What happens to cash and debt when a PE firm takes over a public company?

Baby Monkey's picture
Rank: Monkey | banana points 56

Quick question that I hope some of you experienced banker can help me understand.

Say a PE firm is looking to take a publicly traded company private. Let's assume the public company has:

Market cap: $500
Debt: $200
Cash: $100
Enterprise value: $600

For simplicity, let's say the PE firm doesn't pay any premium. So they acquire the public company for $600 EV. What happens to the $200 debt and $100 cash that was on the balance sheet? Does the company keep the existing debt and cash on the balance sheet? Or do both cash and debt get wiped out and PE firm starts running the company with a fresh balance sheet?

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Comments (5)

Apr 4, 2018

Debt gets refinanced/overwritten with the new capital structure and cash is used to fund the acquisition.

Sources
Existing Cash on BS: 100
New Debt: 400
Sponsor Equity: 200
Total Sources: 700

Uses
Purchase of Equity: 500
Refinance Existing Debt: 200
Total Uses: 700

    • 1
Best Response
Apr 4, 2018

I'll add to this with two points: 1) this is a good typical example of how this would work in practice, but in theory the new capital structure is completely at the discretion of the PE sponsor. There's no rule that says cash/equity has to be taken out of the business in favor of debt. A sponsor could theoretically write a bigger equity check to add cash to the business and/or de-lever. But for obvious reasons, that's not what typically happens in practice. 2) The oft-overlooked part of the EV equation is EV = E + D - Excess cash. There's a certain baseline cash balance necessary for the ongoing operation of the company, and it should be viewed similar to working capital. The only reason a cash balance would change and end up on the "sources" list is if the PE company determined old management had a higher-than-necessary cash balance on its books.

Apr 4, 2018
Quaneaser:

Debt gets refinanced/overwritten with the new capital structure and cash is used to fund the acquisition.

Sources
Existing Cash on BS: 100
New Debt: 400
Sponsor Equity: 200
Total Sources: 700

Uses
Purchase of Equity: 500
Refinance Existing Debt: 200
Total Uses: 700

Thank you, that's super helpful. Under Sources, how did you determine the 400 of new debt and 200 sponsor equity though?

Apr 4, 2018
Baby Monkey:
Quaneaser:

Debt gets refinanced/overwritten with the new capital structure and cash is used to fund the acquisition.

Sources
Existing Cash on BS: 100
New Debt: 400
Sponsor Equity: 200
Total Sources: 700

Uses
Purchase of Equity: 500
Refinance Existing Debt: 200
Total Uses: 700

Thank you, that's super helpful. Under Sources, how did you determine the 400 of new debt and 200 sponsor equity though?

Purely an example, could have been any combo that adds up to 600

    • 1
Apr 10, 2018
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