Sponsors LBO Accounting Modeling Question
Hey guys need to get a model out tonight so I need your help. Appreciate it in advance! For a model:
If a company is being bought why is preferred stock treated like debt and bought out at book value? Shouldn't the purchase price of equity also include buying out the preferred stock? From the models I've seen purchase price only includes common stock.
Should I capitalize/amortize these costs or directly expense them?
- Call penalty to recall all existing bonds? (i.e. $5 million on a 105 call premium) - Discount taken when issuing new bonds (i.e. 99 OID on $100 million)? - Advisory fees and general fees are expensed? - Debt financing fee is capitalized and amortized?
I'm a little confused on your scenario but, for an LBO because of a change in cap structure your equities will be weighted differently. Treating the pref stock as debt will allow it to be bumped down to a liability off of the balance sheet. Buying it a par is akin to the sell price of any other capex. And what you said below is correct because of that all related costs to the liability are capital expenditures and can be amortized. For discrepancy in purchase price check minority interest, intangibles, maybe even goodwill or other for their calculations.
Call penalty would be could be capitalized, any advisory or other fees are ALWAYS expensed (there's no intrinsic value). New bond issuance is expensed. I have a model I built for XM post merger w/ Sirius that has all of that modeled out if you need it.
Hope any of that helps.
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