Please help me form the sources and uses of the below problems
The purchase price is 24mm at an EV/EBITDA of 7.5x
The management rollover equity is 15
The existing debt on the balance sheet is 1.5 and is repaid at the time of transaction
The PE firm is investing in the form of loan notes at a 10 percent coupon
Bank loan can be taken to fund the transaction
Last two have to be assumed
PUSH
Happy to talk through / debate it with others. My understanding / assumptions:
EV is $24mm, no cash on balance sheet, $1.5mm of debt
No transaction costs associates with the transaction
Uses
Purchase of Equity: $22.5mm
Repayment of Existing Debt: $1.5mm
Total Uses: $24mm
Sources
Management Rollover Equity: $15mm
PE Sponsor Loan: $9mm
Total Sources: $24mm
Based on the above, I don't think you would need a bank loan, unless the sponsor does not want to give a loan that is $9mm in size. For example, if the sponsor were to give a max loan of $6mm, you could take out a bank loan that is $3mm to reach $24mm of total sources to do the transaction. Also, uses could be increased by transaction costs. In that case, a larger sponsor loan or bank loan could be used to pay those costs.
Agree with the above solution. Couple of remarks: - You state purchase price --> that is a synonym for equity value. However in the same sentence you talk about EV/EBITDA --> Enterprise value. Make a clear distinction between the two. - Above solution makes the PE a mezzanine provider, with a capped upside (max 10% IRR, no equity upside). Most PEs would want control and equity upside. In that case the bank financing also is interesting as it lowers the equity check while maintaining the equity upside.
Thanks for this! SO you suggets that the PE also picks up an equity stake apart from the loan it provides?
In the case at hand, the sale makes no sense. Owners could most likely raise (9-1.5)=7.5m debt from a bank at much lower cost or combine it with some sort of subordinated debt element if they make 3.2m EBITDA. This is not a typical PE deal where owners sell majority, PE raises 3-5x leverage, etc.
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