Ok.... so I need to talk this out loud followed by critique or confirmation of the validity of what Im doing.
Ok so TEV = Mkt. Val. Equity + Debt + Pref. Eqty. + Min. Int. - Cash
Fully diluted ShO: 10 million
LTM EBITDA: 100M
Purchase Multiple: 10x
Cash: 100M
No preferred, min. int. or debt
So Purchase price is 100 mln. x 10 = 1,000 mln., which is equal what you believe the firm's TEV is.
So add back the 100 million of cash you subtracted, and you have a MVE = 1,100? Correct? So no divide the MVE by fully diluted ShO, so 1,100 / 10 mln., which is equal to a proposed per share price of $110..... correct?
Ok, do you guys agree with everything up until here? Lets add in a monkey wrench. You expect to use $50 million of the company's balance sheet cash in the LBO. So your PF BS will show a 50 mln. decrease in cash and you'll have 50 mln. as a source of funds in your Sources & Uses table. So now you do the same exercise as outlined above, but you use a $50 million cash figure to calculate TEV and implied per share offer price. So now its $1,050 MVE, divided by 1,100 fully diluted ShO, implying you would have to buy the company out at $105 per share?
Agree, disagree? Thoughts? Do you agree with the method for dealing with using BS cash and the resulting impact to TEV and implied per share purchase price?
Lets try to limit responses to certified monkeys (Anthony, CompBanker, Mezz and MezzKat, etc...) to keep this thread on track and ensure the validity of the answers.
lol
You'll need to figure out if you keep the cash or not of the company and adjust it to an optimal level i.e. negotiate the cash you keep on the balance sheet.
However, assuming you keep and the cash on the balance sheet, you would basically just use less of the buyer's equity (source), but the purchase price would be the same and the seller gets his or her 10x. The total sources wouldn't change, just the make-up of where that money is coming from - $950 from the sponsor and $50 from excess cash. Uses would be $1000mm to buy the company.
This doesn't take into account a number of other considerations for sources and uses, etc.
First of all, I think your share price or shares outstanding # is wrong ($1,100/10 is not $11.0).
Secondly, whether or not you can use the company's cash on the pro-forma balance sheet shouldn't effect the price at which the existing shares (guys getting bought out) are valued. The existing shareholders are entitled to $1,100.0 (if the 10X EBITDA is what you're driving the EV off) no matter how much of the cash can be used to fund the acquisition. So your total uses (assuming no fees) are $1,100.0. If you can use $50 million of cash on the balance sheet to help fund the acquisition, then that will reduce the amount of money the sponsor has to raise by issuing debt or investing their own capital, but won't change what the existing shareholders are getting paid.
I'm certified -- am I allowed to respond or do I not meet your list of qualified users?
Sensitive much?
Thanks, Jim Brown.
Im just a but confused because Im coming up with a purchase multiple which gets me to TEV and then I'm backing out the implied share price to determine how much I would have to pay existing shareholders at that valuation. I guess it's easiest to think about this as a cash free, debt free transaction. But then should my PF Adjustments include debiting cash down to zero and crediting it with my desired opening cash balance? I know its a wash at the end of the day, but it sounds a bit awkward to me.
half those guys u listed never did banking at a bb
I don't think Anthony has ever done banking, not sure about the rest of his guest list.
So in an effort to help you think through this, here is how I would go through it:
You're valuing the company on an EBITDA multiple. It's an unlevered metric, so you're starting off with an enterprise value. From here, you're going after an equity value (also, purchase price) -- take your $1,000M enterprise value, subtract debt, add cash, and you have $1,100 equity value. Divide this by 10M shares outstanding, and you have an offer price of $110. So you're good here.
When you throw in the "monkey wrench," you're not really changing anything aside from the sources side of the S&U. Because you're acquiring the company, you're still acquiring their cash balance -- thus, it's still $110 per share. However, instead of paying $1,100 in cash for the company, you're paying $1,050 out of your own pocket -- $50 will come from the company's excess cash. But it does not change the fact that you are acquiring $100 worth of cash from the company.
