Urgent Comprehension Question LBO
Hi. Trying to understand exit calculations; esp. why some models not deduct the full net debt amount at exist (incl. pensions, NCI etc.) but only the new sponsor debt
- Entry Net debt consists of bank debt and pensions / cash. Pensions are rolled over in the S&U - do you have to deduct these from sponsor exit proceeds?
- Entry net debt consists of bank debt, pensions, accrued liabilities / cash. Pensions rolled over in S&U, do acc. liabilities have to be rolled over when leaving constant on the BS? Do we have to substract at exit?
PUSH
I don't think many of your modeling tests will include things like pension liabilities - maybe at a megafund, not sure
Can always be part of the CIM you have to model....
The entry net debt is immediately relevant because the sponsor seeks to refinance it. Arguably shortfall (underfunded) pension obligations should be considered "debt"-like but even then, it is, as with other things such as accrued liabilities, "assumed" to remain on the balance sheet PF.
This is correct. When you buy a business, there are seller liabilities that must be paid off at close, and which are generally funded with the buyer's purchase capital. These would include seller's net debt, seller's transaction expenses.
In diligence, buyers will often identify items which they don't want to pay for - for example an underfunded pension liability. While the pension will most likely not be trued up / funded at close, the buyer will "dollar-for-dollar" reduce purchase price by the amount of these "debt-like" items.
For liabilities that are satisfied, the buyer is indifferent - you either are paying the seller, or paying the lenders / the transaction expense vendors - either way you are funding purchase price. For PP reduction debt-like items, the buyer gets a benefit by having a lower total funding need (reduction in price to seller), but also assuming the liability.
The theory behind why buyers can reduce purchase price for these liabilities is that all buyers will do it - so while you get a benefit on entry, your exit value gets reduced on the other end. So to your question, at exit, you would deduct any remaining debt-like liabilities right off of received proceeds.
Pension liabilities in some jurisdictions have to be bought out by the sponsor, e.g. in the UK...
And at exit, these pensions are then deducted, so lowering sponsor exit equity value correct
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