What is meant by the “tax shield” in an LBO?

This means that the interest a firm pays on debt is tax-deductible – so they save money on taxes and therefore increase their cash flow as a result of having debt from the LBO.

Note, however, that their cash flow is still lower than it would be without the debt – saving on taxes helps, but the added interest expenses still reduces Net Income over what it would be for a debt-free company.