Interesting question reg. Net Debt / Sources & Uses
Hello,
Interesting problem I encountered. In a CIM, there is the Net Debt overview, including items like cash and Liabilities to bank Plus debt like / cash like items; e.g. accrued portion of arrangement fee (to be repaid upon closing), accrued interest (for bank financing), shareholder loans (I assume the old sponsor equity; it says settled upon closing - why is this counted to net debt if its equity?), fair value of land & buildings.
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Do you include all of these in the EV to Equity bridge in determining the purchase equity in LBO? Or just the ones not refinanced?
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Sources & Uses: How to do sources uses? Put all these items in? Only cash and debt?
Someone told me to "roll over" debt and cash like items.
Approach that I am currently following: Calculate full ND, and put this ND figure in Uses. No cash on sources side.
Please help me, very confused.
LBO's are done on a "cash free / debt free" basis, meaning the buyer ignores the capital structure of the business pre-acquisition and puts in a new one, including cash. What that means practically is the buyer requires the seller to repay all debt and debt-like items at the closing out of the seller's net proceeds, and then the seller gets additional proceeds for balance sheet cash.
What that means is you can ignore all of the items you mention above in your sources and uses as they are all debt or debt-like items, absent fair value of land and buildings. Arrangement fees, accrued interest, shareholder loans will all be cleaned up at close and the buyer won't fund the clean up - they are the seller's net debt at exit. Note this is also how seller transaction fees are also treated - netted out of seller total proceeds.
Buyer's sources and uses should remain simple - total purchase price (we don't care how this gets split between seller proceeds and paying off seller's liabilities), buyer funding sources and buyer fees.
Caveat on the FV of land - the reason the CIM has highlighted this is because the seller has probably identified that its owned property has value beyond what's on the balance sheet. The bankers are likely asking buyers to "top up" purchase price for this value - if the business is worth 8x and the FV of the property is $20mm, they will want to get paid 8x + $20mm. If you are doing a case study it wouldn't be the worst thing to say you considered this in your valuation.
Thank you very much.
So you are suggesting, putting the EV (entry multiple x EBITDA) in Uses, and not splitting between purchase equity value and refinancing debt; like in nearly all case study models?
Transaction fees: you mention that they are also treated by that; however I have leaned to put the transaction fees in Uses?
FV of land: So I should add this to what? If i put EV in uses, does not make a difference?
Why not roll over the other items?
Cash on BS in Sources / Minimum cash in Uses?
Example:
EV: 500
Liabilities to bank 50 Accrued arrangement fee 10 Accrued interest: 10 Shareholer loans: 30 Cash 10 FV of land (treated as cash): 20
Equity value: 500 - 50 - 10 - 10 - 30 + 10 + 20 = 430
Min cash: 5
S&U
Uses:
Purchase equity value: 430 Refinance debt: 50 Min cash 5
Sources:
New debt: 300 Cash on BS: 10 Sponsor Equity: 175
Thank you in advance for your help
What about pensions?
Never pay for FV of land/buildings!!!
If the land/buildings/PPE are required to achieve EBITDA (i.e. a factory if you produce coockies), than it has 0 value in excess of the cash flows the company can generate with it. Don't pay extra for it as the cash flows do not provide the required return in that case.
Love the passion!
Unlocking property value is a strategy PE firms employ all the time, often in the form of sale-leaseback transactions. You make a good point that I missed in the original write up - you should adjust EBITDA down by pro forma rent before giving value to the property.
Agree! Buy the company for 6x EBITDA and sell the property for 15x rent :)
If the seller is required to repay all debt and debt-like items, why is refinancing of existing debt included in Uses, and thus the sponsor has to raise funds for it?
Based on some of the feedback in this thread I guess the practice models you are doing have you include a breakout between seller proceeds and repayment of seller liabilities in uses. However, from a buyer's perspective, the split doesn't impact your sources and uses.
Example 1 Value Business at $500 It has $200M of debt and other "Seller" liabilities Value to Seller of $300M Total Uses - $500
Example 2 Value business at $500 It has no debt and other liabilities Value to Seller of $500 Total Uses - $500
Either way the buyer is coming up with enough capital to fund the value of the business, and receiving a liability-free asset.
By the way, you can ignore all of this if we are talking about a take-private. In that case equity value is not plugged from TEV, but the reverse, so you care about the liabilities that need to be satisfied.
I'd do as follows:
EV: $520 (uptick of $20m for land)
Sources:
Debt: $300
Sponsor equity: $225 (plug if debt is set at $300)
Total: $525 (EV + min cash to NewCo)
Uses:
Purchase of equity: 430 (520-50-10-10-30+10)
Repayment of debt: 90 (50-10-10-30+10 i.e., net of cash)
Min cash funding: 5
Total: $525
Rover-S As you seem very knowledgable on this topic, could you help?
Confused about the S / U ; what to put in Uses (Purchase Equity Value), Refinance Debt ?
As mentioned above: put enterprise value + your costs in uses. Enterprise value will then be divided between seller's bank, seller's advisers, seller's equity holders, etc.
Your purchase price = Enterprise value minus YOUR bank debt you raise for this transaction. Has nothing to do with existing debt.
Debt-like items can be rolled over (pensions for instance, depending on applicable legislation). In that case both source and use, but lower the equity price for sellers, so again already in EV on uses side and addition on your sources side. However, should be added to debt to determine your exit proceeds.
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