Sources & Uses and Repayment of existing debt
Hi all,
I got a little bit stuck with the following case – I would be hugely grateful if somebody could help me with this!
Assuming an EBITDA of 100m, EV/EBITDA of 10x, debt of 75m and excess cash of 25m, how would the Sources & Uses look like? The maximum obtainable leverage of the target is 4.0x and transaction costs for the PE are estimated to 2% of the EV.
Given that net debt equals 50m, the EqV should be worth 950m.
Version 1 (cash free and debt free):
Uses:
Purchase price of equity = 950m
Transaction costs = 20m
Sources:
New debt = 400m
Sponsor equity (plug) = 970m - 400m = 570m
Version 2:
Uses:
Purchase price of equity = 950m
Transaction costs = 20m
Repayment of existing debt = 75m
Sources:
New debt = 400m
Excess cash = 25m
Sponsor equity (plug) = 1045m - 425m = 620m
Is my understanding correct? Why is the sponsor equity in V2 50m higher than in V1? Is this because the transaction is not assumed on a cash free and debt free basis? Would any PE investor be willing to take over the difference between V1 and V2, or rather want to deduct the net debt of 50m from the EqV of 950m, so that the sponsor equity is at 570m again?
Many thanks in advance!
Sorry I'm having a hard time following this question? I'm assuming you're coming in with a PE perspective. This company is worth $1B ($100M x 10x), and currently has $75M of debt and $25M of cash, implying an equity value of $950M, as you've noted. To buyout the company, a PE firm usually has to refinance and take out all the existing debt. Obviously the transaction should be levered as much as possible based on market investability, and the debt can be paid down over the course of the holding period. If the maximum leverage is 4.0x, $400M of debt can be raised. That means the sponsor needs to have an equity injection of $600M to make up the difference.
So the S&U:
Sources:
Uses:
Forgot the transaction costs: Add $20M either side. Source: cash from sponsor, use: transaction costs
Agreed.
Sources:
Uses:
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