Consolidation Exercise
Hi guys,
Have this technical that was shared to me, and I want to reply very simply: 1. 5x because only B fully consolidated, 2. No because A becomes an Associate of B and doesn't improve EBITDA while the acquisition increases Debt.
I am guessing that there is more to it, specifically because the EV/EBITDA multiples should have some use.
Do you have any idea?
Case study
Working for company H
H has a 30% stake in A
H has a 70% stake in B
Leverage of A is 3x
Leverage of B is 5x
EV/EBITDA for A is 15x
EV/EBITDA for B is 10x
1. What is the consolidated leverage of H?
2. B wants to reduce its leverage, thinks it should acquire 20% of A, is it a good idea?
#1: Yep, 5x since it's less than 50% ownership
#2: We can use the EV/EBITDA multiples to derive Equity/EBITDA = EV/EBITDA - Debt/EBITDA.
Equity/EBITDA(A) = 12x and Equity/EBITDA(B) = 5x.
If we take the inverse of these to get EBITDA as a % of Equity, we'll see A is at 8.3% vs. B which is much higher at 20%.
If H acquires 20% of A, it will reduce leverage but will get less EBITDA/Equity, making it a shit deal.
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