LBO: Sources and Uses question
Hi,
I have one question on the sources and uses.
Assumptions:
EV = 100
Debt = 30
Cash = 10
equity value = 80
50% / 50% debt equity funding
No fees
Sources and Uses - Version 1
Sources:
Debt = 50
Equity = 50
Uses:
EV = 100
Sources and Uses - Version 2
Sources:
Equity = 50
Debt = 50
Cash on balance sheet = 10
Uses:
Equity value = 80
Refinanced debt = 30
Which of the two sources and uses is correct?
I'd guess v1, because the enterprise value = 100
equity value (80) + net debt (30 - 10)
Multipleexpansion.com has been making the rounds, and has a good LBO overview.
It's Version 2 (slightly modified).
Uses: Equity: 80 (stock you have to buy) Repay debt: 30 (debt you need to pay back) **Total: ** 110
Sources: Debt: 55 (cash you need from bank. has to be equal to 50% of total uses) Cash on BS: 10 (cash in their bank available for transaction) Equity: 45 (cash you need to put in) **Total: ** 110
Version 1 is correct.
We have the uses of 100 as: 1. Equity= 80 (To pay the existing shareholders; 50 through equity proceed and 30 through debt raised) 2. Debt = 30; (Assumed to be repaid by using existing cash of 10 and 20 through debts raised) Total = 100
Sources for 100: 1. Equity = 50 2. Debt = 50 (20 will be used for repaying existing debt and balance 30 will be used for further recapitalizing)
Hope it helps !
Sorry foffy, but this couldn't be more wrong. Don't use this response. Biggest error is his total uses (80 + 30 = 100??). I have a feeling you haven't done an actual lbo model before.
My response is 100% correct.
Hi Exlurker,
You need to understand the following before any further comment: 1. Meaning of net debt 2. Meaning of Total Uses [which means using the source of funds for equity and existing net debt; which are 80 + 20 (i.e, 30-10) =100 ]
Hope to help you further, if required :)
I know i am getting MS here, but look at the SOW LBO guide: http://www.streetofwalls.com/wp-content/uploads/2013/12/LBO-sources-and…
Cash on the balance sheet is considered a source of cash. foffy meant no disrespect, but net debt isn't typically considered a use of cash (only the debt portion is). When an actual transaction occurs, the flow of funds works such that cash on the balance sheet is used to finance the transaction.
total uses = total stock purchased (80) + total debt refinanced (30). Since the total uses is 110, the new debt needs to be 55 (50%).
It's the same thing, really. Splitting up debt and cash instead of a net debt figure might make cell referencing more convenient in your model.
Yes I agree. For a better clarity, we can show debt and cash separately instead of net debt figure.
Thanks for your help! I talked again to some colleagues and agree that its basically the same thing. In our models we usually show debt and cash separately.
Don't listen to any of the above. Never seen an LBO where the sources and uses treats debt as "net debt" in either the sources or uses boxes- highly impractical when it comes to doing your debt schedules / calculating forward cash balances based on a minimum threshold.
Version 2 is correct, assuming there is no minimum cash balance (unlikely in any real-world business) and you can apply the full cash balance towards the transaction.
Both 1 and 2 are correct, it's just different optics of whether you want to show the uses with EV or equity value. But in both instances, the sellers are receiving $80 of cash, the existing debt holders are receiving $30, and you're using $50 of new debt and $50 of new equity (plus the $10 cash of the b/s).
LBO Structured as Asset Acquisition - Sources and Uses of Cash (Originally Posted: 04/05/2018)
I'm working on a basic LBO practice model and one of the assumptions is that the acquiring company is acquiring the selling company through an "asset acquisition". In this case, would you generally assume that the acquiring company is assuming all of the selling company's assets AND liabilities? Or would you assume that the acquiring company is solely purchasing the assets? I know that these transactions can be structured either way, but I'm wondering what would be the norm.
In the case that the buying company is not assuming any liabilities, how would you handle current liabilities such as accounts payable? Would these be $0 on the purchase date?
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