Key Rule 5 Flashcards
Key Rule 5:
- more advanced LBO features
- dividend recaps
- private companies
- other types of debt
- less than 100% acquisitions.
Dividend recap means:
This PE firm forces the company to take on additional debt, and issues a big cash dividend to itself with the proceeds from that debt.
Dividend recap example
PE firm has the company raise an additional £100 million in debt, then takes all 100 million in cash for itself, leaving the company with the obligation repay it.
- boosts returns as it allows PE firm get its capital back earlier than waiting for official exit.
- many debt investors dont view dividend recaps positively as they reduce the credit quality of the company while saddling it with more debt and only belong the PE owners.
Private Companies
LBOs of private companies are similar to LBOs of public companies.
- main difference is purchase price is based on implied value for the company rather than the premium over the company’s share price
- everything else rhe same
Biggest obstacles to completion a LBO of a private company are:
- Company may not want to sell, can’t force a sell like with public companies
- Info is more limited, may not even be able to assess whether or not an LBO is feasible.
Other Types of Debt
Bank debt split into different types of Term Loans, all of which carry different principal repayment terms, interest rates, covenants and maturities
High yield debt split into senior notes, subordinated notes and mezzanine, all different seniorities, etc.
Some debt also has Payment in Kind option for Interest.
Less than 100% acquisitions
Very similar to what we saw in Merger Model, as when you acquire between 50-100% of a company, works the same way as a standard LBO model, as you now control the company.
- go through goodwill calculation, PPA, NCI etc
- if you acquire less than 50% of a company, no longer a true LBO as you can’t force a company to take on debt if you dont control it.
