Calculating Value of Warrants at Exit

Quick question guys,

I'm working on an LBO of a private company that involves sub debt (11% cash coupon, 1% PIK, and penny warrants for 2% of the fully diluted equity). The deal also includes a management option pool for 10% of the business. I'm currently calculating the equity value at exit and while I know how dilute the equity value for the management option pool, my question is whether or not the calculation to dilute equity for the penny warrants should be done the same way? If not, I would greatly appreciate if you could tell me how to dilute for the warrants.

Also, does the equity value have to be diluted for the management options before the diluting for the penny warrants? Or can they be done simultaneously?

Thanks.

 

It depends on how the legal docs are written. I think it's more common to have the warrants kick in after diluting for management options but think I've seen it done the other way before, too. If I were you, I'd take a look at the docs and/or ask your counsel.

 

Hi there, I know this was posted a whille ago but trying my luck.

I am preparing for a LBO modelling test, i've seen assumptions for the mezzanine debt given as 20m with 12% intrest and +2% warrants.

Throughout the investment period, do these warrants affect the modelling at all (3 statements)? does it appear in the debt schedrule? or are they off BS items?

or is it at exit, when I am computing the sponsor equity that I need to remove the 2% of EqV, as In EgV to sponsor and managment =100%-2%, then assuming management equity of 3%, EqV of Sponsor will be 98%*95%*EqV at exit?

Grateful for any help!

 

attract21

Hi there, I know this was posted a whille ago but trying my luck.

I am preparing for a LBO modelling test, i've seen assumptions for the mezzanine debt given as 20m with 12% intrest and +2% warrants.

Throughout the investment period, do these warrants affect the modelling at all (3 statements)? does it appear in the debt schedrule? or are they off BS items?

or is it at exit, when I am computing the sponsor equity that I need to remove the 2% of EqV, as In EgV to sponsor and managment =100%-2%, then assuming management equity of 3%, EqV of Sponsor will be 98%*95%*EqV at exit?

Grateful for any help!

Earlier this year I was working on a similar case study as the two mentioned involving substantially similar penny warrants. Anybody have any tips on how to handle these in the S&U and returns analysis? I’m not familiar with penny warrants in practice and still can’t seem to dig up much information from a modeling context. I’d be very thankful for any guidance.

 

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