LBO modelling
Hi guys,
I have one question regarding sources and uses for LBO, because it is still not 100% clear to me.
Assume that the company has 100 cash on BS, out of which 20 is min operating cash, 80 excess cash. How to reflect this in EV-EqV bridge and uses&sources?
My understanding (assuming no debt and no fees):
Uses: 20 min operating cash, purchase price/equity value
Sources: 80 excess cash, sponsor equity
EV-EqV bridge > EV - debt + excess cash = EqV/purchase price
What do you think?
Thx
Companies are bought/sold on a cash-free, debt-free basis. You can look at a S&U from both the buyer's and seller's perspective. Let's say company is being acquired for $750M with $400M new debt and seller will retire $200M of old debt with $100M of cash on BS at exit.
Buyer:
Sources -
New Equity - $400M
New Debt - $400M
Uses -
Cash to Sellers - $750M
Fees - $10M
Cash to BS - $40M (illustrative, probably too high)
Seller:
Sources -
Cash from Buyer - $750M
Cash on BS - $100M
Uses -
Cash to Shareholders - $630M
Retire Existing Debt - $200M
Fees - $20M
Thanks for a reply, but not sure if this really answers my question. Maybe, let me put it into more complex example:
The target: EV of 1,000, debt on BS 500, cash on BS 100 (10 is min operating cash),
Deal assumptions: available Term loan up to 600, transaction and financing fees 10, target debt will be refinanced with a new debt
I am interested in buyer's perspective of the deal
-------------------
EV to EqV bridge> 1,000 - 500 + 90 (excess cash 100-10) = 590 EqV/purchase price
Uses: 590 (purchase price), 500 (debt repaid), 10 (fees), 10 (min operating cash on BS) = 1,110
Sources: 600 (tem loan), 90 (excess cash), 420 (sponsor equity) = 1,110
Is that correct?
I guess I'm confused on who is dictating the minimum cash. The full cash balance belongs to the seller. If the buyer chooses to put $10M on the balance sheet for operating cash, that's their decision, but your EV to EqV bridge should give sellers full credit for the $100M cash unless the $10M is somehow debt-like (e.g., required deposit for something operational).
Honestly, I still think you're making if confusing. Unless this is a public company, as a buyer, the seller's existing debt and cash balances really don't matter to you until you're creating the funds flow. You would value the business on implied equity value (i.e., debt/cash-free), not enterprise value.
Understand the first part of your reply - those 10 was meant by a buyer as a assumption on minimum operating cash, which needs to be on BS right after closing. But, undrestand that this does not matter for EV/EqV bridge, as the seller is simply entitled to all cash (no matter whether buyer has identified some portion of it as min operating), right?
But the second part of your reply is not 100% clear to me. I mean, if I know there there some debt on tha target BS and I would need to refinance all or some part of its debt, I need to somehow reflect it in U&S, right? I also need to reflect that those 10 needs to be on BS after closing, and I might use the excess cash as part of sources? Not 100% about, that is why Im asking. Thanks for clarification
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