Ownership of bolt-on acquisitions in an equity-roll scenario
Looking to clarify whether my understanding of how equity value is split between a sponsor and vendor in a scenario where the vendor rolls equity in the initial platform acquisition and then the platform makes a bolt-on acquisition.
Platform Acquisition
- Assuming post-transaction ownership of 80% sponsor and 20% vendor
- The platformco has access to an acquisition financing facility to finance bolt-on acquisitions up to 50% of their purchase price
Bolt-on Acquisition
- Financed with: 50% debt, 10% sponsor equity, 40% excess cash available from platformco
As the acquisition facility and excess cash are at the platformco level where the sponsor owns 80% and vendor owns 20%, is the following ownership in the bolt-on accurate:
- Sponsor: 40% (80% of debt) + 10% sponsor equity + 32% (80% of excess cash) = 82% ownership
- Vendor: 10% (20% of debt) + 8% (20% of excess cash) = 18% ownership
At exit, assuming both companies are sold together at the same multiple, is it accurate that a simple split of equity value would be calculated by multiplying the exit EBITDA of both the platform and bolt-on by the exit multiple, calculating down to equity value and allocating based on the % ownership of the platform and bolt-on separately?
Would something like this be done in a real scenario?
I think we’re getting to the same place, but ownership is only based on equity. So if the total equity in the company is $100mm (80/20 sponsor/seller), and then a bolt on is funded with $10mm additional equity paid by only by the sponsor, then the new ownership would be $90/$20 or 82%/18%. That also implies the new equity is funded at the same share price as the existing equity. This bolt on would be 100% owned by the platform company, and all equity ownership is for the platform. Same way you don’t buy stock in one division of a public company, you’re just buying a share of the whole thing.
At exit you just sell the platform / entity that owns all of the operating companies, and proceeds are distributed based upon ownership in the platform.
You would normaly see anti-dilution wording in the shareholders-agreement: every shareholder is asked to contribute to its pro-rata stake when additional equity for add-ons is needed.
That makes sense. In a case where the sponsor is willing to contribute “growth equity” for an acquisition pipeline (multiple acquisitions) where the vendor doesn’t have funds to contribute pro rata, would such a dilution occur? It may be pointless to theorize as the structure/dilution would be addressed by the parties when the matter arises and is probably unique in most situations, just wanted to get some perspective from those who may have experienced this.
First scneario: yes they would dilute (but still benefit from the multiple arbitrage for instance)
Vendor with roll-over often preferes a line of pref shares/mezzanine from the PE party so it does not have to contribute equity in case of acquisition. Makes its equity 'sweeter' with every acquisition.
This would be stuff you agree upon before transaction, because it can make a material difference (also voting rights would probably dilute, leaving the vendor with less and less grip on corporate affairs like budget and other major decisions).
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