Minority Equity Investment / Convertible Preferred Security

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M
Rank: Monkey | 40

What is the correct way to model a minority position in a company, financed with a combination of new leverage and convertible preferred securities? For example:

Assume the founder of the business owns 51% and a sponsor owns 49%. With new leverage and sponsor equity, the new sponsor would purchase the 49% stake and take out any existing debt. The capital would be invested as a convertible preferred security.

Any help here would be greatly appreciated Thanks!

Comments (14)

Apr 25, 2016

How about instead of demanding people send you a model, you let us know what you are having trouble with and we help you think through it.

For starters, do you think you can handle this problem if the sponsor just bought 100%

    • 1
Apr 25, 2016

No.

Apr 25, 2016

bump

Apr 25, 2016

Why do you list minority equity if Company A owns 60% to start with?

http://www.investopedia.com/terms/m/minorityintere...

Apr 25, 2016

He's thinking the second definition. For example, what is minority interest and why do you add that into EV?

Apr 25, 2016

But, he poses the question from the point of view of Company A. Assuming he didn't think 60% stake in Company B counts as minority equity, A is purchasing B, meaning it is irrelevant in the EV of Company B.

Apr 25, 2016

Cash would decrease in line with liabilities

Company A only owns 60% of Company B

Comp A Pre-remaining 40% acquired:
Cash: 100
Liabilities: 40
Equity: 60

Comp A Post-remaining 40% acquired:
Cash: 60
Liabilities: 0
Equity: 60

"Success means having the courage, the determination, and the will to become the person you believe you were meant to be"

Apr 25, 2016
nontargetPSD92:

Cash would decrease in line with liabilities

Company A only owns 60% of Company B

Comp A Pre-remaining 40% acquired:
Cash: 100
Liabilities: 40
Equity: 60

Comp A Post-remaining 40% acquired:
Cash: 60
Liabilities: 0
Equity: 60

Never open your mouth until you know what the shot is.

On Day 1, Company A owns 60% of Company B. Therefore, *all* of Company B's assets and liabilities are consolidated on Company A's balance sheet, with 40% showing up as "Minority Interest". Post-transaction, the Assets and Liabilities on the Balance Sheet won't really change (except to reflect financing of the transaction) and what was previously Minority Interest now just goes into Common Equity.

Apr 25, 2016

Mrb87 I agree with you, however can you explain what would happen if you used cash for the acquisition of the 40% how does the Balance Sheet Balance?

Apr 25, 2016

Before Acquisition
Cash 100
Total Assets:100

Liabilities 50
Minority Interest 20
Equity 30
Total: 100

Post Acquisition
Cash 80 ( reduced by 20 for acquisition of minority interest)
Total Assets: 80

Liabilities:50
Minority Interest: 0 (reduced by 20 for acquisition)
Equity: 50 (increased by 20 for acquisition)
Total: 100

Where do you allocate the missing 20 under total Assets?

Apr 25, 2016

Your equity does not change upon this acquisition.
No goodwill as you are paying 20 for 20.
Simply cash down 20 and MI down 20. That's it.

Apr 25, 2016

bump

Apr 25, 2016
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