LBO modeling question - IPO exit
I am a newbie to LBO modeling and here is a question that i've encountered recently when i need to calculate the return for an IPO exit.
If it is a M&A exit, you just need to assume an exit EV/EBITDA multiple and that's all. But if it is IPO exit, other than EV/EBITDA exit multiple, you also need to assume % to be floated, IPO proceeds and here is the question. Say you are listing the company in 5 years at 7x EV/EBITDA, 15% float, then your IPO proceeds will be 15% of the enlarged company's equity value. However, your equity value = 7* EBITDA in 5 years - net debt in 5 years, while your net debt = net debt at listing - IPO proceeds, so now you have a circulatioin in your return analysis which I believe should not be there. So I am asking the modeling experts here how you would normally do it and if there is a "standard" way of getting rid of that circulation? thanks a lot in advance!
It depends whether the shares are new shares or a secondary sale
You can deal with this by assuming a pro forma capital structure at IPO. i.e. say the company will be 3x levered post IPO, then calculate the size of the primary offering to get down to that leverage.
Then you can say that the IPO will be 20% of PF equity value OR (Net debt at IPO - PF NET debt), whichever is larger.
In the real world, that is often the way investors will think about how to size the IPO.
Sponsor IPO Exit Follow Up (Originally Posted: 08/15/2013)
I'm trying to model a Sponsor IPO exit, but am unclear on where "fully distributed", "pre-money valuation" and the other IPO terminology fits in. I read this thread (//www.wallstreetoasis.com/forums/lbo-modeling-question-ipo-exit) which was helpful, but was hoping to get some more clarity.
What I've done is assume some exit multiple, EBITDA, and net debt such that you have a Company 4.0x levered pre-IPO. Your target leverage post-IPO is 2.5x, so I calculated the required net primary proceeds required to de-lever from 4.0x to 2.5x (assumed arbitrary IPO price and goal seek # of shares after underwriting discount of 6.0%).
Then I have my same exit multiple EBITDA that gets you to the same Agg. Val as before the IPO, but now you have less debt (de-levered to 2.5x from net IPO proceeds) and thus a higher equity value.
Four questions: 1. Is this equity value post-IPO the "fully distributed" value? 2. Once you take a 15% discount from that, is that your "IPO valuation" / "pre-money valuation"? 3. Understand sometimes you target a certain percentage of equity value to be floated (ie 15-20%). But given we are targeting a specific leverage post-IPO, we have to back into the required gross proceeds. To calculate the percentage floated, is it just the (gross proceeds / IPO valuation)? or (gross proceeds / fully distributed valuation)? 4. If the Sponsor wanted to do follow-on's moving forward, how would that impact the valuation? Reduce fully distributed equity value by the gross proceeds from secondary share sales?
Thanks very much!!
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