Trans-World Airlines (TWA) is planning a leveraged buyout of Global Air Lines (G

Question

Trans-World Airlines (TWA) is planning a leveraged buyout of Global Air Lines (GAL), and has secured the tentative support of GAL’s managers for its bid if TWA offers $81 per share for all 10 million outstanding shares of GAL stock. TWA wishes to structure the LBO financing package as one-third equity, two-thirds debt and believes that its bid will value GAL at 1.5 times the company’s current enterprise value and at 9.0 times the airline’s EBITDA. GAL currently has no debt.

a. How much debt and equity (fund capital) must TWA raise to complete this LBO?

b. What is GAL’s current stock price per share?

c. What is GAL’s current EBITDA?

Explanation / Answer

Amount to be paid $81 per share

i.e. $81*10,000,000 = $810,000,000

Debt = 2/3 = 810,000,000*2/3 = 5=$540 million

Equity = 1/3 = $270 Million

b.Bid Value = 1.5 times Enterprise’s value

Hence, Enterprise Value = $810 million/1.5 =$540 million

GAL’s current stock price per share = $540 million/10 million = $54

c.Bid Value is 9 times Company’s EBITDA

Hence, EBITDA = $810 million/9

= $90 million

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