How to deal with assets held for sale when calculating TEV in an LBO
Hi there,
I have come across an LBO case study where there is approx. $1,000M of assets held for sale on the balance sheet and approx. ~$300M of liabilities associated with those assets held for sale.
When calculating TEV at Entry, which would be a better approach and why:
1) Keeping the assets held for sale & liabilities against them on the balance sheet throughout the holding period (i.e., including them in the purchase price)
2) Reducing the transaction value by the net gain from the assets held for sale, which assumes that you dispose of the assets held for sale at the same time as acquiring the wider business (i.e., reducing the TEV by $700M).
Any advice on the best approach and factors to consider would be very much appreciated!
Thank you.
I would include them in the purchase price on the basis they won't be disposed of prior to the transaction closing.
If you remove them from equity value you effectively not paying for the assets which is incorrect.
It would be a key DD item ( assuming material to the overall transaction) to better understand the timing on disposal as well as what value the assets can be realised. This should then be factored into your financial modelling as timing and quantum will impact your IRR and TMB
Thank you so much - this was really helpful and appreciate the explanation!
They should be removed from EV but included in equity value.
They are HFS and accordingly are no longer needed for business operations for the business you are buying. As a result, it's inappropriate to consider them as part of EV but they still need to be considered in equity value given you are in fact paying for them.
Familiarize yourself with the walk from enterprise value to equity value via google for more context.
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