M&A acquisition financing case study?

chippymonkey's picture
Rank: Chimp | banana points 2

Hey guys,

I gave an interview 3 weeks back at a middle-market bank during which I got a case study to solve, I still am not sure if I went about the correct way but thought would be a good idea to hear your thoughts!

So a company wants to make a Cross Border acquisition this year for about $100m. We need to advise the company on selecting the most appropriate financing mix (Debt vs. Equity) for the transaction. The company does not want to dilute more than 30% stake at this stage.

Following data is available:
1. Key items of Acquirer P&L (Revenue, Gross Profit, EBITDA, EBIT, PBT, PAT) for 5 years
2. Balance sheet of the acquirer for 5 years
3. Key items of target's P&L and Debt amount for 5 years
4. Synergies, their phasing and net working capital from additional revenue synergies (for 5 years)

No other data is provided and reasonable assumptions to be made!! Thanks

This was my approach!

  1. Arrive at the combined cash flows available to finance the acquisition
    Combined EBITDA (EBITDA of individual entities and EBITDA from synergies ) less interest on existing debt and repayment of principal, assumed WC changes
  2. Calculate acquirers equity from the balance sheet (No market cap given)
  3. Calculate financing mix as the ability to take debt after existing debt on the books (Debt/EBITDA of Comparables) and PF equity stake of acquirer not less than 30%
  4. After taking into account refinancing of existing debt on target's books. So total debt is acquirer debt plus target debt plus acquisition debt.

Spoke to a friend and he suggested I
calculate the equity value of acquirer via DCF
Calculate PF entity's value assuming different cases, and check if 70% of that equity is more than current acquirers equity value

Let me know what you guys think?

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Comments (3)

Best Response
Oct 19, 2017

They want you to first run some accretion/dilution math. Based on that, you will conclude that a 100% debt financed transaction would be most accretive. The next step would be to figure out if the acquirer can take on that much debt, so you would need to look at PF leverage. If that's the case, then the acquirer will need to start issuing equity in lieu of some of the new debt. The amount of equity issued will depend on an assumed target PF leverage and/or the given equity dilution constraint. Once you determine the appropriate mix of debt/equity, the last thing you will need to do is to go back and calculate the EPS impact. Hope that is helpful.

    • 2
Oct 19, 2017
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