Majority Stakes in LBOs

I have a question regarding a LBO acquisition of a majority stake (>50%, <100%), i.e: 51% . Most of the models out there are built on a 100% basis...

  • What happens with the sources and uses (Purchase price, debt, Fees, equity..)?, do you account for just 51% of the purchase price?. 
  • How does it affect the calculation of Goodwill compared to a 100% stake acquisition.

Would it be correct to assume everything: purchase price, sources and uses, equity and Goodwill at 100% basis and only adjust for the acquired stake at the very end just for return calculations?.

Any insight would be much appreciated.

 
Most Helpful

Hi James, someone had a similar question a few months ago modelling 65% stake in an LBO. I am pasting my reply to that post below. In summary, if all holders rank pari passu and there are no differentiating features in your respective economics, always work everything out @ 100% and then use the size of your specific stake to work out your specific return. 

Here is what I wrote in response to modelling 65% stake in an LBO.

---------------------------------------

For an LBO where investors do not purchase 100% equity, it is best not to pro-rate anything until the very end.

  1. Calculate EV, purchase price and determine sources & uses in the same way as for 100% transaction.

A quick word of warning relating to your question whether this will hold: 65% of EBITDA * purchase multiple = EV. No matter what stake you are buying, 1% or 65%, all purchase prices are always worked out on the basis of 100% EBITDA and 100% net debt. Then you get to 100% EV and figure out your 100% equity. Only then do you multiply 100% equity by the % holding you are buying to determine what amount you will be paying at entry.

  1. In your example, 65% shareholder is majority, so presumably they will be driving capital structure at the time of purchase. Therefore, all leverage assumptions can be made in the same way as for 100%

  2. Calculate IRR and MM at exit in the same way as for 100% transaction. Unless there are structural features that differentiate economics between 65% holder and other shareholders, the returns should be the same for all same-ranking shareholders invested in identical instruments

  3. At the very end, calculate economics of 65% holder by assuming that a) money out will equal 65% of total equity at entry; 2) any interim distributions will be 65% of all interim equity distributions (for example from recap); and 3) at exit the holder will get 65% equity proceeds.

Good luck,

Tamara

 

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