July 16, 2024

A global private equity group recently retained us to conduct financial due diligence for two prospective investment opportunities. Interestingly, one of the engagements was to review the work of two other financial advisory firms. Here’s what we discovered.  

A vertically integrated design-manufacturer needed to expand capacity after securing a contract with a national big box retailer. The Company had pending LOIs with two acquisition targets, necessitating over $90MM in acquisition financing.

Our client hired two global financial advisory firms to conduct simultaneous operational and financial due diligence.

B&A was engaged as an independent advisor to evaluate both firms’ findings, particularly the likelihood of the company achieving proforma revenue targets and synergy-driven cost and proforma savings.

B&A’s Approach

Our comprehensive assessment involved:

• Interviewing both financial advisory firms;
• Evaluating multiple EBITDA-related adjustments, from one-time, non-recurring items to projected cost savings, raw material price adjustments, proforma efficiency improvements, and other proforma adjustments;
• Reviewing workpapers, supporting details, and other materials to corroborate findings; and
• Modifying or eliminating certain adjustments made by the other financial advisory firms based on experience and the feasibility of assumptions.

Outcome



We lowered the projected EBITDA run rate by more than 25% based on more conservative assumptions related to integration synergies and disallowing management adjustments. Our client viewed our assessment, observations, and recommendations favorably since the adjusted proforma figures were consistent with its investment committee’s downside model.

Fortunately for the borrower, the financing was structured at a conservative leverage ratio, so our conclusion did not compromise the transaction. 

An investment management firm purchasing the publicly-listed common shares of a global provider of online educational programs (ASX; Australian Stock Exchange) was seeking financing for the approximately $125MM ($187MM AUD) go-private transaction. Our client had issued an LOI to support the transaction and engaged B&A to assess the target’s revenues, program contribution margins, and cash flows for existing and discontinued programs.

At the time of our engagement, the Company offered over 200 online programs in multiple areas of study and disciplines by partnering with schools in the United States, Canada, Australia, United Kingdom, Malaysia, and Singapore. It was underperforming and an affiliate of the PE firm already was a substantial investor in the Company.

B&A’s Approach

Our comprehensive assessment involved:

• Inspecting and verifying program costs and contribution margin analyses for over 200 programs;
• Reconciling the program costs and contribution margins to amounts reported in the consolidated Results of Operations;
• Reviewing revenue and contribution margins of active programs by vintage and market;
• Reviewing revenue and contribution margins of discontinued programs by vintage and market; and
• Inspecting non-allocated costs to ensure non-program costs were consistently reported and not misallocated to distort contribution margins.

Outcome

The results of our assessment substantiated the Company’s reported results, including cash receipts, sustainable contribution margins, and cash harvesting from discontinued programs.

The financing will enable the Company to continue its path toward going private, pending regulatory approval. The elimination of public reporting costs will be accretive to the Company’s earnings, lowering leverage and sustaining profitability.