Price paid vs use/source of funds
Hi,
I am a bit confused. Say you want to acquire a company and that you value it at $50m (5x LTM revenue, the EV correct?) which has $10m of debt and $5m in cash.
The TEV is $50m, the Equity Price is $45m.
Would the purchaser pay the TEV or the Equity price? What are the implications?
To add to my confusion : say purchaser pays the Equity price, the use of funds will be : $45 (equity) + $10m (debt) while the source of funds will be $5 (target cash) + $50 (equity). So the table will show $55m on both sides. Does that means the transaction costs the buyer a total of $55m and not $45m?
How different would the situation look if using the TEV as a starting point instead? Would the transaction be cheaper?
What to choose if the buyer wants to go for a cash free/debt free transaction?
Thanks!
For cash free debt free transaction you are right on sources and uses. It would "cost" the buyer $50m or the TEV.
Sources: $5m target cash, $50m cash from sponsor
Uses: $45m cash to sellers, $10m debt paydown
Now, it would only cost the buyer $50m if they funded it all themselves. Let's say the company you are acquiring has $5m of EBITDA. In that case the sources & uses might look like the following:
Sources: $5m target cash, $20m cash from sponsor, $30m newly issued debt (6x EBITDA)
Uses: $45m cash to sellers, $10m debt paydown
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