Help with Sources and Uses for Cash Free Debt Free LBO Transaction
Simple question that I think I'm getting unnecessarily confused on.
Say a company is to be acquired for $10 a share (currently trades at $8, so 25% premium offered). There are 10mm shares outstanding (so buyer's offer implies a market cap of $100mm) and has $50mm of debt and $25mm of cash. EV = $125mm.
What is the significance of if this were to be acquired on a cash free debt free basis versus non-CFDF? I assume buyer doesn't pay $10 per share to each existing shareholder if they don't get to keep the cash. So what is the actual consideration provided in a CFDF transaction? I've heard and it seems intuitive that buyer always pays the EV for a business ($125mm, i.e. MCap + Debt - Cash = EV, but if you get rid of Debt and Cash, then MCap = EV) but I can't for some reason wrap my head around the sources and uses.
Could someone help me with a detailed sources and uses in both cases?
Scenario 1: non-CFDF transaction (this is how many models online are setup as)
New LBO Debt $50mm
Cash on BS that Buyer Keeps $25mm
Sponsor's Equity $80mm
** Total Sources $155mm**
Buyer Offer to Purchase Shares $100mm LBO Debt $50mm
Sponsor's Equity $80mm
** Total Sources $130mm**
Purchase of Company $125mm EV is what is actually paid to seller?
Financing / TXN Fees $5mm
** Total Uses $130mm**
Above are clear cases where Net Debt is positive. What about if there is cash above the debt (i.e. net negative debt?). How about if it's a negative EV busineses (i.e. say it was $100mm market cap, $50mm in debt and over $150mm in cash? How does the "seller/buyer" dynamic change in CFDF transaction where you would assume the seller to take the dividend out of the business?)
bump
For your example, case 1 is the most common method, but its really more complicated than that when you get into the technical stuff. For cases where there are net cash balances, typically you see a "dividend" paid to the shareholders before the transaction closes to clear any excess cash. Also, your sources and uses don't balance or add up properly either in case 2.
Flow of funds is really interesting when these cases happen. What you will see is generally short term funding to extinguish outstanding loans if there is net debt, so that the actual entity comes CFDF. The other thing you will get into is working capital adjustments, which for example if the owners when paying that "dividend" decide not to pay any suppliers or decided to pay out way more cash than you can run the business operations, its all part of the negotiation.
Thank you George, that makes a lot of sense. I guess what I'm trying to understand is the pure "technical stuff" you are talking about that happens in a transaction. In regards to Case 1 and Case 2 above, they are actually the exact same (i.e. showing cash as a source and pay down of debt as a use is same as just showing the EV as a use. So I'm just trying to understand...what changes when we say "CFDF" or not.
That's where my confusion lies - I'm trying to understand a way to always have a S&U template setup so that it balances regardless of whether company has excess cash or positive net debt, is public or private, and also understand when you have a SPA, when it says "purchase price of $X, on a cash free debt free basis", if that is referencing the EV being offered (i.e. seller receives $X from buyer, but also keeps $Y of net cash on the BS), or if that purchase price is actually already factoring in the cash (i.e. buyer has offered $X purchase price, which includes seller keeping $Y cash).
Yes, I know what you are trying to get at, and the short answer is that it gets very complicated very quickly. For the purpose of modeling, I would say the best thing to do is set up your sources and uses so that the totals reflect your total deal value, which I would basically say equals your EV + Fees + any working capital adjustment. If you are trying to have a one-size-fits-all approach, include all cash and debt on the balance sheet and include it in both sources in uses so that it ultimately nets out. Your uses will be the enterprise value, and you can determine the sources, which could include balance sheet cash, rolling debt, in the event its not a CFDF transaction (i.e. your source for existing debt is existing debt), or whatever the required new capital may be.
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