Williams-Sonoma, Inc., LBO: Let's Get Cooking

In May 2023, partners from a private equity (PE) fund, Jefferson Capital, and a private (mezzanine) debt fund, Cavalier Capital, need to join forces to design their bid for Williams-Sonoma, Inc., to take the company private. May 2023's market environment looked unfriendly for LBOs: interest rates were steadily climbing as the Federal Reserve was trying to rein in inflation, the risk of the economy entering a recession was high, and banks themselves were under pressure from financial turmoil and were tightening their lending standards. Dealmaking at the top investment banks seemed to have frozen. At the same time, the PE industry was sitting on a record amount of dry power, and players were eager to move from the sidelines into the heat of the investing battle. Investing in iconic home-goods retailer Williams-Sonoma was the biggest opportunity of the year. Jefferson Capital's team knew that its initial 7.05x EBITDA bid was not super competitive. The fund had to apply all of its operational and financial engineering muscles, including expanding its debt financing to include mezzanine debt. Subdued before 2022 when investors had easy access to senior debt, mezzanine financing has regained popularity in early 2023, catalyzed by higher interest rates and reductions in the availability of traditional debt finance. Cavalier Capital and its mezzanine debt fund were perfectly positioned to aid Jefferson Capital in its aspiration to acquire Williams-Sonoma. The case is designed as a platform for a negotiation exercise between equity and mezzanine debt investors who need to put their heads together and form a bid to acquire Williams-Sonoma via an LBO. Students can be separated into paired equity and mezzanine teams. Faces with fixed amount of Tranche A and Tranche B debt (4x to 4.5x, depending on instructor risk appetite), each equity-mezzanine consortium needs to decide the amount of capital it is willing to invest and interest rates and warrant overage for the mezzanine

• Private equity
• Financial negotiations