Can someone please explain both qualitatively and quantitatively how to buy down a multiple using the following:
1) Sale-Leaseback
2) M&A -> Assume just EV/ EBITDA weighting
3) Divestiture --> Assumes same as above, but inverse
4) Anything else
Much appreciated
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what does "buy down a multiple" mean? Like pay a smaller multiple for a company?
I'll take a stab at what I think you mean - it's all about relative multiples.
Let's say you pay $200m for a company generating $10m EBITDA - 20x.
1) Sale-Leaseback: Let's say the cap rate on warehouses is 2% (good luck in this market but it's an example). You get your hands on the company and immediately sell a warehouse for $40m. You just reduced the price you paid by $40m. But, you now need to pay rent - since it's a 2% cap rate, you'll be paying rent of $0.8m, so your EBITDA is now $9.2m. Effectively, you paid $160m and paid 17.4x (i.e. $160m / $9.2m)
2) M&A: Same company, but now you buy a smaller rival for $50m at 10x. No synergies just for the fun of argument. You paid $250m ($200m + $50m) for a company generating $15m ($10m + $5m) EBITDA. You paid 16.7x
3) Divestiture: Similar to (1); you have a division of your company which specialises in some really cool niche, but there are no dis-synergies by selling it (again, just for argument). In fact, that specialist division typically trades at 30x, and generates $3m EBITDA. You sell it for a princely $90m. You paid $110m ($200m - $90m) effectively for a business generating $7m EBITDA 15.7x
4) Anything else: I guess you could outsource manufacturing to a CDMO? Suppose you sell a bunch of machinery that generates $20m in cash, but now since you rely on third parties for manufacture, you need to pay $0.5m annually in additional costs. Well, now you paid $180m for a business doing $9.5m EBITDA. You paid 18.9x.
Be creative with (4) - maybe there's a fleet of private jets that could be sold off, and sure, there might be added expenses by chartering planes instead, but you do the maths and it makes sense.
Hope this helps and indeed is what you meant.
Thank you! Exactly what I needed
One follow-up how in the Sale Leaseback how do you think about the fact that Debt increases, but cash increases offsetting each other for TEV but EBITDA goes down. Basically isnt impact on TEV neutral and impact on EBITDA negative driving the multiple up.
Realize we are looking at it on an entry multiple perspective.
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