Interesting question reg. Net Debt / Sources & Uses
Hello,
Interesting problem I encountered. In a CIM, there is the Net Debt overview, including items like cash and Liabilities to bank Plus debt like / cash like items; e.g. accrued portion of arrangement fee (to be repaid upon closing), accrued interest (for bank financing), shareholder loans (I assume the old sponsor equity; it says settled upon closing - why is this counted to net debt if its equity?), fair value of land & buildings.
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Do you include all of these in the EV to Equity bridge in determining the purchase equity in LBO? Or just the ones not refinanced?
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Sources & Uses: How to do sources uses? Put all these items in? Only cash and debt?
Someone told me to "roll over" debt and cash like items.
Approach that I am currently following: Calculate full ND, and put this ND figure in Uses. No cash on sources side.
Please help me, very confused.
LBO's are done on a "cash free / debt free" basis, meaning the buyer ignores the capital structure of the business pre-acquisition and puts in a new one, including cash. What that means practically is the buyer requires the seller to repay all debt and debt-like items at the closing out of the seller's net proceeds, and then the seller gets additional proceeds for balance sheet cash.
What that means is you can ignore all of the items you mention above in your sources and uses as they are all debt or debt-like items, absent fair value of land and buildings. Arrangement fees, accrued interest, shareholder loans will all be cleaned up at close and the buyer won't fund the clean up - they are the seller's net debt at exit. Note this is also how seller transaction fees are also treated - netted out of seller total proceeds.
Buyer's sources and uses should remain simple - total purchase price (we don't care how this gets split between seller proceeds and paying off seller's liabilities), buyer funding sources and buyer fees.
Caveat on the FV of land - the reason the CIM has highlighted this is because the seller has probably identified that its owned property has value beyond what's on the balance sheet. The bankers are likely asking buyers to "top up" purchase price for this value - if the business is worth 8x and the FV of the property is $20mm, they will want to get paid 8x + $20mm. If you are doing a case study it wouldn't be the worst thing to say you considered this in your valuation.