Accretion/Dilution
Company A: EBITDA 200, Leverage 3x, EV/EBITDA 8x, 100M shares outstanding
Company B: EBITDA 100, Leverage 4x, EV/EBITDA 6x, 50M shares outstanding
What are reasons the multiples are different given same industry and business model?
What is Company A's Share Price?
Assume A buys B with debt (including debt rolled over from Company B). What is the combined leverage ratio?
Assume the combined company trades at 8x. What is the new share price and is it accretive to the current share price?
Is this a test? Or are you working through an interview question or something?
B's multiple is lower because it's smaller (half as much EBITDA) and has higher leverage, so inherently riskier for equity owners.
A's share price is $10: $200 EBITDA x 8x = $1,600 EV - ($200 x 3x) = $600 of debt = $1,000 equity / 100 shares = $10
If A buys B with Debt -- note this assumes no premium and no synergies -- the combined leverage is 4x (A's current debt $600 + transaction debt $600 = $1,200 PF debt / $300 ProFormaEBITDA (shout out) = 4x
Combined share price is $12: $300 ProFormaEBITDA (shout out) x 8x = $2,400 EV - $1,200 of debt = $1,200 equity / 100 shares = $12
Working through practice interview questions! I was unsure if you could just combine A + B's debt for pro forma leverage. Thanks!
Interesting. So company b is acquired using 100% debt, is that a common assumption for acc/dil?
Obviously not common in the real world but it’s meant to test your knowledge of the acc/dil math
For pro-forma debt, is it fair to say though that it would be $600 debt from company A + $200 transaction debt (ie. debt you raise to fund transaction) + $400 debt from company B (“rolled over”)
Yeah but it's saying you're paying the deal in debt so add on another 200 of debt for the equity part of company B
Yeah you could think of it as you're paying $200 for the equity (funded with debt) and rolling the target's current debt, but in reality a change of control usually triggers repayment so it's unusual for debt to roll.
(shoutout)
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