Hello! I'm interested in a more technical transaction question typically seen in growth equity cases. Would be incredibly helpful to get some experienced thoughts.
Let's say the company as of closing has 100m PF net debt. Let's say the offer EV is 10x 100m fwd EBITDA = 1,000m. The minority investor invests 200m primary, and 100m secondary for a total ticket of 300m. Let's also say that as part of the transaction, the company takes on 400m debt, and that transactions costs are 10m.
EV: 1,000m
- Pre-money EqV: 1,000m-100m=900m?
- Post-money EqV: 900m+200m=1,100m?
This implies (200m+100m)/1,100m=27.3% ownership of investor at entry (assuming no discount for the secondary and they're done at the same time)? But, shouldn't we factor in the acquisition debt here to fully bridge from EV to EqV? Said differently, isn't the actual post-money EqV 900m+200m-400m=700m? The more debt is used here, the more the post-money EqV decreases, which leads to lower prices per share. That seems counterintuitive, as I wouldn't understand why existing shareholders (doesn't matter whether they're participating in the capital increase or not) should have a lower equity absolute value post transaction?
Separately, what would be the correct sources and uses in this example?
Sources total: 1,110m
- Company roll: (1-27.3%) * 700m = 509m
- Investor equity: 27.3% * 700m + 10m = 201m
- Acquisition debt: 400m
Uses total: 1,110m
- Company equity: pre-money EqV = 900m
- Primary: 200m
- Transaction costs: 10m
Thanks in advance!!
Based on the most helpful WSO content, here's how to approach your question:
Pre-Money and Post-Money Equity Value:
Pre-Money Equity Value:
Pre-money EqV = EV - Net Debt = $1,000m - $100m = $900m.
Post-Money Equity Value:
Post-money EqV = Pre-money EqV + Primary Investment = $900m + $200m = $1,100m.
However, your concern about factoring in the acquisition debt is valid. If the company takes on $400m of new debt, the net debt increases, which impacts the equity value. Adjusting for this: Adjusted Post-Money EqV = Pre-money EqV + Primary Investment - New Debt = $900m + $200m - $400m = $700m.
This adjusted post-money EqV reflects the increased leverage, which reduces the equity value. The counterintuitive nature of this result stems from the fact that the new debt increases the company's obligations, reducing the residual value available to equity holders.
Ownership Calculation:
Investor Ownership = (Primary + Secondary) / Adjusted Post-Money EqV = ($200m + $100m) / $700m = 42.9%.
This is higher than the 27.3% you calculated because the adjusted post-money EqV accounts for the new debt.
Sources and Uses Table:
Sources:
Total Sources: $1,100m.
Uses:
Total Uses: $1,110m.
Key Takeaways:
If you have further clarifications or need deeper insights, feel free to ask!
Sources: Pre-money vs. post-money valuation and Modigliani Miller, Sources and Uses statement - private LBO model, M&A Question Asked by PJT London, What is paid for an aquisition - EV or Equity Value?, How Private Equity Owned Companies Fund Add-Ons
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