cash-free debt-free basis
I know this has been posted about before but I still can't make sense of this. I am working through the PE guide's Full LBO model Example 2. In the prompt, it is written that the deal will be done on a cash-free debt-free basis. The EV of the Target is 325, and debt prior to transaction is 100 and cash is 40 in the Target.
Other assumptions:
- Minimum cash = 5
- Advisory fees = 20
- Financing fees = 4
- New debt as part of LBO = 207
- Sponsor equity = 158
What I don't get is the answer key's S&U table. It looks like this:
Sources
- Debt = 207
- Cash acquired = 40
- Sponsor equity = 158
Total = 404
Uses
- Min cash = 15
- Purchase price = 265
- Extinguish debt = 100
- Fees = 24
Total 404
Question 1: In what way are the sellers getting the excess cash here? why call cash "cash acquired"? isn't the cash given to the sellers?
Question 2: what is the difference between the debt free cash free value and EV?
Cash is given to sellers by a higher equity price. If cash was 0, equity price would be lower as well (now 265, in case of 0 cash-> 225).
Min cash in assumptions is 5 and in uses 15 ?
Update: corrected 2 figures.
Rover-S
Could you help explain why here we calculate purchase price as TV - debt + cash whereas in this post (https://www.wallstreetoasis.com/forums/sources-uses-private-co-lbo) it was calculated using TEV - debt but could still use B/S cash on hand as a Source? Having some trouble understanding this. Thank you!
Because there is some confusion there whether that cash is already included in that 33m offer or not (is that an equity price (=purchase price) or and debt-free TEV offer?). What you label as TEV was actually purchase price it seems. There are just 3 options for this:
Option 1 Uses: EV + cash on BS target + buyer costs Sources: buyer debt + buyer equity + cash on BS target
Option 2 (same result as option 1) Uses: equity value (includes target cash so is EV minus net debt) + gross debt Sources: buyer debt + buyer equity + cash on BS target
Option 3 - Seller takes cash Cash is taken out by seller before transaction and we can just use EV + buyer costs as uses and debt + equity for sources.
Step-by-step approach: 1. determine EV (i.e. 100) 2. determine gross debt of target (i.e. 50) 3. determine cash of target (i.e. 15)
Seller must receive 100-50+15 in this case. Equity of buyer is the plug to let S&U balance.
It's the same thing as 0 cash and a lower purchase price. You can just assume that. To the above response I think you mean purchase price 225 vs 265 (the sponsor infusion doesn't change from 158).
If the EV is $325, then subtracting net debt gets you equity value of $265. This is what cash free debt free is, that no matter what changes with your debt and cash between now and transaction close, your equity value will remain $265. This answers your question #2, that net debt is the difference so you need to calculate equity value.
For question 1, remember that the sources and uses is for the EV, not equity value. So you need to include the cash (source) and payoff debt (use) as uses of the EV. These are correct sources and uses:
Sources Cash on B/S 40 New Debt 207 Sponsor Equity 158 Total: 405
Uses
Min Cash 15 Advisory Fees 20 Financing Fees 4 Refinance Debt 100 Acq of Equity 265 Total: 404
They are $1 apart presumably because of a typo you made or rounding of decimals.
So can one ignore debt and cash from the balance sheet when given in the case outline cash and debt free assumption?
No. Because your sources and uses are on EV, cash on b/S and payoff debt are two items that bridge the equity value (cash free debt free) and EV. See my sources and uses above, neither was ignored
ok perfect, fully understand. have entered the repaying existing debt into uses, however in the case i have just been given “net debt, consisting of mainly debt” and no cash figure - so correct to leave out of sources?
Another question: min cash in my case is 5m, no cash given so including min cash 5 in Uses.
in case cash would be given, i would calculate excess cash by cash on BS - min cash correct? Thank you so much
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