My question is regarding the structure of an LBO for an investor when they buy a controlling stake. I.e. over 50% but not 100%
For example: Assume a PE firm plans to buy 65% of a company.
How do you calculate purchase price, sources of uses etc? Is it still the same process as buying 100%? Or are their accounting differences?
Purchase price: Do you just assume 65% of EBITDA * purchase multiple = EV? How should you view debt / cash, when calculating equity value? Should you also only account for 65% of that?
Sources / uses: Similar sort of question. If there is cash on the balance sheet of the target, do you assume you get 65% of that cash, and hence can include it in your sources table?
Any insight would be much appreciated.
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
Really informative response. Thanks!
Thanks so much for this! Very helpful
Thank you! Would this also be the case for a minority stake purchase, lets say 35%?
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