LBO transaction debt included in net debt?
if using $50M of equity and $100M of debt financing to purchase a private company, does that $100M of debt get included in the transaction net debt and effective valuation?
if using $50M of equity and $100M of debt financing to purchase a private company, does that $100M of debt get included in the transaction net debt and effective valuation?
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I'm confused, what are you asking?
No
Net debt is only referring to the OLDCO company debt minus OLDCO company cash
Hope you're a student, else may God have mercy on your LP's.
ha, I am an intern as my summer boss said try learning to drive on the highway and make heavy use of this site as the drivers ed manual!
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Yes. You build pro-forma financial statements and use an adjusted present value calculation if you're using the DCF method of valuation.
I don't understand why most people are dissing a legitimate student/intern question.
Think of it this (slightly simplified) way:
USES (i.e. what do I need to "buy"): - The Equity that the current owner will want to be paid - The existing net debt that the current owner is responsible for
Why would he be paid more/less because you finance the company with more/less debt?
SOURCES (i.e. how do I find the money I need to buy this company): - The Equity that I will use (my real money) - The debt that someone gives me to help me buy the company
This will only depend on my choice and ability to raise debt. (Of course sometimes you just roll-over existing debt, or partially re-leverage the company, but let's keep it simple for this example).
This can be achieved in many different ways depending on structure, tax requirements, legislation, etc. but a useful and immediate way for you to visualize this is to imagine that selling shareholders pay themselves a dividend equal to the increase in Net Debt (difference between what we called pre- and post- transaction) just before closing, so that the equity received by the buyer + the dividend gets them their equity value with current debt position, leaving a more indebted company to the buyers, who will be "compensated" by using less equity.
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