LBO and leases

Question

Hey monkeys,

I am doing an LBO model and the company has a fairly significant amount of leases as a result of IFRS 16 accounting. The leases should be included in EV and net debt. As the leases will be rolled over, how do I take this into account in the model? It is included in EV so it is included in uses. Should I add it to the sources part of the S&U table to reflect this?

TheGrillMan · Accepted Answer

Broadly speaking I think there are three ways to model the lease liability (in terms of increasing comprehensiveness):

Keep flat

The issue I have with this approach is that it implies a growing business has a fixed quantum of lease liabilities - in reality, a growing business would likely be increasing this as it expands its operations etc.

Grow with revenue

Addresses the point above however, the issue with this approach is that the lease liability quantum will take a massive hit along with revenue if you are, for example, modelling a recession/downside case.

rocket2019 · Answer

Agree with Rover-S - basically I think the uses and sources table will look something like the following

Background
EV = 100 
Debt = 50
Lease = 10 
Cash = 10

Uses
EV = 100
TX costs = 2
Min cash = 5
Total = 107

Sources
Debt assumed = 50 
Leases assumed = 10 
Sponsor EqV = 47
Total = 107

Regarding the modelling part, 1) calculate the PV of the lease obligation and its corresponding right to use asset 2) project their future balance on the BS 3) link it to the lease expense on the P&L (i.e. RTU amort.

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LBO and leases

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LBO and leases

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