PE interview question: sources & uses
Assumptions: Entry multiple: 8.0x EBTIDA: 40m Debt: 60m Non-controlling interest: 10m Unfunded pension liabilities: 10m
New debt: 160m
What is the required equity contribution? Please create a sources & uses table and assume you roll over pension liabilities.
Follow-up: If the shareholder/founder wants to roll over a 20% stake, what would be his equity value pro forma for the transaction? In this case, what is the required equity cheque by the existing shareholder/founder?
sinsinsin, sorry there are no responses yet. Maybe one of these topics can point you in the right direction:
Fingers crossed that one of those helps you.
Did you figure out the answer?
Wondering as well
push
Uses Equity purchase price (8*40-60-10-10) = 240 Debt repayment: 60 NCI: 0 (NCI will roll over) Pension: 0 (will be paid at certain moment in time through cash flow but does reduce equity purchase price now)
Sources New debt 160 New equity: 140
Roll-over 20%: 24020%= 48m Roll-over to retain a 20% stake: 14020% =28m
That is not correct, you need to solve for the Equity Value of NewCo ($150m), since that is what the Seller is looking for a 20% equity stake in. See below.
You buy out the NCI, I did not in my calc (as clearly mentioned). Stop giving monkey shit if you don’t get it.
I would agree with Rover-S
Based on my understanding of the follow-up question, equity stake to roll-over should be based of the equity proceeds to the seller, not the new equity value. The question does not say that the founder wants to invest 20% alongside new buyer but rather says that the founder wants to roll-over a 20% stake. To me this implies that the founder wants to roll-over his existing stake that amounts to 20% of exinsting equity.
OP's question was what is the seller's equity check to roll a 20% stake. Translation: what dollar amount would he need to roll in order to own a 20% stake in NewCo. This requires both Sources (NewCo equity value) and Uses (seller proceeds). Calculating 20% of existing equity value requires only Uses.
Rover-S did correctly calculate this (as did I) given NCI could be treated either way.
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OP's question states that the founder wants to roll over a 20% stake. This phrasing usually implies that 20% of equity owned by the founder before the sale is reinvested alongside a new buyer. Existing phrasing doesn't seem to imply that the founder will own 20% of equity when the buyer invests. I am not sure why you made such assumption
What happens if you have 20m cash as well?
i have exactly the same solution. MI and Pension is "rolled over" outside the S&U; both in my opinion are reducing equity to sponsor at exit, have to be deducted in the end.
Please correct if wrong
Pension is both a source and a use if you roll it - same as rollover equity.
I treated NCI as something that gets cashed out at close, doesn't roll. Probably missing some information here from OP that would suggest how this gets treated.
Pension and NCI could be settled from cash flow in holding period as well, but in principle you’re right. Tricky thing with NCI is that it can have consequences for your financing and that book value could hugely under/overestimate actual value.
so my solution is correct? friend working in PE told me to of course substract from EV to calculate purchase equity, roll over all these other debt items outside of s&u, and then deduct at end to artive at exit equity value
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