When looking to fund a M&A transaction, do you only consider funding the equity portion or do you also include debt?
I have seen some sources and uses schedules from previous transactions and they typically, if not always, include the debt to be acquired but a transaction that I am currently working on, we only consider the equity portion. The rationale is that the debt will simply be taken over by us, the acquirer, and thus does not need to be funded.
Can someone please shed some light on this topic? Please keep it straight forward, i.e. only debt and equity and disregard preferreds, options, transaction costs etc.
I'd say that you usually find a change of control clause for debt and in this case you would need to refinance it. Maybe that's not the case in your transaction?
Thanks for your quick reply.
But even if we refinance the debt wouldnt that just be raising new debt to pay down the existing debt, i.e. no net effect? The result is still the same, i.e. the target's debt, in one form or another, go on our BS? I would agree that we would have to include debt if we decided to pay down the target's debt, without raising new debt, but that is essentially the same as deleveraging, right?
If you refi the existing debt then you're using some new funding source to accomplish that refi, thus you include the refi in your Uses table. Yes, the same amount of debt (or mix of debt/contributed equity) is on your BS, but it's a completely different facility with different characteristics. If you do keep the legacy debt, treat it as you would a new debt facility, just model out payments, interest, etc. based on the facility(ies) terms.
Regardless, it's pretty rare to not refinance the existing debt. You not only have change of control clauses as above poster mentioned but keeping legacy debt complicates things with new lenders - primarily seniority & covenants.
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