Majority Stakes in LBOs
I have a question regarding a LBO acquisition of a majority stake (>50%, <100%), i.e: 51% . Most of the models out there are built on a 100% basis...
- What happens with the sources and uses (Purchase price, debt, Fees, equity..)?, do you account for just 51% of the purchase price?.
- How does it affect the calculation of Goodwill compared to a 100% stake acquisition.
Would it be correct to assume everything: purchase price, sources and uses, equity and Goodwill at 100% basis and only adjust for the acquired stake at the very end just for return calculations?.
Any insight would be much appreciated.
Anybody knows the answer?
Thanks in advance!
Yeah I think it's fair to do what you did - assume 51% of equity at exit. If this is for a modelling test then as long as you stake your generic assumptions upfront, you should be fine. If this was for a transaction then of course it will need to be more nuanced.
You'd account for the minority stake in the sources as well, depending on if it's seller rollover or coinvest or whatever. It's just another line in addition to "sponsor equity." Everything else should work the same as a 100% deal.
Thanks for your answers, they were really helpful.
Hi James, someone had a similar question a few months ago modelling 65% stake in an LBO. I am pasting my reply to that post below. In summary, if all holders rank pari passu and there are no differentiating features in your respective economics, always work everything out @ 100% and then use the size of your specific stake to work out your specific return.
Here is what I wrote in response to modelling 65% stake in an LBO.
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For an LBO where investors do not purchase 100% equity, it is best not to pro-rate anything until the very end.
A quick word of warning relating to your question whether this will hold: 65% of EBITDA * purchase multiple = EV. No matter what stake you are buying, 1% or 65%, all purchase prices are always worked out on the basis of 100% EBITDA and 100% net debt. Then you get to 100% EV and figure out your 100% equity. Only then do you multiply 100% equity by the % holding you are buying to determine what amount you will be paying at entry.
In your example, 65% shareholder is majority, so presumably they will be driving capital structure at the time of purchase. Therefore, all leverage assumptions can be made in the same way as for 100%
Calculate IRR and MM at exit in the same way as for 100% transaction. Unless there are structural features that differentiate economics between 65% holder and other shareholders, the returns should be the same for all same-ranking shareholders invested in identical instruments
At the very end, calculate economics of 65% holder by assuming that a) money out will equal 65% of total equity at entry; 2) any interim distributions will be 65% of all interim equity distributions (for example from recap); and 3) at exit the holder will get 65% equity proceeds.
Good luck,
Tamara
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