How can LBO debt be put on targets balance Sheet?
Hey guys,
maybe this is a very basic question. How can a PE firm raise debt (bank loans, bonds, mezzanine) to finance an LBO and put that raised debt onto the acquired company's balance sheet straight after?
Does this have something to do with SPVs and if yes could someone explain the structure of involved entities in such a LBO?
Thanks!
A company is like any asset.
Think of a house.
You buy a house and then leverage it and make mortgage payments but rent it out so it throws off cash you can use to pay the mortgage.
Same with a company. You buy it and leverage it, then repay the "mortgage" and it throws off cash in the interim.
The cool thing about a company is that you can improve cash flow substantially by improving it. Sometimes without very much expenditure at all.
Yes, i get that. However technically, if I but Debt on a Balance Sheet, the Asset side has to go up by the same amount. In a normal case this would be the Cash position. Here though, the cash is used by the Fund to buy out old shareholders and will hence never show on the targets Asset side. So how does that Balance sheet equal out after debt from the LBO has been put on its BS?
Thanks!
You usually have a holding company 'HoldCo' based in a country/state where there is tax benefits in which you the fund will put say $50 in cash (50%equity) and HoldCo will take on $50 in debt (50% Debt). You know have HoldCo's balance sheet with on one side $100 cash and $50 in Equity and $50 in Debt on the other side. Using these $100 you will buyout a Company. HoldCo will own a company that is worth $100 (Asset) and on the other side of the balance sheet have $50 in Debt and $50 in Equity.
You borrow 50 and receive 50 equity injection to buy a company for 100 --> get your stake in the company in return on the single entity basis (HoldCo), showing a financial asset of 100 and equity and debt of 50 each.
Consolidated you see the assets/liabilities you acquired and you create goodwill for the amount between net asset value and the price paid.
You refer to 'debt pushdown': google it. Basically driven by local legislaation and taxation. One option is to let the target borrow the money and pay out a dividend to the new holdco.
Thanks for that great example! So I guess the BS of the HoldCo and the BS of the target are "combined" post transaction as explained https://corporatefinanceinstitute.com/resources/knowledge/accounting/co…</a">here?
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