Post LBO capital structure question

Hi guys, would appreciate any help with the below question which should be very simple but I still struggle with some logic behind it.

My understanding is that in an LBO the EV of the target should not change post acquisition, but the split between equity and debt is what will obviously change (with debt being a much larger % of EV post LBO), but looking at below S&U of a simple transaction, the EV before LBO ($800) and EV post LBO is different ($810). Obviously I understand that the difference of $10 is coming from extra financing needed to be raised to cover $10 transaction fees but still I just can't logically get if it even makes sense that before the transaction the EV was $800 at 8x multiple, but after LBO the EV became $810 with a slightly higher multiple now. It just seems wrong to me or my logic is incorrect somewhere. I have been thinking about it for 2 days straight now. Could someone please explain? Thank you!

EBITDA $100

8x multiple paid  - $800 EV

$300 debt, $100 cash, implying 800-300+100= $600 equity purchase price

Assume no mgmt/investor rollover, 100% acquisition

$10 transaction fees and $15 cash to the balance sheet

Financing: 5x EBITDA debt

Uses:

$600 purchase equity

$200 refinance net debt

$15 cash on the balance sheet

$10 transaction fees

Total = $825

Sources:

$500 debt

$325 sponsor equity

Total = $825

EV post LBO = 325 (new equity) + 500 (new debt) - 15 (new cash on the BS) = $810

Comments (4)

Most Helpful
Jan 8, 2022 - 1:08am

I would not define it as EV pre- and post-LBO but rather see it as incl. and excl. fees given that this is relevant for different stakeholders.

The EV pre-fees is the more relevant metric for the seller given that this is basically the price he gets paid for the company and ultimately determines the value of his equity by deducting all EV-EQ adjustments.

The EV post-fees is basically what the PE buyer has to pay given that he needs to fund the transaction fees.

Note that the PE buyers usually look at the EV before buyside transaction costs as a reference point for their assumption for the exit multiple.

  • Prospect in HF - EquityHedge
Jan 15, 2022 - 6:02am

Thank you! I agree to you but still after the transaction the target will essentially have higher EV due to larger financing requited to cover fees and I don't see how you can look at it excluding fees

Jan 15, 2022 - 6:29am

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