Lbo sources and uses question
Weird question phrased in a case study I got: You get: 2x worth of revolver with 3x capacity 2x worth of sub 1x cash equity from sponsor granting sponsor 80% ownership .25x rollover equity (non-cash) granting this portion 20% ownership Assume no cash and no debt on purchased company Further, you have transaction expenses that are an additional draw on the revolver and a small amount of finance fees. I'm confused on what this prompt wants as there ends up being more sources than uses as the .25 rollover exceeds the transaction expenses and financing fees. Any ideas on what I should do? It doesn't seem like they want me to use the sponsor equity as a plug like I'm used to.
Rollover equity is both a source and a use. Easier to contextualize with actual numbers instead of turns here. Lets say its a $100 EBITDA asset, in this case trading for 5.25x (ignoring fees for simplicity here)
Sources:
Uses:
Math works out on the equity ownership. $125 of total equity, Sponsor cash of $100, seller rollover of $25 (20%)
Outside your question, pretty unique cap structure. ~75% debt to cap for an extremely weak multiple. Probably some sh!t asset-heavy industry in decline company, imagine the RC is ABL and the "sub" is some sort of split lien opportunistic direct lender tranche.
Hope this is helpful. Good luck!
Thanks!
Just a couple of clarifying questions, the prompt indicated that the sponsor was willing to pay 5x total for the business which is where the confusion over the .25x extra came in. Further, still not seeing where the fees and such would come out of. I'm assuming draw down further on the revolver for the transaction expenses but not sure what to do with the financing fees as every other source is capped with a multiple.
Finally, am wondering if you always use management rollover as both a source and a use as I have never seen it in both before.
Sure thing. Depending on how the deal is structured the transaction fees (i.e. M&A advisory, 3rd party diligence, legal, etc.) and financing (upfront fees, arrangement/underwriting fees, OID, etc.) would either need to be netted out of the proceeds from the debt issuance or an incremental borrowing.
Example netted out of proceeds ($15 transaction fees, 50bps upfront on RC, 97.0 OID on sub) with the sources "capped"
Sources:
Uses:
re; management rollover - I have seen it only as a source when the purchase price on the uses side of the table is not broken out (i.e. instead of $500 cash proceeds to seller + $25 seller rollover, $525 total purchase price) but I have never seen a situation where it is only a use and not a source? If the seller is rolling equity, not sure how it wouldn't commiserate reduce your "sources" as it is less of the total consideration you are paying in cash.
Doesn't it say the fees are an additional draw on the revolver? They've basically simplified it already for you. I think that's why they have the additional capacity on the revolver
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