LBO Modeling Question
Let’s say you’re a sponsor and acquiring a 60% stake in a business segment of a larger conglomerate. The conglomerate parent retains a 40% interest. Also for simplicity the transaction is a debt free transaction (meaning debt does not fund the purchase price and there is no debt on the business segments books) If the purchase price is $60MM, opening cash balance is $2MM, and fees are $1MM would the Sources and Uses look like this:
Sources:
1) Sponsor Equity = $38MM = 60% * $63MM (purchase price, opening cash, fees)
2) Conglomerate Parent Equity = $25MM = 40% * 63MM (purchase price, opening cash, fees)
Uses:
1) Equity Purchase Price = $60MM
2) Opening Cash Balance = $2MM
3) Fees = $1MM
What this S&U is telling me is that the conglomerate parent has no cash out the door and will receive $38MM cash from the sponsor for selling a 60% stake in the business segment.
Is the “Conglomerate Parent Equity” referenced in the Uses above the same thing as “Rollover Equity”? Also, can someone explain to me what Management Promote is?
Management Promote is a portion of the equity set aside for management. Depending on the deal, management can be given a percent of equity day one or have some set aside to be earned on an accrual basis based on time and metrics hit. There are probably tons of way this can be structured. It's purpose is to bring in and incentive a strong management team.
if theres no debt its not an LBO brah.
guy above me is right. mgmt promote is just the options package you give mgmt when you do the LBO (in a lot of cases it will 5-10% of the equity value of the company with a strike price equal to the deal price, i.e., strike price at 1x multiple of equity investment)
in the scenario you outlined, the 40%interest in the business segment kept by the conglomerate would be the same as rolled/rollover equity (the equity is rolled from the old company into the new company rather than being cashed out). assuming noo fees and no cash, so 60M fully loaded purchase price, you could also do your sources and uses as follows
Sources: 1. Sponsor Equity = 36M = 60% of 60M 2. Rolled Equity = 24M = 40% of 60M
Uses: 1. Purchased equity = 36M 2. Rolled equity = 24M
in the LBO world, you will more frequently see the rollover equity concept when you buy a company where the existing mgmt team has existing equity in the company and you want to keep the same mgmt team. to align your interests with the mgmt teams, you don't want to cash out all of the mgmt team's existing equity and just give them a bunch of new options, instead you make them roll a significant part of their existing equity into the new deal so that they still have "skin in the game" (and you will give them options on top of their rolled equity.
here's a simple example (numbers used are unrealistically small to keep math simple). Say you are going to do an LBO of a public company and you are going to keep mgmt in place. Mgmt owns 10 shares of stock in the existing company. you are going to buy the company at $10/share so mgmt's equity in the public co is worth $100. instead of buying all 10 of mgmt's shares, you are going to give them $50 cash for 50% of their shares and you are going to make them roll the remaining 50% into the new deal. Besides mgmt, there are an additional 90 shares outstanding so total shares are 100 and total equity purchase price is 100*$10=$1,000 assuming no debt/cash at close, no fees, and an all equity financing, your uses are $1,000 consisting of 1) purchase 95 shares of equity for $950 (50% of mgmt shares + 90 other shares outstanding) and 2) roll 5 mgmt shares for $50. your Uses are 1) sponsor equity=$950 and 2) rolled mgmt equity=$50. So mgmt has $50 invested in the deal alongside the sponsor's $950. Then you will also give options to mgmt (the "mgmt promote")
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