Enterprise Value Bridge Negotiations - Why?
Hi all,
Even though I have gained experience in this field in the past, I am still wondering why there are negotiations and discussions around the enterprise value in a M&A process.
Let's consider a hypothetical example: Buyer X and buyer Y are bidding on target T.
During the bidding phase, buyer X submits an enterprise value of $60MM and assumes $10MM pension liabilities and $10MM net financial debt, finally arriving at an equity valuation of $40MM. Buyer Y in turn bids $50MM but only assumes $10MM net financial debt (implying also an equity value of $40MM).
Both parties are now in-line with their equity valuation. The proceeds that the current owner of T would get are the same.
- Why does it even matter in a M&A process to submit how one arrived at a certain equity value? I.e. why don't you simply submit the sole equity value?
- Why are there discussions and negotiations around certain items in the bridge? For example one could assume $10MM pension liabilities and another bidder $15MM due to different assumptions. Why does it matter to discuss these items with the seller?
It would be amazing if someone could clarify this.
Many thanks!
Buyers and sellers have different objectives as you might very well imagine. This, together with the fact that signing of the deal and closing of the deal often are several months apart also have a great deal of why sellers want bidders to submit their EV-to-equity vallue adjustments.
As a buyer, ideally, I would want to classify as many items as possible as "debt-like" and so this will reduce the actual equity I get to pay. Also you have to note that net debt and pensions are not the only things that get addressed in the bridge - many working capital items are explicitly discussed as well during closing accounts to decide what is debt-like or not.
In the grand scheme of things, 2-3mm dollars worth of adjustments doesn't seem to be a big deal in a $5bn dollar transaction, but as a banker, if you're able to help your client win that amount, you can bet that they will pay you back in kind in your incentive fees.
Thank you very much, this makes perfect sense!
However, one could still argue that in the end, the seller only cares about the equity value proceeds. I get your point that it makes sense to push the price down by classifying as many items as possible. Why are initial bids always based on the EV? Is it easier to compare different bids on a EV basis or are there other stakeholders who might have an interested?
Because in first rounds the seller does not yet provide vendor due diligence nor a data room, meaning buyers have to rely on the IM. Therefor they have not had the opportunity to identify debt like items.
By understanding very bidders bridge you have a better negotiation position (“you are the only bidder with this view”, “CVC looks at it this way”). Also it is important to see with non binding offers what items are already included to get to equity as you might expect some debt likes to be added that you are aware of as a seller.
I mean imagine if a sponsor A is selling this corporate to sponsor B, and in between the equity bid - call it $1Bn of equity and the full sale, sponsor A does a dividend recap for $500m. In that case if the bud was based on equity value then sponsor B would over pay by $500m. And Sponsor A walks away $500m richer than he should.
On an EV basis whatever the Capital Structure is, no one is better of worse off.
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