Deal Summary: LBO of Ravello Refineries by Valen Capital

Disclaimer:

This document has been prepared as part of a graduate portfolio project for academic and professional development purposes only. It does not constitute investment advice, a solicitation to buy or sell any securities, or an official financial analysis. All data, projections, and conclusions contained herein are derived from publicly available information - including Securities and Exchange Commission (SEC) filings (Form 10-K), Bloomberg terminal data, and Yahoo Finance - as of March 2025. The views and financial models presented are the sole work of the author and do not represent the views of any financial institution, advisory firm, or employer.

LBO of Ravello Refineries by Valen Capital.xlsx

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Deal Summary

Valen Capital is evaluating a leveraged buyout of Ravello Refineries, a leading producer of oil and industrial chemicals.

The company is planning to increase its CapEx significantly over the next several years to support higher growth, even if its margins fall.

Ravello Refineries business generating $1,000 million in revenue and $250 million in EBITDA at a 25% margin in Year 0. The acquisition is priced at an enterprise value of $2,500 million, implying a 10.0x EV/EBITDA entry multiple.

The deal is financed with a capital structure comprising 40% equity ($1,000 million), a 4.0x EBITDA term loan ($1,000 million at 5% interest), and a 2.0x EBITDA senior loan ($500 million at 10% interest), totalling 6.0x total leverage at entry. The term loan is amortised using 100% of free cash flow generated each year, while the senior loan remains bullet (interest-only through the hold period).

Over the five-year projection period, revenue grows from $1,000 million to approximately $1,502 million, driven by accelerating top-line growth (5% in Year 1, ramping to 10% by Years 3–5). However, EBITDA margins compress from 25% to 20% over the period, partially offsetting the revenue expansion, EBITDA grows modestly from $250 million to roughly $300 million by Year 5.

Free cash flow generation averages approximately $28–30 million per year, constrained by significant interest expense (starting at $100 million in Year 1), ongoing capex (8% of revenue), intangible asset purchases (4% of revenue), and a 20% tax rate. The cumulative FCF over five years is used to pay down the term loan from $1,000 million to approximately $857 million.

At exit in Year 5, the business is sold at a 12.0x EV/EBITDA multiple, implying an exit enterprise value of roughly $3,606 million. After repaying the remaining term loan ($857 million) and the senior loan ($500 million), equity proceeds to Valen Capital total approximately $2,248 million on a $1,000 million investment.

Returns: The deal delivers an IRR of approximately 17.6% and a money-on-money multiple of roughly 2.2x. This falls short of Valen Capital's stated investment hurdle of 20% IRR and 2.5x MoM, suggesting the deal in its current form does not meet the fund's return threshold and would likely be passed on, unless the entry price can be negotiated down, leverage terms improved, or operational improvements can drive higher margin retention. Key Assumptions

Assumptions	Value
EBITDA	$ 250m
Entry EV/EBITDA multiple	10.0x
Exit EV/EBITDA multiple	12.0x
Revenue growth	5% → 7.5% → 10% → 10% → 10%
EBITDA margin	Declining: 25% → 20% over 5 years
Term loan	4.0x EBITDA ($1,000m), 5% interest, amortised with 100% FCF sweep
Senior loan	2.0x EBITDA ($500m), 10% interest, bullet / no amortisation
D&A	5% of revenue
Capex	8% of revenue
Intangible asset purchases	4% of revenue
Change in working capital	2% of revenue
Tax rate	20%
Holding period	5 years

Intersting Observations

The most interesting tension in this model is that revenue grows significantly (50% cumulatively) but EBITDA margins compress by 500bps, so EBITDA only grows about 20%. That limits both FCF for deleveraging and the absolute exit value. The model is essentially betting on multiple expansion (10x → 12x) to drive returns, not operational improvement — which is a red flag for most PE investors. A stronger thesis would involve margin stabilisation or expansion alongside the revenue growth, which would push the IRR well above 20%.