Hey guys, quick clarification question on Sources & Uses.
Say you have a private M&A deal structured on a cash-free, debt-assumed basis:
Target’s debt is not refinanced and just rolls over.
Target’s existing cash is left on the B/S
In this case, how should the Sources & Uses table look?
| +130 | New Article: Dramatic Slide as UBS #22 (US) & New Leadership Desperately Needed | 25 | 5h |
| +102 | Americas M&A League Table Q2 Updated | 49 | 6m |
| +73 | Wealthy Parents / Jaded | 24 | 1d |
| +58 | How are hours rn for SA (interns) | 31 | 20h |
| +54 | A COMPLETE GUIDE TO SUMMER INTERNSHIP RECRUITING | 11 | 19h |
| +49 | Venezuela Debt Restructuring - LAZ vs CVP | 22 | 1d |
| +42 | Boutique firm wants access to my LinkedIn? | 34 | 17h |
| +33 | Investment Banking in Mexico | 9 | 21h |
| +28 | MM bottom bucket bonus | 9 | 4d |
| +26 | Investment Banking is Hard | 11 | 15m |
Career Resources
Get instant access to lessons taught by experienced private equity pros and bulge bracket investment bankers including financial statement modeling, DCF, M&A, LBO, Comps and Excel Modeling.
Uses:
Target Purchase EV (based on EBITDA multiple)
M&A / Legal fees
Debt / Equity underwriting fees
Sources:
Cash (cash on buyer’s B/S less min. cash)
Debt issued
Stock issued
Debt assumed (Target’s debt less existing cash on target’s B/S as acquisition is cash-free)
Thank you, could you explain me how is the assumed debt the source if we don't have this money and don't pay with it for the Target?
It is a cash-free acquisition. Meaning all of target’s cash will be used to repay whatever target’s debt it can. The remaining debt will roll-over / assumed.
Just checking if that's correct:
Assumptions:
My understanding is, if we do non-CFDF, we will pay for Target's Equity and assume ALL ASSETS (incl. cash) AND LIABILITIES (incl. debt). If we do CFDF, we will pay Seller's to repay Debt and they can walk away with all the Cash, hence we pay for an entire Enterprise Value.
In my table, I show full EV, reconcile it with Assumed Debt (so it's effectively just a bridge to Equity Value, at this point it's 1,000-300 = 700). Therefore now we are facing the following situation: we purchased the company, we assumed the debt, but cash hasn't decreased Enterprise Value / increased Equity Value -> the transaction is Cash-free but non Debt-free transaction.
If we pay 800 of Equity Value (not 700) -> we also assume the Cash (100) (and 300 of Debt). Although, we only want 80 of Cash on the B/S and Seller's can leave with 20. Therefore, the formula is EV-Assumed Debt+Cash on B/S (so the bridge to EqV but we only want 80 of cash)+Transaction Fees= 830 of Total Uses.
In other words, we purchased the entire Equity Value of 800, assuming all assets (cash) and liabilities, but we only want 80 of cash. Full Equity Value of 800 grants us an ownership over 100 of Cash. Ownership over 80 of cash results in decrease of Equity Value by 20 (100-80) to 780 (thus we only pay for 80 of cash and leave seller's with 20).
On top of that, we must cover Transaction Fees of 50 -> 800-20+50 = 830.
I'm a bit confused by your premise. "Cash-free/debt-free" is a way to refer to transaction value for purpose of negotiation / agreements. It does not refer to what actually occurs in the transaction.
In your example, you have $1 billion of enterprise value, $300 million debt, $100 million cash. The question is on what basis is that enterprise value?
If you and the seller agree to a $1 billion enterprise value on a "cash-free, debt-free" basis, then at closing, regardless of how the debt and cash changes between signing and closing, you will transfer $1 billion to the seller, and the seller will transfer the business to you with $0 cash and debt on the balance sheet. If you need $80 of cash on the balance sheet to keep the business running (aka "minimum cash balance"), then you'll simply need to raise more proceeds from debt or use more of the cash on your balance sheet to service that.
If you and the seller agree to a $1 billion enterprise value NOT on a "cash-free, debt-free" basis, then at closing, if we assume the debt and cash didn't change and remain at $300 / $100, respectively, then you will transfer $800 to the seller, and the seller will deliver the business to you with $100 cash and $300 debt on the balance sheet. You can do whatever you want with the $100 cash (keep it on the BS, use it to pay down debt, or transfer it to yourself as a dividend) and $300 debt (assume it on the BS or pay it off).
The scenario you laid out sounds like the latter, with debt assumed after the transaction. However, I'm confused what the arrangement is for the cash. I'm assuming you mean that the $1 billion enterprise value is not CF/DF basis, so the seller can't take the $100 million of cash, and it remains on the balance sheet. However, you don't need $100 million, only $80 million, so you can use $20 million of that cash to pay for the $1 billion enterprise value you are transferring to the seller. Therefore, sources & uses look like this:
So the $100 of existing cash is one of your Sources. You also have $80 of minimum cash that you must fund in Uses. The implication is there is $20 of "excess" cash in your sources that can be used for any of the Uses, whether it's paying for the equity purchase price, paying down debt, paying txn fees, etc.
Thanks for your reply. The point that I don't comprehend - what's the logic behind leaving Rollover of Existing Debt on the Uses and Sources sides? My understanding is that if we pay for the Equity, we assume Target's all debt and assets. Why would we show Debt on the Uses side, if we don't pay Seller to "clear" the Debt? By the same logic, why would we show rolled over Debt on the Sources side, if we effectively don't issue any liabilities to fund this acquisition - it just sits on the B/S. Doesn't it inflate Sources & Uses?
Aside from that, if we roll over 300 of Debt, and our Total Debt Capacity is 8.0x EBITDA (EBITDA=50), can't we raise only 100 of the new debt (8.0*50-300), which translates to higher Equity ticket?
Regarding Cash, sorry for being vague - I meant that we only leave 80 of cash on the B/S, we don't fund the acquisition with it, and the remaining 20 is taken by the Seller.
I'd really appreciate a bit of guidance on this subject!
Btw, not sure if WSO placed my reply under your comment, but in case not, see my second comment on this thread.
Aut error non ut sequi aut. Praesentium dignissimos blanditiis illo esse perspiciatis dolores. Possimus expedita natus minus rem ratione ut hic laboriosam.
Voluptates laboriosam aut fuga rerum quae maiores. Doloremque velit minus fugiat suscipit cum repellat. Ut cum sed aut libero ratione sit.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...