Q1. As of November 2012, what (in your opinion) are the three most important reasons why Apax
SHOULD invest in Cengage debt [no more than 15 words each]?
Answer No 1
Followings are the reason due to which Apex should invest in Cengage debts
- Revenue of the company Fall about 22 % in the last quarter of the company.
- 49 % drop in Operating Income, which was huge set back in the last quarter.
EBITDA in the last twelve months reach to $ 673 Million.
Q2. As of November 2012, what (in your opinion) are the three most important reasons why Apax
SHOULD NOT invest in Cengage debt [no more than 15 words each]?
Apax expects Cengage to file for Chapter 11 bankruptcy, and emerge from bankruptcy in
June 2013 with an estimated enterprise value (TEV) of $3,438 million. Assume that Apax has
decided to invest $750 million of its funds to purchase senior debt. Also assume that the Chapter
11 plan of reorganization follows absolute priority in determining the distributions to prebankruptcy debt and equity owners (as described in paragraphs 3 and 4 of the case), and is based
on the assumed $3,438 TEV for Cengage. Lastly, assume that any equity in the restructured
company that Apax receives under the plan of reorganization will be sold in 2018, when Apax will
exit its investment in Cengage at [7× (projected 2018 adjusted EBITDA)].
Answer No 2
Based on the financial position of the company, the management of the Apax Company estimated that there could be around no more than 700 to 800 million senior and junior debts. At the time of bankruptcy of Cengage, the total investment made by the Apex in the Cengage was around 1.8 billion dollars which would be totally lost. At the time of bankruptcy the total market value of the company was divided according to water fall recovery model into three categories according to low rang, mid-range, and higher range of creditors. After making payment to all types of creditors, there was no cash left for payment to equity holders. This turned around 1.8 billion loss due to bankruptcy of the company. Following are the cash flows of the company particularly with Cengage
- ApaxhadpurchasedCengagefor$7.1billioninthefrothybuyoutmarketofMay2007
- Financedthe buyoutwith$5.6billionindebt in 2007
- Invested 1.8 billion dollars in equity of the company.
- Acquire Thomson Learning for $7.1 billion in May 2007
Apax acquired 10% of the senior secured debt, it would receive $143.8 million in cash (0.10 × $1,438 million) upon emergence from bankruptcy.
Q3. What are the cash flows to Apax from its investment strategy in Cengage’s senior debt? Please
list the cash flow (in $ millions) followed by the date of the cash flow (month, yr) : for example,
enter your answer as $xx , MMM YY ; $xx , MMM YY ; etc.
Answer No 3
Apax acquired 10% of the senior secured debt, it would receive $143.8 million
Q4. What is the return to Apax from this investment in Cengage’s senior debt (you can use the excel
XIRR function; enter your answer here in percent, xx.x%).
The owners of Cengage’s junior debt are unhappy with this potential outcome, because they
believe the company will benefit more quickly from its move to digital products. They have
prepared their own set of projections for the firm, which are provided in your additional excel
spreadsheet on canvas (“Cengage junior debtholders projections.xlsx”). The debt structure at exit
from bankruptcy would not be changed. Based on this information, they have hired you as their
financial advisor to produce a discounted cash flow valuation of Cengage.
Answer No 4
5a. What is the 2014 cash flow that you would discount in your DCF valuation, and briefly describe
how it is calculated? Enter your value in $ millions, with one decimal place, followed by your
explanation (enter as $xxx.x million ; “explanation” ).
5b. What is the 2015 cash flow that you would discount?
5c. What is the 2016 cash flow that you would discount?
5d. What is the 2017 cash flow that you would discount?
5e. What is the 2018 cash flow that you would discount?
5f. What is your terminal value of cash flows, stated as of 2018?
5g. What discount rate would you use to discount these cash flows, and briefly what inputs did you
use to calculate that discount rate (enter as x.xx% ; “explanation”)
5h. What is the TEV (at of June 30, 2013) from your DCF valuation?
Answer No 5
The discounted cash flow of the company is evaluated on the 10 % required rate of returns. This rate is assumed. The company free cash flows are calculated on the basis of each year FCF from 2014 to 18. Than these cash flows are discounted each year. That is how I gather the discounted cash flows.
5a.39. 30 Million dollars
5b. 101.25 Million dollars
5c.133.24 Million dollars
5d. 159.83 Million dollars
5e. 196.67 Millions dollars
5f. 603.29 Million dollars
5g. The discount rate is 10 %
5h. 140.55 Million dollars
Q6. Continue to assume that Apax had invested $750 million in the Cengage’s senior debt in Nov
2012, and held this investment as described in Question 3. Assuming the same exit multiple for any
equity received in the bankruptcy restructuring (but using the revised projection for 2018), what
would Apax’s realized return be if the court had instead agreed with the junior creditors’ valuation,
and confirmed a reorganization plan following absolute priority but assuming the junior creditors’
estimated TEV of the firm at exit from bankruptcy? Would this outcome suggest a different 2012
investment strategy for Apax? Why?
Answer No 6
The management of the Apax Company was looking thinking parallel. On the one side company had invested around 1.8 billion dollars and on the other hand side the company was also pushing themselves to become strong creditors of the company and have major share at the time of bankruptcy. In my point of the view in order to take up the company was good strategy, though on one hand company was losing 1.8 billion dollars investment which done in purchasing the stock of the company. Though both these angles works in the best interest of the Apax as company has claims being owner and creditors. So in my point of view company played well for acquiring the company.
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