On Debt and M&A , is debt to be repaid or refinanced ?
Hi everyone, i apologize if this is the wrong section for a technical question. I don't really have a fin/acc background so i had to teach myself this stuff by myself. yesterday i had an interview question: What would a PE firm pay for a company it wants to acquire. in my BIWS Guide there is this
b2. When looking at an acquisition of a company, do you pay more attention to Enterprise or equity value?[/b] Enterprise Value, because that’s how much an acquirer really “pays” and includes the often mandatory debt repayment.so that's what i answered EV because debt must usually be repaid.
guy said it's always refinanced and wouldn't make sense if it was to be paid back.
Can someone please shed some light on this. Why would it be different for a PE Firm ? is the statement in the guide wrong ?
(random rant: i got no question on valuation and stuff which i really studied in depth such as wacc :'( )
Strategic acquiror might just pay off the debt. A sponsor would refi it. The new owner can't just roll it over since there are change of control provisions. The old debt usually has to be paid off at 101.
Sponsors only care about equity value. They almost always refinance debt compared to a strategic that will almost always pay off the debt. It wouldn't make much sense for a sponsor to pay off the debt with their own capital--they would just refinance to use the cash flows of the business to pay down the debt over time.
Just to clarify - I thought refinance means to pay off the debt? So it's only a use of funds. Whereas assuming debt means taking on the debt, so it becomes both a source and use of funds.
Thanks to both chipperbanker & Buegie. and too bad for my interview :(
Strictly speaking, the PE buyer pays the full EV, but with that funded partly by the PE fund's equity, partly by new debt.
The total purchase price pays out the old debt and the return to equity. Typically the new debt is larger than the old debt because the business has deleveraged prior the sale and the new buyer re-leverages it up.
Often, the lenders in the old debt will "roll" into the new debt, as they know the company well, like it, are happy to keep debt in the company.
PE fund would focus more on the equity value implied by their entry EV, as that's the piece they fund and so it's the basis on which they calculate their returns. However, that equity value is implied by the EV and the focus for both buyer and seller will be on the EV and price will be based on EV, not equity value.
While each of the buyer and seller's returns are very relevant to themselves and will be based on their respective entry equity value (plus any additional equity contributed since acquisition), those respective equity values are different and not mutually relevant*. So pricing all centers around EV.
In conclusion, the OP's recounting of the interview makes it sound like two guys discussing something neither of them really understand that well.
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