Sources & Uses - Private Co LBO
Hi guys,
Was going through old posts and got tripped up on this one. Hoping someone could help clarify a bit:
Given purchase price of $33,000 (owner must pay off existing debt), current cash on balance sheet of $175 and debt on balance sheet of $12,602.
Financing assumptions: senior debt of 2.5x EBITDA (at EBITDA of $6,420, implies $16,050) and mezz debt of 1x EBITDA ($6,420), owner retains 15% of remaining equity.
This answer below was the answer that people seem to agree on, but I am very confused why the Equity is $20,398 and not $20,573. It looks like the existing cash of $175 was stripped out of the equity value (implying it wasn't purchased by the sponsor) but then it's included as a source. Could someone please help explain this to me? Very confused. Thanks so much in advance
Uses:
Debt ReFi: 12,602
Equity: 20,398
Tx costs: 600
Total uses: 33,600
Sources:
Senior: 16,050
Mezz: 6,420
Existing cash: 175
Equity: 10,955 (of which 15% or 1,643 is rollover and 9,312 is from Sponsor)
Total sources: 33,600
It's just 33,000 - 12,602 of debt to get the implied purchase price of equity. The cash is being shown as a Source which means we have to make sure we show Gross Debt as opposed to Net Debt in the Uses - the S&U solution does this correctly.
If you were to show Net Debt then the equity would remain as is, but then you could not show the $175mm of cash as a source since it has already been accounted for in the uses.
Thanks very much!
Excuse my confusion here, but when you are subtracting out gross debt, how is cash being accounted for in the implied equity price? The way I was thinking about it was implied equity value of $20,398 from subtracting gross debt does not include the value of the cash on the B/S, which is why you wouldn't be able to include it in Uses. Where am I getting this wrong?
Edit to clarify: really what I'm confused by is how you're paying "less" for the implied equity price ($20,398 vs. $20,573) but are also able to use the cash on B/S as a Source?
You're not wrong, you're just approaching it from a valuation perspective. When you're doing Sources & Uses you are not trying to value the Company - you're structuring a new transaction to buy the Company.
The prompt has done the valuation work for you and has told you what we are going to pay for the Company - it's 5.14x EBITDA ($6,420 x 5.14 = $33,000). In other words the Equity item in Uses (more appropriately labeled as Purchase Price of Equity) is the real price paid for the Co's shares, not an implied value of what those shares should be worth.
The treatment of the cash can be done in either way as discussed before.
I'm having some trouble reconciling this method (where B/S cash is included only if gross debt is used to back into equity purchase price) with the method that's used in this post below, where everyone seems to agree the correct answer is arrived at by using net debt to back into equity purchase price, but still using B/S cash. Does anyone have any insights?
https://www.wallstreetoasis.com/forums/cash-free-debt-free-basis-1
Thanks very much!
I agree that the method discussed here is accurate and would be easier to look at from this point of view - where you use cash on balance sheet as as source and refinance gross debt. I guess what is in contention (here and in the other thread) is what constitutes the equity purchase price and whether it is done so on a cash-free/debt-free basis.
You need to decide if 33,000 is the enterprise value of equity value of the transaction - if 33,000 is done so on a debt-free/cash-free basis then I am inclined to say that this is in fact the "equity value"
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