I have some questions about M&A for minority stakes and intercompany loans. Posting in the IB forum as it draws the most views and it's a M&A tropic.
Overview: A company is selling a minority stake (up to 49%) of itself (EV of 500m). EBITDA of 50m and FCF of 40m. However, this company has an interco loan of 300m from it's Holdco and has the option of capitalising the loan from Debt to Equity.
I think the main questions are:
- If the Debt of 300m is capitalised, does the equity investment amount that the new investor will have to put up for a 20% stake change? (I.e. change from 40m to 100m)
- Or do most transactions ask the potential investors to invest on a "EV basis" and apportion debt i.e. buy equity stake of 20% but on the basis of a 500 EV, with the minority "taking on" a pro-rata amount of the interco loan (investors inject 100m, but 60m goes to their share of "clearing" interco debt and 40m goes to buying equity)
- If the company does not apportion debt to the minority shareholder, and if all cash is upstreamed to shareholders as dividend and debt is not repaid, wouldn't the minority shareholder receive an much higher % return on their capital?
- Best practices of handling interco debt between company and holdco during a M&A minority transaction?
Tried to post a picture of some calculations for guidance but can't seem to post it.
Thank you all for your help.