Where complexities will enter will be in working capital negotiations and transactions structured as cash free, debt free deals. Later on in the deal process, when working capital negotiations begin, there will likely be a portion of cash that is considered necessary to "operate" the business. You can consider this portion of cash as "operating cash," and it will not be included in the calculation of enterprise/equity value (as it's part of the business). This will slightly reduce the equity value. In a cash free, debt free transaction (I've never seen this structure in a public deal, just smaller, private deals), enterprise value will be equal to equity value, and all cash and debt will be kept with the owners of the target and removed off the balance sheet (though often times, a piece of operating cash will be left on the balance sheet). I've also only really seen this in sponsor-backed acquisitions as opposed to strategic acquisitions, though I think that's just from my experience and is not indicative of what actually happens.
Also, sources would be (1) cash from acquirer and (2) excess cash. Uses would be acquisition of target's equity, which is $1,100. Cash from acquirer is now a plug, and is equal to acquisition of target's equity less excess cash. In your first example, excess cash is $0, so both cash from acquirer and acquisition of target's equity are $1,100; second example would show excess cash at $50 and cash from acquirer at $1,050.
I was just kidding about the whole "certified" thing.
I'm not sure what you're asking, please clarify. What are you backing out? I see you backing into implied share price... Think of it like this. You're buying the company and its assets, and its cash is an asset (thus, you're purchasing it). You can either leave the full amount of cash on the balance sheet, like in example one, or take a portion of the cash on the balance sheet to fund the transaction -- either way, shareholders are receiving the exact same amount (in example 1, you pay $1,100 to the shareholders and leave all $100 on the balance sheet, in option 2, you pay $1,100 to shareholders, but $1,050 comes from you and $50 comes from the cash balance of the company you just acquired). All it really is is a determination of optimal cash structure -- do you need the $100 on the balance sheet?
Think of the cash as fungible. You have to pay to acquire the cash, but as soon as you acquire the company, the cash of the company is the same as cash from your pockets. So you can either pay out $1,100 from your pockets and leave $100 on the balance sheet, or take $50 from the company and leave it with a $50 cash balance.
why would you be buying the equity of the company when you model source and uses? you're total sources should equal your EV of 1,000 not 1,100 - so forget about the "you're buying it for 1,100" argument...
As would said, the amount of equity the sponsor of buyer uses is a plug...
What? Aren't you suggesting sources should be $1,000 in this post, which spurs my response that this is wrong? You're confusing me here.
Uses would be $1,100. Sources are $1,100, split between how much is paid for by excess cash and the rest being cash from acquirer. This is what I've been saying all along.
EDIT: I traced back to your first post and understand what you're getting at, but you're wrong. As an acquirer, you don't get to pay $1,000 for the business and get the $100 in cash for free -- that would suggest an enterprise value of $900, which suggests a 9x multiple, which is not what the OP said. Equity value is $1,100 -- I think we've gotten this far. That means shareholders will need to be compensated $1,100 to give up their company. Their company includes all assets & liabilities, which includes all cash & debt. Upon acquisition of the company, you can take part of the cash balance and fund part of the purchase price with it (again, the simple concept that cash is fungible) since the company is yours (which means the cash balance is yours). What you're saying is that upon acquisition, cash flies off the balance sheet into the acquirer's pocket. This doesn't really happen, and even so, it is still modeled as the acquirer giving up $1,100 and the selling shareholders receiving $1,100.
That's wrong. Explain to me what your S&U table would look like if sources were only $1,000. So the company's equity is valued at $1,100, and acquiring that is a use of cash... So how do you justify your comment? It doesn't make sense.
From my experience, acquisition of target's equity is ALWAYS a use. Other uses include refinancing of debt, transaction expenses, etc. I think you just don't know what you're talking about.
what are you talking about? how could you have total sources of $1,000 but supposedly pay for equity at 1,100? this makes no sense
gotcha - i appreciate the clarification and agree
No I never worked for a BB, no I never did FT banking, no I didnt start my finance career on the buyside, yes I dont know what I'm talking about most of the time, yes I know about LBOs from text books, no I have never worked on a real deal, no the PE firm I work for doesnt have over $20bn of AUM,...
But you have to admit, I am a pretty good bull shitter...
Check out his avatar / profile pic - only true LBO ballers play with homophones, so he must be legit.
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