So currently I am working on completing a DCF model for a Canadian-based SaaS company. I can't figure out how to model the debt primarily because of little to no guidance provided by management regarding how they use their revolving line of credit. The firm currently has no debt but has access to a $150 million line of credit which they primarily use for acquisitions (the firm is known for their M&A pipeline; spent approximately $80m on acquisitions over the past 4 years). Their trend of drawing on their line of credit is super inconsistent: when they made $120m worth of acquisitions in 2015, they withdrew nothing, but in 2016 when they spent $72m, they withdrew $10m and paid that off by the end of the year. For my model, currently I have projected a total of $160m worth of acquistions for 4 years in the future, all of which is financed by the firms cashflow (no debt). My questions are: - If I do need to model debt, how would I approach this (already read the annual report and earnings call transcript)? - Should I stop focusing on the debt element and assume that the firm would not draw on the line of the credit?
Any and all help would be appreciated. Thank you.
I think you're going about it the right way which is to go through MD&A and listen in on analyst call's to see if there's any guidance. If nothing, personally I'd model in the revolver to finance acquisitions. and ensure a debt pay down with excess cash. Model a toggle that allows for the use of debt or cash for acquisitions this way you can run a sensitivity.
If this is only for DCF reasons you could see the impact of with or without debt and see if it's material or not.
I am trying to model the revolver as well but I am so stuck on it. Like there is literally no guidance regarding an optimal cash balance after which they draw on their credit line. I dont think its a good idea to model the revolver such that the entire acquisition is financed by debt because that would seem so impractical since the firm is so cash-rich it can acquire target firms without relying on debt at all (as my current model shows). Your sensitivity suggestion is a good idea - running a sensitivity on the % of debt used to finance acquisitions would give me better insight imo.
If you;re doing an unlevered DCF, there is no need to model in any debt changes.
Thats true. For now I am just trying to project the 3 statements. Its for an initiating coverage report I am working on for a finance club but I wanna be as thorough as I can to show that I know my shit
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Not working on Shopify.
There is more than one Canadian SaaS company?
Two things:
Projecting acquisitions is really tricky because a) you have no clue what they're planning on doing, b) external forces may speed up or slow down their processes, and c) you'd have to model in the impact to the three statements (as well as any synergies) and that's going to be pointless since you don't have any idea what company is being acquired even in three months.
You're mistaking complexity for being impressive and likely sacrificing accuracy for precision. One of the first deals I ever did at work was a series c investment in an IoT company. Really cool product and the idea was that you could put sensors on pretty much everything and collect a ton of really valuable data to use and sell so I built that model out based on number of endpoints across 8 different places you could put the sensors and then broke out all of the initial revenue items and then all of the recurring times. I ended up with a model that had like 9 boxes that summarized the growth, endpoints, revenue, COGS, etc. After spending a couple hours debugging the damn thing, I rolled it all into the valuation and sent my results off. We ended up passing. Well, 6 months later we got more info and were offered another chance to invest. Boss tells me to update the model with the new deck but they didn't give us nearly as much detail as before and what I was given was way off where they thought they'd be. The model I'd built before was worthless. I explained the situation to my boss, switched it to growth rates, and he was fine with it. Switching to growth rates took less than an hour and I got to the same result as a model that would've taken all day to fix.
All this is to say that it doesn't matter how complex something is if it's for a projection because it's just a guess and trying to make little adjustments to the FS isn't going to make you more accurate.
Also, only pull on the revolver if you hit a min cash balance. It doesn't matter if you pull on all of it or none of it, just the number at the end of the year. The only consequence would be your interest paid but that should be really small and won't have any meaningful effect.
Thanks for the thorough reply. I understand that sacrificing accuracy for precision is not worthwhile. As for your last statement, I honestly wish I knew what the min cash balance threshold is. If I did, I could wrap up the model in a matter of minutes. The model itself is super simple but the debt aspect threw me off guard so I wanted to understand how one would approach a matter like this.
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