB) to help them finance an LBO of Consolidated Supply SA (CSSA)

 Deutsche Bank Securities has also contributed in such financings in the past and another
reason to participate in the deal was the profitability of the transaction which was quite
huge

Key Words: Acquisitions, Auction, Leveraged Financing, Hospitals, Synergy, Credit Risk.
___________________________________________________________________________

PROBLEMS IDENTIFIED:

 This transaction was based upon a very significant level of the debt; therefore, it was a
highly leveraged acquisition for Deutsche Bank Securities
 The problem faced by Deutsche Bank Securities was now to analyze the deal, place a
valuation on the firm, identify the valuation of the future possible synergies and then
make a final decision

 Moreover, the core problem underlining this case is not to make a yes or a no decision
for the proposed financing request, rather it focuses more on changing the design
structure of the transaction in order to make it more fruitful for some of the related
parties to this transaction

 Apart from this, a detailed credit analysis also needs to be performed for the target
company in order to determine the significance of risk inherent in this proposed deal
for Deutsche Bank Securities and all other related parties
ANALYSIS AND INTERPRETATION:

The actual worth of CSSA could be determined through a number of approaches as below:

1. Initially beginning with identifying the true worth of CSSA, the internal rate of return
for this transaction as provided in the case exhibit 10 is 21.3% which could be compared
to an appropriate benchmark and if it exceeds that benchmark then CSSA could be
considered as worthy for investment.
2. The internal rate of return of 21.3% reflects the return which would be earned by the
target equity holders therefore, the most appropriate benchmark to compare this equity
holder’s return would be the target company’s cost of equity.
3. In order to identify the cost of equity, the capital asset pricing model may be used. The
beta has been unlevered and then re-levered to reflect the leverage of the target firm
and the same level of risk. The cost of equity thus ranges from 9.4% to 12.6% and the
internal rate of return is 21.3%, therefore, based upon this approach CSSA seems to be
worthy and the valuation for CSSA also looks attractive.
4. However, there are a lot of studies which show that the default risk is not captured by
the levered beta and as a result of this the return which is required by the equity holders
is understated and it might result in wrong decisions being taken.
5. The private equity investors usually demand a rate of return in the range of 25%-35%.
The case also states a target required rate of return for the private equity investors of
30%. If the return generated by this deal of 21.3% is compared with the required rate
of return of 30%, then the valuation of CSSA and its worth seems quite weak.
6. Apart from these approaches, the valuation of the firm could be performed on the basis
of the projected cash flows and growth assumptions. Through this approach, the worth
of the firm could be evaluated in more depth based on economic view. The bid which
has been placed upon CSSA is $ 1.513 billion.
7. A detailed discounted cash flow model can be based upon the new weights and the costs
associated with debt and equity for CSSA. The terminal growth rate has been stated to
be 4-5% therefore, 4% has been used in this case in order to compute the terminal value
beyond 2013.
8. The total valuation for CSSA has been found to be $ 3.148 billion based upon the
discounted cash flow method. This valuation is $ 1.635 billion in excess of the purchase
price as provided in exhibit 6.

RECOMMENDATIONS:
All of these valuations suggest that ICL is paying an adequate purchase price and it is not
overpaying in this deal. This deal is going to generate a plenty of value for the firm along with
the total of $ 979 million of funded debt.

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