As most of us US financiers are aware of, whenever we build LBO models, they are of the consolidated financials at the holdco level as that is all that really matters since the share pool is up there and well, if the cashflow isnt sufficient, it doesnt really matter where you stick the debt because the deal is dead...
Unfortunately, the European counterparts are very fond of modelling an opco and holdco (which gets a "Dividend" from opco sufficient to cover its debt expenses)... Would anyone be familiar with this style as it the idea is simple if the holdco is a shell holding company, but what if it is a full operating entity in itself? Any one have any experience with this stuff?
We own several operating companies where we break the model down into Opco and Propco and then consolidate everything at the Holdco level. This is often done in situations where a business has a significant real estate platform and the operating entity pays internal rents. What specifically are you asking?
JBS, I know what you're talking about (there's most likely a situation with a sale lease back to the Opco, or there's significant CMBS behind the real estate and you're looking at Opco at an EBITDAR level) but I think what the original poster is asking is just from a legal entity standpoint where the company is at the operating level and there's a holdco or super holdco above it. Alot of times we'll shove our additional equity PIK notes above the opco at the holdco. I've never had to deal with a situation where the holdco is a completely operating entity while in private equity, but I imagine that it's not unlike a parent company with a wholly owned subsidiary.
the general question is, how do you treat the general conso of the two entities? I'm not familiar with the accounting dynamics of the consolidation... Also, an equity injection by holdco into opco is a clear impact on the opco BS (increase in equity), but what effect does it have on opco's assets? under what line item is the opco equity asset held?
i have a situation where holdco isnt just a shell but owns assets and generates revenue off these assets while opco is the core business..
thnx
OK I'll try to answer this as accurately as I can.
I guess your questions relate mostly to the holdco's BS. It is usually pretty straightforward :
ASSETS
INTANGIBLE ASSETS -Can be empty, especially during the first year of the transaction
TANGIBLE ASSETS -Usually empty, unless for some reason RE assets are held by the holdco but I've never seen this in real life.
FINANCIAL ASSETS Usually contains a few accounting items: -Share ownership: this is where you value the participations the holdco owns in the opcos. Following the deal (ie. during year one) this equals transaction E.V.*Holco % Ownership. This is your most important asset item usually. -Loans Outstanding -Other financial assets
CURRENT ASSETS -Accounts receivables : Usually there is something there (the holdco charges management fees to the opco) -other items are usually empty, you can have some prepaid expenses and some cash though.
LIABILITIES
EQUITY -Well this one is obvious.
LIABILITIES -Mostly your LBO debt outstanding, and some current liabilities but they would be almost non existent (like your audit fees not yet paid, etc.)
That's pretty much it in my opinion. For a typical LBO/holdco though. In your case the BS should be slightly more complicated provided the holdco participates in one way or another in the business...
So when you do an equity injection from the holdco to the opco, you first have a capital increase at the holdco level (to bring the cash in the holdco in the first place. This is of course not the case if the cash is already at the holdco level for one reason or another, but bankers usually don't like it) with the cash appearing on the asset side following the capital inrease. Then you have a capital increase at the opco level having the same effect. When the cash has left the holdco, it increases the shareholding line of the assets of the holdco and the cash position of the opco.
As far as the consolidated balance sheet is concerned, the only impact is that the equity side is increased by the capital increase amount, and asset side is increased of the cash you injected (or at year end, whatever you did with that cash will reflect in the asset base, e.g. an intangible assets acquisition)
If holding company is subject to US GAAP, and it infuses equity into subco such that its equity stake in subco now exceeds 50% (effectively controlling it), then holdco will have to account for the transaction as a business combination using the purchase method of accounting as specified in SFAS 141R where all the assets in subco will be fair valued and placed on holdco's balance sheet with goodwill recognized if any. Any interest in subco not owned by holdco is minority interest or non-controlling interest on the right side of the b/s right in between liabilites and SH Equity/RE.
Note that if subco is still a standalone subsidiary, i.e., does not merge with holdco, it actually has the option of a push-down or no-push down from the stepped up parent fair values used in the purchase accounting, and SAB 5J covers this. Basically if Holdco's stake exceeds 94.9%, subco is subject to a Holdco push down in its books, so it's balance sheet can change dramatically. If Holdco's stake in subco is between 80 and 94.9%, subco has the choice of a push down or no push down (you will have to look at the pros and cons on your own as every case is different). If holdco's stake in subco is under 80%, subco is exempt from push downs from holdco, and depending on how you structure the equity infusion this can have a dramatic impact on your GAAP step ups on the subco level and of course your GAAP earnings and of course IPO exit multiple which is based on GAAP earnings.
If holdco's equity stake in subco is under 50%, then holdco must use the equity method of accounting to reflect its equity interest as an asset on its balance sheet as specified in SFAS 115.
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