Understanding the Actual Structure of an LBO
I'm a bit unclear on how an actual LBO is structured. From what I understand, the PE firm doesn't directly buy the target, but rather uses a shell company of sorts to do it, with the debt going on the books of the target?
Does this mean that a ShellCo is formed, raises debt from investors, and the Sponsor invests in the ShellCo's equity? And then, ShellCo merges with TargetCo, meaning ShellCo's debt is now on TargetCo's books?
Sorry if it sounds like a juvenile question, I've got an extracurricular event coming up on M&A and I'm only a freshman, and just want to understand how an LBO actually works. Thanks!
There are typically 3 layers above the Target Co.
TopCo, Midco and BidCo.
The equity from a PE fund buys shares in TopCo, which filters the cash down through Midco and BidCo.
The MidCo is often where external debt is raised from (though it can be BidCo), providing BidCo (and by ownership, TargetCo and its underlying assets) as security.
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