IPO - Capital Increase - LBO

Question 1

How is the price at IPO?

Answer 1

Usually lower because of:

• information asymmetry
• signal theory
• potential liquidity issues
• reputation.
• consider to use a discount to attract customers that depends on: market conditions, quality of the company, quality of the transaction (bank reputation).
• ignore control premiums because you are selling minority shares
• no synergies at all

Question 2

What is a capital increase?

Answer 2

It is a sales of shares and proceeds goes to the company. It is perceived as managers believe future cashflows value less than actual price so downward adjustment due to: overvalue of stock price, EPS dilution, market mechanism.

If price of new shares>true value, value creation otherwise value destruction.
It helps reduce asymmetry, reduce agency cost.
Cost of it is the rate of return required by shareholders given the market valuation of the stock.

Question 3

What is dilution?

Answer 3

Dilution comes when old shareholders do not subscribe the new issue.
In case of Rights issue (lower costs) instead of cash offers dilution is only apparent.

Question 4

Which are the different types of dilution?

Answer 4

• Apparent dilution: #new shares/#new shares + #old shares
• Real dilution: proceeds of cap increase/equity value before+proceds of inc
• Technical dilution: apparent dilution – real dilution.
• EPS Dilution: diluted if post deal EPS > Acquiror initial EPS

Question 5

FORMULA: TERP

Answer 5

TERP: (PcurrentOS+PstrikeNS)/OS+NS=Current price – Value of 1 right
TERP: Issue price + V of Subs parity

Question 6

FORMULA: Value of subs parity

Answer 6

Value of Subs parity: (Pcurr-Pstrike)*NS/OS+NS

Question 7

What is an LBO?

Answer 7

Acquisition of a company (established one) by one or more PE funds, through an SPV (shell companies capitalized with a mix of debt and equity)
The bank take the cashflows from assets of the target that is merged with the SPV. Main driver for acquisition is the return made with its capital (IRR at least 20%). Typically split between debt and equity is 60/40.
Credit metr: Net Debt/EBITDA(4x-7x),EBITDA/Interest(>2x), Debt S Cov(>1.2x)