DEUTSCHE BANK SECURITIES:
FINANCING THE ACQUISITION OF
CONSOLIDATED SUPPLY S.A.

Teaching Note

Synopsis and Objectives

In November 2003, Maria Ober, a vice president of Deutsche Bank Securities, received a client request for financing the acquisition of a large hospital-supply distributor. The client needed to present the seller with an offering price and an indication of financial commitment within two weeks. The contemplated transaction entailed a highly-leveraged acquisition of the target. The tasks for the student are to value the target firm and projected synergies, assess the credit worthiness of the target (i.e., its ability to bear the high debt), and critically evaluate the general design of the transaction.

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Case Analysis

The problem

This is a complicated deal requiring careful analysis. On one hand, its very complexity will prompt some students to reject it. On the other hand, Deutsche Bank makes a business in such financings, largely because they are very profitable. A willingness to do the careful homework begets more financing business. Thus, the core problem is not to make a “yes or no” decision, but rather, to consider possible transaction designs that could improve the position of some parties to the transaction without necessarily worsening the position of others.
Part of the problem for students is planning the analysis of this transaction. In this regard, students can draw on some scheme of credit analysis. A simplistic framework is the “6 C’s” of credit:

Cash flow: Is the firm’s expected cash flow large enough to meet the principal and interest payments?
Collateral: If we have to foreclose on the loan, are there sufficient assets in the firm that we could sell to repay the loan?
Capital: Is there enough other capital ranking in priority below this loan to withstand a reasonable cyclical downturn in this firm’s business?
Conditions: Do the current economic conditions favor timely debt payments?
Course: Is the use to which these funds will be put appropriate? Is the general strategy of this firm on course?
Character: