So more of an informational thread for newbies like me who have a general idea but not any real experience regarding this.
so a company has long term debt of diff forms (senior notes at diff rates at a few hundred million dollars each, convertible notes at a couple million dollars and minimal Lease financing obligation. All have maturity dates n the future ranging from 5 to 20 years)
Lets say you are carrying a valuation for a prospective acquisition. And for the company trying to takeover, they do not have the ability to just pay off the debt and hence will absorb it.
How will that affect how the deal is structured and what effect will it have on the bid amount?. Was going through the forum and read some where that's it simply thus:
Fair value - Debt + Premium
This doesn't convince me for some reason.
What do ppl here think about this. Also how will the funding for the takeover affect this? Will not be an LBO so what other options are out there? Mezz debt?
^ though having said that FV includes debt to begin with so : FV (acc to dcf, nav etc)+ Premium
Your post is quite confusing.
Why would the acquirer take on the target's capital structure? Most transactions are conducted cash-free, debt-free, particularly if the acquirer doesn't have the means to take on the target's liabilities (meaning the target's shareholders receive cash on the balance sheet but have to pay off existing debt with the proceeds.
lets just super simplify it.
firm has market cap of $1.2b. Debt is $600 mil (breakdown: $200k 7% senior notes, $300k 7.5% senior notes and lets put in $100m lease fin obligation maturing in 2016, 2020 and 2022 respectively.)
how would the acquirer want to structure such an acquisition considering he will finance most of it through debt anyway.
The existing rates essentially don't matter, because as was mentioned above, the acquirer will almost always have to refinance it anyway. Thus in terms of deal structuring, the new debt amount is completely dependent on 1) the current market conditions 2) cash balance on hand 3) stock price (if applicable) of the acquirer.
Some debt may have call premiums that need to be paid in the event of a change of control so that must be factored in also.
Typical buy-out features debt finance for the buyer, with new debt replacing the target's existing debt.
Some (certainly not all) target companies have debt terms which ensure this eg change of control required existing lender consent or triggers acceleration.
Does debt have to be re-financed in an acquisition? (Originally Posted: 10/26/2015)
In the Mergers and Inquisitions guide, they state that generally debt must be refinanced in an acquisition. They then proceed to explain that generally a buyer will pay off a seller's debt. Apologies in advance for the stupid question (very basic beginner here), but what's the difference between refinancing in an acquisition and paying off the seller's debt? Or perhaps they can be the same thing?
Thanks
Often times there are change of control provisions in the debt docs so you can't just roll it over in an acquisition. It needs to be refinanced which involves paying off the old debt (usually at 101% of par) and issuing new debt.
Got it, would that mean an acquisition could also mean the buyer pays off the debt for good? In the long run perhaps?
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