Exxel Group Case Summary

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Typical value creation approach for Exxel 

The Exxel group was one of the pioneers of Latin American private equity. It was successful through the value creation in the buyouts, recapitalizations, acquisitions and mergers. The founder of Exxel, Juan Navarro sought to build unique deals, focused on local business, and then create value to these enterprises.
Around 1998, Exxel did substantial acquisitions in Latin America. The related industries were supermarket chains, operation of airport shops, food and beverage producers and retailers, private postal service couriers, music and electronics retailers, and leading apparel retail stores. They provided consumer goods and were mostly small-cap companies, which all had potentials of growth.
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For the equity, the Argentinian Private Equity Fund Ⅱ, L.P. was not allowed to put “more than 25% of its capital into a single deal, or $37.5 million.” Hence, the Supermarket Holdings, L.P. established by the Cayman Islands as a limited partner had the additional fund raising issue. “This fund raised $180 million from existing limited partners and some new investors. The total equity financing for the transaction was $215 million” , which was the largest fund raised in year 1996.
For the debt structure, the Exxel group chose to finance the majority of the LBO using two tranches of senior-secured long-term loans in the amount of $130 million. Tranche A was a three-year floating note with a 3.25% spread on the London Interbank Offered Rate (LIBOR). Tranche B was a four-and-a-half year floating note with a 4.25% spread on the LIBOR. The second major source of debt was a $90 million subordinated short-term floating bridge loan with an ascending interest rate starting at a 6.25% spread on the LIBOR.

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The formula of r_wacc is: r_wacc=E/(E+D) r_E+D/(E+D) r_D (1-τ) (1)
In order to calculate the equity cost of capital (r_E), we have to use the Capital Asset Pricing Model (CAPM): r_E= r_f+(r_Mkt-r_f)β (2)
According to the case study , Norte’s publicly traded competitor, Disco, had a similar valuation result in 1996 as Norte, as the following Table 2 can show. They have the same business model and structure. Since Norte was not listed at a stock exchange, the risk factor: beta (β), was not available. Therefore we estimate that Norte would have a similar beta factor as Disco, which is 0.43. Norte Disco
Equity 215 392.2
Debt 220 200.6

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