How to model an LBO with minority stake
What would you do in the case where a financial sponsor makes a minority investment? What is the equity contribution amount? This is assuming the management team stays on.
For instance, if a PE firm buys a 30% stake in a company, requires the firm to take on bank and mezz debt and also makes the management team stay on, would the equity contribution equate to the 30% cash/equity from the financial sponsor + the book value of equity from the existing ownership team (staying on)?
Anyone?
if I'm understanding your question, here's how I'd think about this...
normally, if PE firm acquires all equity, they repay old debt, buyout all old equity, put in new debt, put in new equity (some other smaller steps can apply)
the difference here would be that not all of the old equity is bought out. they'd still repay old debt, and use new debt issuance to reduce some existing equity, but not all of it. equity contribution is 30% of total equity valuation (I don't think you'd add 30% of book value - you would just increase total equity balance such that the sponsor has 30% of the diluted equity pool -that would balance with the cash that the firm receives for the equity stake).
bumping; how do the debt assumptions work in this case?
ie; does one still assume they can lever the company?
Sure. Why can't they? You can almost think of it like a div recap with the PEG contributing to the deal.
Would the pe firm in question acquiring a minority stake have to have covenants with respect to the debt to be added? How do they go about "controlling" that aspect of the company when they don't have a control stake?
How do you mean? What is there to control? The PEG has a minority equity stake. I would assume they are more interested in board seats than covenants on debt.
Hi, I have a similar question to the above user.
If the PE investor only has a minority stake, how do they make the company take on debt and lever up? Wouldn't that only be possible if the PE investor has a majority stake and gets to control the company's financing decision?
Also, when you say dividend out, do you mean that the company takes on the debt and immediately dividends it out to the PE investor? Or does the PE investor directly take on the debt to fund the acquisition instead of making the company take it on? (not sure if this gets onto the legal structure aspect of deals..)
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