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!
- 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
- Calculate acquirers equity from the balance sheet (No market cap given)
- 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%
- 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?