Question: Acquisition Multiple

I have a question on the calculation of implied multiples of the transaction illustrated below:

Assuming Company A has:
$100M market cap
No debt and no cash
Thus, EV is also $100M
Generates EBITDA of $20M

The company trades at a multiple of 5x EBITDA.

Now, assuming a party pays $100M to acquire 50% of the business. The pro forma company (50-50 owned) is expected to use the $100M to fund growth initiatives.

What EV / EBITDA multiple did the acquirer pay to acquire its 50% stake?

Would the multiple be different the target sold $100M of treasury shares to the acquirer?

 
Best Response

I'll try to help you out. So if they bought 50% of the business for $100M, then the implied value would be $200M. No matter what % is purchased, you gross up the value to a 100% implied value. The EBITDA multiple in this case would be 10x. I worked in PE & Corp. Dev, and I saw this plenty of times, and its kind of confusing at first, so I thought I would help you out.

As an illustrative example, a company with a $500M EV is purchased for $1B for an 80% stake, the company would have an implied value of $1.25B. So if it had $50M in EBITDA, it was purchased for 25x EBITDA, because you use the complete implied value for your multiple calculations.

 

Thanks. This is what I thought as well.

A friend of mine believes that your acquisition EV should be adjusted for the pro forma cash of the target post transaction, as the target intends to keep the cash on hand to fund growth initiatives (think of it as a treasury offering).

As such, in my original example, you are paying $100M for $10M in 50% attributable EBITDA for a 10x multiple. However, the $100M should be adjusted downward by $50M as the acquirer will own 50% of the pro forma company's cash balance (status quo the company had no debt and no cash). Thus, you are actually paying $50M in EV for $10M in attributable EBITDA for a 5x multiple.

Is this methodology right or wrong?

Any other inputs would be much appreciated as well.

 

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