LBO of private company with management reinvestment with a lot of cash on B/S - help needed
Dear community,
I would appreciate your advice on the following.
I am analyzing an LBO of a private company and am getting a bit confused regarding management reinvestment / rollover.
Assumptions:
1M EBITDA, 10x multiple, no debt on B/S, 2M cash on B/S pre-transaction
Hence, 10M EV and 12M Equity Value
Financing:
2M Senior debt, 20% rollover, and rest Sponsor Equity.
Which of the following is the correct way to see this deal please?
- Sources: 2M debt, 2.4M reinvest (20%*12M EqV), 2M Excess Cash, 5.6 Equity Sponsor
Uses: 9.6M Equity Purchase price, 2.4M reinvest
2.
Sources: 2M debt, 2M reinvest (20%*10M EqV because 2M cash has been taken out), 6M Equity Sponsor
Uses: 8M Equity Purchase price, 2M reinvest
I would be grateful if you could shed some light on this and help out.
Many thanks
Two issues here: 1) On CFDF basis, from the buyers perspective the purchase price is the EV of the business (EBITDA * Multiple). Ignoring fees and min. cash requirement all that needs to be funded is the EV (so total Uses = EV). Rollover is not a use of funds, only source
2) You're confusing pre-Tx equity value (and hence rollover stake value) with post-Tx value. Rollover needs to be 20% of post-Tx equity value, so (EV minus - debt raised) * 20%.
You could assume for simplicity that 2m cash is the min. cash requirement so its stays in the business and shown in both sources and uses. This way rest of calcs stay the same regardless of what you do with the cash. What you do with cash in BS and whether Tx is on CFDF basis does not change debt raised, sponsor eq. check and Rollover, just the total amount to be funded. Meaning that if the 2m is deemed by all parties to be min. cash requirement then seller won't cut this out as dividend before the deal closes (if they do you can deal with it through leakage etc and reduce purchase price on £ for £ basis )
Rollover is a source and a use of funds. Important for tax & accounting purposes. Ex. below:
Sources:
$2m debt / $2m rollover / $6m equity
Uses:
$8m purchase price / $2m rollover
Total: $10m EV
In PE-context rollover is generally thought of as a percent of transaction proceeds, not post-transaction ownership. If I heard someone was rolling 20% I would assume EBITDA x Multiple x 20%. In this scenario would say sellers rolled 20% of proceeds and own 25% of the post-tx entity. That said may be a phrasing issue if this is an interview question.
Good point. Its a phrasing issue: rollover x% of proceeds vs PF stake.
#2 is generally what you'd see as most deals are done debt-free/cash-free at that level. That said, not sure how you're getting 10m EV... Would be 5 in your scenario unless one of your input numbers is wrong.
Although this way rollover stake is 25% not 20%
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