Melissa Bockhold Heather Coddington - Franklin College

equity required in the LBO will have to be greater than 30.4% due to the above-average
risk level of the industry in which the company operates.
S&P Key Industrial Financial Ratios by Long-Term Debt Rating
Three-Year Medians—1997 to 1999
AAA AA A BBB BB B CCC
EBIT Interest Coverage 17.5x 10.8x 6.8x 3.9x 2.3x 1.0x 0.2x
Total Debt as % of Market Cap. 3.7% 9.2% 16.4% 30.4% 47.5% 59.3% 74.3%
The increase in the equity requirements for a leveraged buyout of a company such
as Seagate will change the proportions of the company’s capital structure after the
buyout. Less leveraging will have to be done in this particular case, than in past buyouts
because there is a much larger risk of debt failure.
Based on Seagate and Silver Lake’s objective to maintain their current investment
grade rating, BBB, we feel that their capital structure after the LBO should be composed
of 45% equity, 50% senior debt, and 5% subordinate debt. The equity portion of the
capital structure is composed of two parts. The first part is the equity, provided by the
private equity firm, Silver Lake, and its partners like Texas Pacific Group (Snow). We
feel these groups should provide approximately 89% of the total equity for the project, or
40% of the capital structure. The other 11% of the total equity should be provided by
Seagate’s top six managers including Luczo and Charles Pope, Seagate’s current CFO.
One of the stipulations of the deal specifies that these six managers must continue in their
current roles, and they must also “convert a portion of their Seagate equity into new
equity and deferred compensation of the company that would operate the disk drive
business” (Andrade 8). This stipulation exists for two reasons. First, Silver Lake has a
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