Private Equity Investment

1449 Words Jun 20th, 2011 6 Pages
Executive Summary
Envelope Products is a leading manufacturer and distributor of quality paper products especially envelopes with its position further strengthened with its recent acquisition of Envelope Makers. This company has good stable growth with no gearing and potential cost synergies between Envelope Products and Envelope Makers operations. It is recommended to purchase the entire shares of this company as a going concern rather than net assets at a value of $48m with 35% equity stake and geared at 60%. Management will receive 5% equity stake with 10% ratchet on exit. The investment horizon is expected to be 5 years with IRR target of 35%. The exit strategy is to increase the earnings capacity of the company through cost
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Forecast capital expenditure spend High Low • The financials provided estimated annual capital expenditure to be approximately the value of annual depreciation of around $1.5m. Based on PE internal financial forecast, internal funding are sufficient to fund additional unbudgeted capex
Risk of non-renewal of license agreement for its open and reusable products Medium High • Review and re-negotiate for longer term agreements as most would require renewal between 2001 and 2003.
Failure in development and application of Glyphs Medium High • Would require further investigation into the progress and development of the new technology during due diligence
Delay in implementation of ERP system Medium Medium • Would need to closely monitor the progress of the implementation of the ERP system at Envelope Products and ensuring systems at Envelope Makers are Y2000 compliant
Implementation of Site Agreements in Sydney and Perth Low Medium • Negotiation currently in progress and the management have previously been successful with the agreements. Closely monitor the progress of negotiation.
• To bring in own expertise if current negotiation breaks down.

Valuation / Deal Structure The financial position of Envelope Products including the redundancy and reorganisation costs of $62,000 in Year 1999 is as follow:

Transaction EBIT Multiple
Envelope Products have recently acquired
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