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It's possible, sure. It's not that uncommon to see companies that have debt issues out of multiple "boxes" (issuing entities), and a debt-financed acquisition is one reason. Another (probably more common) reason would be an acquisition of a company with existing debt wasn't refinanced in the transaction.
However, there are a some challenges to a levered/sponsor-owned company doing this: a) You (usually) can't 100% debt-finance the acquisition, so someone (generally the sponsor) will have to kick in additional equity b) Besides availability of equity, Company A's debt (to use your example) will usually have restrictions on use of capital injections and on making acquisitions/investments in general (generally governed as part of the restricted payments covenants) c) Depending on the debt covenants at Company A, the new debt at Company B may count against various maintenance or incurrence tests d) You now have a more complicated capital structure with more tranches, compliance/reporting requirements, etc. This only gets more complicated as you integrate the companies and figure out how to share synergies, etc.
I'm sure there are other challenges I'm forgetting here.
In practice it's much more common to see Company A/its sponsor approach lenders with an amendment request that will allow the company to make the acquisition and incur the incremental debt at the current issuing entity. Typically not that hard to get permission if the company has been performing ok and the acquisition makes sense, especially if the sponsor is bringing new equity to the table.
Generally a bolt-on like this would have Company A go to its bank to negotiate based on the new debt of the combined entity, because the combined company will have more collateral/cash flow and a higher borrowing base. So the acquisition will expand the combined company's debt capacity.
However, as the previous poster said, this expansion in debt usually isn't enough to acquire a bolt-on by just Company A alone so it would typically require another equity raise.
came here to say this
I'd as that, even when the post acquisition company could support the higher debt from a 100 per cent debt funded deal, that can sometimes be a negative when marketing the debt, which can translate to having to pay higher coupon, bigger OID, perhaps give more covenants than you'd like. How big an issue this week be will depend the overall attractiveness of the credit, so may not be a factor at all in done high quality 100 per cent debt funded bolt ons.
Company A can go to the LBO debt market on the basis of the pro forma EBITDA of the combined company A+B and can usually increase the absolute value of $ debt, with leverage usually somewhere in the 5.5 - 6.5x range (6.0x OCC soft cap notwithstanding) if it's a PE sponsor backed company.
For example, see the Novolex acquisition of Duro Bag in 1H 2014, followed by its acquisition of Packaging Dynamics in late 2014. Both deals were bolt ons where Novolex raised new debt. Wind Point Partners was the PE sponsor behind that deal.
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